Mohan Venkatachalam

Bio: Mohan Venkatachalam is an academic researcher from Duke University. The author has contributed to research in topics: Earnings & Stock market. The author has an hindex of 44, co-authored 90 publications receiving 6543 citations. Previous affiliations of Mohan Venkatachalam include University of Iowa & Stanford University.

Institutional Ownership and the Extent to which Stock Prices Reflect Future Earnings

Abstract: Articles in the financial press suggest that institutional investors are overly focused on current profitability, which suggests that as institutional ownership increases, stock prices reflect less current period information that is predictive of future period earnings. On the other hand, institutional investors are often characterized in academic research as sophisticated investors and sophisticated investors should be better able to use current-period information to predict future earnings compared with other owners. According to this characterization, as institutional ownership increases, stock prices should reflect more current-period information that is predictive of future period earnings. Consistent with this latter view, we find that the extent to which stock prices lead earnings is positively related to the percentage of institutional ownership. This result holds after controlling for various factors that affect the relation between price and earnings. It also holds when we control for endogenous portfolio choices of institutions (e.g., institutional investors may be attracted to firms in richer information environments where stock prices tend to lead earnings). Further, a regression of stock returns on order backlog, conditional on the percentage of institutional ownership, indicates that institutional owners place more weight on order backlog compared with other owners. This result is consistent with institutional owners using non-earnings information to predict future earnings. It also explains, in part, why prices lead earnings to a greater extent when there is a higher concentration of institutional owners.

Accounting Discretion, Corporate Governance, and Firm Performance*

Abstract: We investigate whether accounting discretion is (i) abused by opportunistic managers who exploit lax governance structures, or (ii) used by managers in a manner consistent with efficient contracting and shareholder value-maximization. Prior research documents an association between accounting discretion and poor governance quality and concludes that such evidence is consistent with abuse of the latitude allowed by accounting rules. We argue that this interpretation may be premature because, if such association is indeed evidence of opportunism, we ought to observe subsequent poor performance, ceteris paribus. Following Core et al. (1999) we conduct our analysis in two stages. In the first stage, we confirm and extent prior literature and document a link between poor governance and managers’ accounting discretion. However, in the second stage we fail to detect a negative association between accounting discretion attributable to poor governance and subsequent firm performance. This suggests that, on average, in our relatively large sample, managers do not abuse accounting discretion at the expense of firms’ shareholders. Rather, we find some evidence that discretion due to poor governance is positively associated with future operating cash flows and ROA, which suggests that shareholders may benefit from earnings management, perhaps because it signals future performance. *Corresponding author: Box 90120, Durham, NC 27708; Tel: (919) 660 7859; Fax: (919) 660 7971; E-mail: vmohan@duke.edu. The authors gratefully acknowledge helpful comments and suggestions offered by Patty Dechow, Hemang Desai, Mark DeFond, Ron Dye, Jennifer Francis, Wayne Guay, Rebecca Hann, Michelle Hanlon, Hamid Mehran, D.J. Nanda, Karen Nelson, Per Olsson, Scott Richardson, Katherine Schipper, Terry Shevlin, Doug Skinner, K.R. Subramanyam and workshop participants at Duke University, University of Southern California, Washington University at St. Louis, 2003 Summer Symposium at the London Business School, 2003 European Finance Association meetings at Glasgow, 2003 Financial Economics and Accounting conference at Indiana University, Bloomington and the 2004 mid year Financial Accounting and Reporting Section (FARS) meetings at Austin. We thank Li Xu for research assistance. We acknowledge financial support from the Herbert O. Whitten Professorship, the Accounting Development Fund and the Business School Research Fund at the University of Washington, and the Fuqua School of Business, Duke University.

The Power of Voice: Managerial Affective States and Future Firm Performance

Abstract: We measure managerial affective states during earnings conference calls by analyzing conference call audio files using vocal emotion analysis software. We hypothesize and find that when managers are scrutinized by analysts during conference calls, positive and negative affect displayed by managers are informative about the firm’s financial future. In particular, we find that positive (negative) managerial affect is positively (negatively) related to contemporaneous stock returns and future unexpected earnings. However, analysts do not incorporate the information when forecasting near term earnings. When making stock recommendation changes, however, analysts do incorporate positive affect but not negative affect. We observe market underreaction to negative affect as if market participants follow analyst recommendation changes. This study presents new evidence that managerial vocal cues contain useful information about firms’ fundamentals, incremental to both quantitative earnings information and qualitative “soft” information conveyed by the linguistic content.

Value‐Glamour and Accruals Mispricing: One Anomaly or Two?

Abstract: We investigate whether the accruals anomaly is a manifestation of the glamour stock phenomenon documented in the finance literature. Value (glamour) stocks, characterized by low (high) past sales growth, high (low) book‐to‐market (B/M), high (low) earnings‐to‐price (E/P), and high (low) cash flow‐to‐price (C/P), are known to earn positive (negative) future abnormal returns. Note that “C” or cash flow is operationalized in the finance literature as earnings adjusted for depreciation. Sloan (1996) shows that firms with low (high) total accruals earn positive (negative) future abnormal returns. We find that a new variable, operating cash flows measured as earnings adjusted for depreciation and working capital accruals, scaled by price (CFO/P) captures mispricing attributed to the four traditional value‐glamour proxies and accruals. Interpretation of this finding depends on the reader's priors. If the reader believes that value‐glamour phenomenon can be operationalized only as C/P, and not CFO/P, then one wou...

Regression Diagnostics: Identifying Influential Data and Sources of Collinearity

Abstract: 1. Introduction and Overview. 2. Detecting Influential Observations and Outliers. 3. Detecting and Assessing Collinearity. 4. Applications and Remedies. 5. Research Issues and Directions for Extensions. Bibliography. Author Index. Subject Index.

Economics of Information

Abstract: The author systematically examines one of the important issues of information — establishing the market price. He introduces the concept of «search» — where a buyer wanting to get a better price, is forced to question sellers. The article deals with various aspects of finding the necessary information.