Showing papers in "Journal of Business Finance & Accounting in 2014"
TL;DR: In this article, the authors present an index designed to capture differences between countries in relation to the institutional setting for financial reporting, specifically the auditing of financial statements and the enforcement of compliance with each country's accounting standards.
Abstract: In this paper we present an index designed to capture differences between countries in relation to the institutional setting for financial reporting, specifically the auditing of financial statements and the enforcement of compliance with each country's accounting standards. The use of a common set of standards such as International Financial Reporting Standards (IFRS) aims, in broad terms, to promote the comparability and transparency of financial statements and to improve the quality of financial reporting. However, the effectiveness of IFRS adoption may be hampered by differences, across countries, in the institutional setting in which financial reporting occurs. Studies of outcomes from adopting IFRS use a range of legal system proxies to capture these country differences, but the proxies are deficient in that they seldom focus explicitly on factors that affect how compliance with accounting standards is promoted through external audit and the activities of independent enforcement bodies. To address this deficiency, we calculate measures of the quality of the public company auditors� working environment (AUDIT) and the degree of accounting enforcement activity (ENFORCE) by independent enforcement bodies. We do this for 51 countries for each of the years 2002, 2005 and 2008, using publicly available data provided by the International Federation of Accountants (IFAC), the World Bank and the national securities regulators. Preliminary tests suggest our indices have additional explanatory power (over more general legal proxies) for country-level measures of economic and market activity, financial transparency and earnings management. We expect they will prove useful to researchers and other interested parties who require country-level measures that focus on the degree of enforcement of financial reporting practices.
276 citations
TL;DR: It is demonstrated that the returns prior to good news events are more pronounced than for bad news events, and that the stock market impact of news events differs substantially across different categories.
Abstract: This study presents a methodology for identifying a broad range of real-world news events based on microblogging messages. Applying computational linguistics to a unique dataset of more than 400,000 S&P 500 stock-related Twitter messages, we distinguish between good and bad news and demonstrate that the returns prior to good news events are more pronounced than for bad news events. We show that the stock market impact of news events differs substantially across different categories.
135 citations
TL;DR: For a large sample of US non-financial firms over the period 1988–2007, it is shown that all measures except for smoothness are negatively associated with absolute excess returns, suggesting that smoothness is generally a favorable attribute of earnings.
Abstract: This paper examines how commonly used earnings quality measures fulfill a key objective of financial reporting, i.e., improving decision usefulness for investors. We propose a stock-price-based measure for assessing the quality of earnings quality measures. We predict that firms with higher earnings quality will be less mispriced than other firms. Mispricing is measured by the difference of the mean absolute excess returns of portfolios formed on high and low values of a measure. We examine persistence, predictability, two measures of smoothness, abnormal accruals, accruals quality, earnings response coefficient and value relevance. For a large sample of US non-financial firms over the period 1988–2007, we show that all measures except for smoothness are negatively associated with absolute excess returns, suggesting that smoothness is generally a favorable attribute of earnings. Accruals measures generate the largest spread in absolute excess returns, followed by smoothness and market-based measures. These results lend support to the widespread use of accruals measures as overall measures of earnings quality in the literature.
117 citations
TL;DR: In this article, the authors investigate whether managers use classification shifting when their ability to use other forms of earnings management is constrained, and they find that when AEM is constrained by low accounting system flexibility and the provision of a cash flow forecast, managers are more likely to use Classification shifting.
Abstract: Prior literature has investigated three forms of earnings management: real earnings management (REM), accruals earnings management (AEM) and classification shifting. Managers make trade-off decisions among these methods based on the costs, constraints and timing of each strategy. This study investigates whether managers use classification shifting when their ability to use other forms of earnings management is constrained. We find that when REM is constrained by poor financial condition, high levels of institutional ownership and low industry market share, managers are more likely to use classification shifting. Further, we find that when AEM is constrained by low accounting system flexibility and the provision of a cash flow forecast, managers are more likely to use classification shifting. In addition, when we limit our sample to firms that are most likely to have manipulated earnings, we continue to find support for constraints of both REM and AEM leading to higher levels of classification shifting. We also find support for the hypothesis that the timing of each earnings management strategy influences managers� trade-off decision. Our results indicate that managers use classification shifting as substitute form of earnings management for both AEM and REM.
115 citations
TL;DR: The authors examined the relationship of CEO overconfidence with accrual-based earnings management, real activities-based management, and targeting to meet or just beat analyst forecasts, and found that overconfident CEOs are more likely to have income-increasing discretionary accruals.
Abstract: This study examines the relationship of CEO overconfidence with accrual-based earnings management, real activities-based earnings management, and targeting to meet or just beat analyst forecasts. Following, we measure �overconfidence� based on the CEO's tendency to hold in-the-money stock options, as rational expected utility maximizers should exercise early to avoid overexposure to company idiosyncratic risks. The results show that before the Sarbanes Oxley Act of 2002 (SOX), companies of overconfident CEOs were more likely than other CEOs to engage in managing earnings through accelerating the timing of cash flow from operations and achieving analyst forecast benchmarks. After SOX, we find that overconfident CEOs are more likely to have income-increasing discretionary accruals. They remain more likely to engage in real activities management through abnormally high cash flows, and also have abnormally low discretionary expenses. These results are consistent with overconfident CEOs feeling less constrained by SOX, and suggest that this individual characteristic works against regulators� attempts to constrain earnings management by corporate executives. In contrast, we find that the tendency of overconfident CEOs to manage to targets decreases after SOX, perhaps due to changes in investor behavior in the new regulatory environment.
105 citations
TL;DR: The authors found that investors view net income measured using IAS 39 Financial Instruments: Recognition and Measurement as more relevant than that measured using domestic standards, which was highly controversial in Europe.
Abstract: Net income adjustments resulting from mandatory 2005 IFRS adoption in Europe are value relevant for financial and non-financial firms. Differences in relevance of the aggregate adjustment and adjustments related to several IFRS standards, for financial and non-financial firms and across country groups, suggest differences in domestic standards and institutions affect investors� assessment of the relevance of IFRS accounting amounts. Despite these differences, except for French/German non-financial firms, investors view net income measured using IAS 39 Financial Instruments: Recognition and Measurement as more relevant than that measured using domestic standards, which is notable because IAS 39 was highly controversial in Europe.
95 citations
TL;DR: In this paper, the effect of product market competition on the incentives to engage in earnings manipulation was studied, and it was shown that manipulating earnings is particularly rewarding in more competitive markets since the boost in market value of reporting good earnings is especially important.
Abstract: We study theoretically the effect of product market competition on the incentives to engage in earnings manipulation, and we show how manipulating earnings is particularly rewarding in more competitive markets since the boost in market value of reporting good earnings is especially important. Using a panel dataset of about 70,000 observations spanning the period 1989–2011, we document that the competitive environment is an important determinant of Jones type discretionary accruals and it also affects real earnings management. In additional analysis, we find that the effect of competition on earnings manipulation is particularly important for companies that seem to be underperforming their competitors and that the competition-earnings management linkage is moderated by the degree of information visibility at the industry level.
94 citations
TL;DR: In this article, the authors examine the patterns in the earnings informativeness of these firms before and after the exogenous break of the networks and find that the costs and benefits of business-politics relationships, which are not measurable by the current accounting systems, diminish the ability of accounting earnings to track a firm's economic performance.
Abstract: The measurement difficulties arising from relationship-based business transactions can result in accounting opacity. We test this hypothesis by exploiting a natural experiment. Using a sample of firms that were networked with 45 high-level Chinese bureaucrats involved in corruption scandals between 1996 and 2007, we examine the patterns in the earnings informativeness of these firms before and after the exogenous break of the networks. We predict that the costs and benefits of business-politics relationships, which are not measurable by the current accounting systems, diminish the ability of accounting earnings to track a firm's economic performance. In turn, a break in a political relationship due to anti-corruption enforcement reduces the measurement noise and improves the earnings informativeness. We find that, relative to the matched control firms, there is indeed a significant increase in the earnings informativeness of the networked firms following the public exposure of a scandal. Robustness tests fail to show that the documented improvement in the earnings informativeness is primarily due to systematic changes in the firms� earnings management behavior or disclosure policies.
58 citations
TL;DR: In this article, the authors investigate the effect of earnings quality on supplier credit in a sample of small and medium-sized firms and show that firms whose earnings present lower variability, higher smoothing and predictability, and higher accruals quality have access to more trade credit from suppliers.
Abstract: In this paper we investigate the effect of earnings quality on supplier credit in a sample of small and medium-sized firms. After controlling for other determinants of trade credit, we show that firms whose earnings present lower variability, higher smoothing and predictability, and higher accruals quality have access to more trade credit from suppliers. This association suggests that earnings attributes associated to lower volatility and higher precision with respect to cash flows facilitate access to trade credit.
54 citations
TL;DR: This paper investigated the interplay between dividend payout ratios and bank risk-taking allowing for the effect of charter values and capital adequacy regulation and found a positive relationship between bank risk taking and dividend payout ratio.
Abstract: In non-financial firms, higher risk taking results in lower dividend payout ratios. In banking, public guarantees may result in a positive relationship between dividend payout ratios and risk taking. I investigate the interplay between dividend payout ratios and bank risk-taking allowing for the effect of charter values and capital adequacy regulation. I find a positive relationship between bank risk-taking and dividend payout ratios. Proximity to the required capital ratio and a high charter value reduce the impact of bank risk-taking on the dividend payout ratio. My results are robust to different proxies for the dividend payout ratio and bank risk-taking.
49 citations
TL;DR: This article examined firm investment behavior when managers are likely to find it more challenging to develop expectations of pay-offs, namely during periods of increased macroeconomic ambiguity, and found that ambiguity reduces the value of investment opportunities, while risk increases the value This article.
Abstract: Standard finance theory suggests that managers invest in projects that, in expectation, produce returns that justify the use of capital. An underlying assumption is that managers have the information necessary to understand the distributional properties of the pay-offs underlying the decision. This paper examines firm investment behavior when managers are likely to find it more challenging to develop expectations of pay-offs, namely during periods of increased macroeconomic ambiguity. In particular, we examine how macroeconomic ambiguity � proxied by the variance premium (Drechsler, 2010) and the dispersion in forecasts of corporate profits from the Survey of Professional Forecasters (Anderson et al., 2009) � impacts managerial capital investment and cash holdings. Consistent with ambiguity theory, we find that macroeconomic ambiguity is negatively associated with capital investment and positively associated with cash holdings. These results are robust to alternative explanations related to risk, investor sentiment and economic conditions. Moreover, consistent with recent theoretical real options literature, we find that ambiguity reduces the value of investment opportunities, while risk increases the value of such opportunities. Overall, these findings provide initial empirical evidence on the economic distinction between ambiguity and risk with respect to managerial investment and cash holdings.
TL;DR: In this article, the authors find that when earnings quality decreases, analysts will be more likely to supplement their earnings forecasts with cash flow estimates, which are not useful to investors and therefore unlikely to be reported by analysts.
Abstract: Cash flows are incrementally useful to earnings in security valuation mainly when earnings quality is low. This suggests that when earnings quality decreases, analysts will be more likely to supplement their earnings forecasts with cash flow estimates. Contrary to this prediction, we find that analysts do not disclose cash flow forecasts when the quality of earnings is low. This is because cash flow forecast accuracy depends on the accuracy of the accrual estimates and the precision of accrual forecasts decreases for firms with low quality earnings. Consequently, as earnings quality decreases, cash flow forecasts become increasingly inaccurate compared to earnings estimates. Cash flow estimates that lack reliability are not useful to investors and, consequently, unlikely to be reported by analysts. This result provides an explanation for why analysts are less likely to report cash flow estimates when earnings quality is low.
TL;DR: In this paper, the authors examined the relationship between asset liquidity and stock liquidity across 47 countries and found that firms with greater asset liquidity on average have higher stock liquidity, and that asset liquidity plays a more significant role in resolving valuation uncertainty in countries with poor information environment.
Abstract: This study examines the relationship between asset liquidity and stock liquidity across 47 countries. In support of the valuation uncertainty hypothesis, we find that firms with greater asset liquidity on average have higher stock liquidity. More importantly, our study shows that asset liquidity plays a more significant role in resolving valuation uncertainty in countries with poor information environment. For example, we find that the asset�stock liquidity relationship is stronger in countries with poor accounting standards. We further find evidence that after the adoption of IFRS, the improved accounting information environment results in a weaker asset�stock liquidity relation, but only in countries with a strong legal regime. Finally, our study shows that the positive asset�stock liquidity relationship may be attributed to transparency and/or liquidity reasons.
TL;DR: This paper investigated the effect of stable shareholders' ownership structures on earnings management patterns and found that stable shareholdings are positively associated with the informational components of earnings smoothing, which suggests that managers with stable shareholders tend to report smoother and less volatile earnings, and do not tend to pursue earnings management to attain short-term earnings targets.
Abstract: Prior studies argue that stable shareholders do not encourage firm managers to manage their earnings to achieve short-term earnings goals. They also state that firm managers with stable shareholders have an incentive to report smooth earnings to maintain long-term relationships with such shareholders. We focus on cross-shareholdings and stable shareholdings owned by financial institutions as stable shareholdings in Japan, and investigate the effect of these ownership structures on earnings management patterns. Specifically, we hypothesize that stable shareholdings are positively associated with the informational components of earnings smoothing. Consistent with our hypothesis, we first find that as stable shareholdings increase, managers are more likely to conduct earnings smoothing that provides useful information to stable shareholders. Further, our additional analysis shows that stable shareholdings reduce incentives for managers to cut discretionary expenditures to meet short-term earnings benchmarks, implying that stable shareholdings could reduce the possibility of a myopic problem. These results suggest that managers with stable shareholdings tend to report smoother and less volatile earnings, and do not tend to pursue earnings management to attain short-term earnings targets.
TL;DR: The authors found that managerial ownership is positively associated with the precision of financial analysts' public (common) and private (idiosyncratic) information, largely consistent with the alignment view of managerial equity ownership.
Abstract: Despite the importance of sell-side financial analysts as information intermediaries in the capital market, little is known about how managerial equity ownership is associated with their information environment. Using Barron, Kim, Lim and Stevens� (1998) framework for measuring the precision of financial analysts� information, we observe that managerial ownership is positively associated with the precision of financial analysts� public (common) and private (idiosyncratic) information, largely consistent with the alignment view of managerial equity ownership. These results are robust to controlling for various economic and statistical factors that might affect the inference.
TL;DR: In this paper, a sample of conference calls and analyst research reports from international banks was used to examine how financial analysts request and communicate fair value-related information in their valuation process.
Abstract: We use a sample of conference calls and analyst research reports from international banks to examine how financial analysts request and communicate fair value-related information in their valuation process. We find that analysts devote considerable attention to fair value-related topics. Most of the conference call questions and references in research reports pertain to fair value reclassifications and fair value changes of liabilities resulting from banks� own credit risk. The accounting impact of these one-time effects during the financial crisis and a lack of corresponding firm disclosures help to explain the prevalence of these two topics. The content of the questions and references suggests that analysts have different motives for their interest in fair value-related information. While some analysts adjust reported earnings for unrecognised fair value changes of reclassified assets, most of the observed analysts exclude banks� own credit risk effects from reported earnings. Thus, the use of fair value-related information varies substantially across analysts and across instruments.
TL;DR: In this paper, the extent of earnings management undertaken within Canadian initial public offering (IPO) and study the extent to which companies with better corporate governance systems are less likely to use earnings management to achieve their earnings forecasts.
Abstract: Prior research suggests that managers may use earnings management to meet voluntary earnings forecasts. We document the extent of earnings management undertaken within Canadian Initial Public Offerings (IPOs) and study the extent to which companies with better corporate governance systems are less likely to use earnings management to achieve their earnings forecasts. In addition, we test other factors that differentiate forecasting from non-forecasting firms, and assess the impact of forecasting and corporate governance on future cash flow prediction. We find that firms with better corporate governance are less likely to include a voluntary earnings forecast in their IPO prospectus. In addition, we find that while IPO firms use accruals management to meet forecasts; the informativeness of the discretionary accruals depends on whether or not the firm would have missed its forecast without the use of discretionary accruals.
TL;DR: In this article, the authors examined the role of lockup agreements on the survival of 580 UK Initial Public Offerings (IPOs) during the period of 1990-2011, and found that lockup length had a statistically and economically significant effect on the post-IPO survival.
Abstract: This paper examines the role of lockup agreements on the survival of 580 UK Initial Public Offerings (IPOs) during the period of 1990-2011. Our accelerated failure time (AFT) survival model shows a statistically and economically significant effect of lockup length on the post-IPO survival. A 12 month increase in median lockup period increases the (median) survival time by 27%. Furthermore, the failure rates for IPOs with longer lockups are consistently lower than the failure rates for IPOs with shorter lockups regardless of delisting reasons. The results are robust to choice of different survival estimation models, heterogeneity, clustering, and alternative specification of variables. Our results highlight the importance of lockup characteristics on the subsequent survival of newly listed firms and inform recent debate regarding alleged short-termism in the UK equity market. © 2014 The Authors Journal of Business Finance & Accounting published by John Wiley & Sons Ltd.
TL;DR: In this paper, the authors investigate the incentives that misvaluation creates for insider trading and concurrent earnings management through both accruals and real activities, and find evidence of a relationship between managerial trading and real earnings management.
Abstract: We investigate the incentives that misvaluation creates for: (1) insider trading; and (2) concurrent earnings management through both accruals and real activities. Managers of overvalued firms have an incentive to sustain overvaluation through income increasing earnings management and, at the same time, to sell their shares (Jensen, 2005). Managers of undervalued firms benefit from buying their firm's shares, however the negative effects of downward earnings management may offset incentives to enhance trading advantages. The results indicate that managers of both over- and under-valued firms act opportunistically, managing earnings upward (downward) with accruals while selling (buying) shares. The Sarbanes-Oxley Act of 2002 (SOX) has been largely ineffective in eliminating trading motivated earnings management. Finally, we do not find evidence of a relationship between managerial trading and real earnings management.
TL;DR: In this article, the authors examine whether firms manage earnings to meet analyst forecasts to signal superior future performance and find that firms with more patent citations have significantly better performance than firms with fewer patent citations, which is consistent with signaling and not the real benefits explanation.
Abstract: This study examines whether firms manage earnings to meet analyst forecasts to signal superior future performance. Prior research finds that firms use earnings management to just meet analyst forecasts and that these firms have a positive association with future performance (Bartov et al., 2002). There are two potential explanations for the positive association � signaling and attaining benefits that allow for better future performance (i.e., the real benefits explanation). Prior studies cannot provide evidence of signaling because they do not control for the real benefits explanation. Our research design enables us to control for the real benefits explanation because we can identify potential signaling firms within the sample of firms that just meet analyst forecasts. We use a unique database from the National Bureau of Economic Research to construct a proxy for the manager's belief about future firm value due to patents. We find that firms with more patent citations are more likely to just meet the analyst forecast and manage earnings to achieve this goal. We also find firms that just meet analyst forecasts with more patent citations have significantly better performance than firms with fewer patent citations, which is consistent with signaling and not the real benefits explanation.
TL;DR: In this article, the authors examined, using proprietary ASX data containing institutional holdings, if institutional investors exit en mass prior to announcements of financial distress and found that most institutional investors hold financially distressed shares through to failure.
Abstract: This paper examines, using proprietary ASX data containing institutional holdings, if institutional investors exit en mass prior to announcements of financial distress. Evidence indicates that while some institutional investors exit the stock, the withdrawal is gradual, commencing approximately 115 days prior to event. This is driven by active institutional investors reacting to the release of the financially distressed companies� last publicly released financial reports. There is no significant decline in institutional holdings before announcements; most institutional investors hold financially distressed shares through to failure. There is evidence that the lack of disclosure drives the increase in information asymmetry prior to company failure.
TL;DR: In this paper, the authors investigated the association between management turnover following financial restatements and the probability of subsequent restatement and found that firms that replace management (CEO and/or CFO) are more likely to restate their financial statements again.
Abstract: This paper investigates the association between management turnover following financial restatements and the probability of subsequent restatements. We find that restating firms that replace management (CEO and/or CFO) are more likely to restate their financial statements again. We also find that subsequent restatements are mainly attributable to the new management. Overall, our results suggest that management turnover following restatements may not be an effective mechanism to remediate financial restatements, but the change to a new management results in a greater possibility of lower earnings quality (i.e., higher probability of subsequent financial restatements and accruals-based earnings management). Our study supports prior literature's findings that the change in the top management leads to organizational instability and higher accounting information risk. Our findings have implications for internal decisionmaking with regard to top executive replacement.
TL;DR: In this article, the authors confirm that US evidence of a negative relationship between earnings persistence and earnings volatility applies to UK firms over the period 1991�2010 and highlight the possibility that this result may reflect downward estimation bias in earnings persistence related to transitory earnings elements.
Abstract: This paper confirms that US evidence of a negative relationship between earnings persistence and earnings volatility applies to UK firms over the period 1991�2010. Our analytical framework highlights the possibility that this result may reflect downward estimation bias in earnings persistence (and persistence of cash flow and accruals components of earnings) related to transitory earnings elements. Out-of-sample forecasts, based on models estimated for earnings volatility quartiles, suggest significant improvement in earnings forecasts for lower volatility firms. The results also suggest that the negative association between earnings persistence and volatility may be due to both estimation bias and variation in core earnings persistence.
TL;DR: In this article, the authors investigated the most important avenues that managers use to manipulate the value of stock option grants and compared the use of these avenues in firms that issue scheduled and irregular options.
Abstract: This study investigates some of the most important avenues that mangers use to manipulate the value of stock option grants. It also compares the use of these avenues in firms that issue scheduled options and in firms that issue irregular options. We document that before the Sarbanes-Oxley Act (SOX), cumulative abnormal returns were significantly negative in the 30-day window before an option grant, but cumulative abnormal returns turned significantly positive after the option grant. This pattern is more pronounced for irregular options, and the evidence supports the hypothesis that opportunistic manipulation of strike prices by CEOs maximized the value of the option grants. We find the disclosure requirement of option grants included in SOX successfully curtails opportunistic behavior in firms that issue scheduled options, but has a lesser effect stopping opportunistic behavior in firms that issue irregular options. Firms granting irregular options take larger negative discretionary accruals in advance of the grant than firms that grant scheduled options, and the degree of downward earnings management increases with the size of the subsequent grant. We further show that firms are more likely to issue irregular options when they offer larger option grants, have a less independent board, receive less analyst coverage, have a new CEO, exhibit poor prior performance, have higher stock return volatility and are smaller in size.
TL;DR: In this article, the authors examined whether more effective boards in terms of size, experience, shareholding and independence limit excessive short-term risk taking or shorttermism, using a state-of-the-art asset pricing model.
Abstract: We examine whether more effective boards in terms of size, experience, shareholding and independence, as discussed in the 2010 UK Corporate Governance Code, limit excessive short-term risk taking or short-termism. We use a state-of-the-art asset pricing model that enables the disentangling of short-term risk (related to short-term returns) and long-term risk (related to long-term returns), and use the former as a proxy for short-termism, where the short-term component not only represents the time horizon for which we are interested but also the risk that is not related to fundamentals. We examine 916 firms in the UK over a possible horizon of 18 years, January 1992�December 2010, and find that more effective boards are associated with lower levels of short-term risk and this result is robust to various types of short-term risk (overall, downside) and specifications
TL;DR: The authors studied the impact of guidance cessation on information asymmetry using a large sample of firms during the years 2002�11 and found that guidance cessation significantly reduced information asymmetric compared to matched non-guiders and guidance maintainers.
Abstract: This paper studies the impact of quarterly earnings guidance cessation on information asymmetry using a large sample of firms during the years 2002�11. After earnings guidance cessation, information asymmetry may increase because less information is provided to the market. Alternatively, information asymmetry may decrease if managers have less pressure to manage reported earnings to meet guidance numbers. Our study shows guidance cessation significantly reduces information asymmetry compared to matched non-guiders and guidance maintainers. We also find that firms engage in less earnings management after guidance cessation, especially for firms that had provided guidance on a persistent basis.
TL;DR: In this article, the authors investigate German banks' motives for the creation and usage of GBR reserves and assess their role in financial stability, and find that banks primarily create and use these reserves to build up Tier 1 capital for regulatory capital management and earnings management purposes.
Abstract: The opportunity of building up visible �Reserves for General Banking Risks� by the bank management represents a peculiarity in the German financial accounting framework for banks. We investigate German banks' motives for the creation and usage of these reserves and assess their role in financial stability. We find that banks primarily create and use GBR reserves to build up Tier 1 capital for regulatory capital management and earnings management purposes. Most importantly, however, we also reveal that banks using these reserves are less likely to experience a future distress or a bank default event. We therefore conclude that the existence of GBR reserves within the financial accounting framework represents both a convenient capital and earnings management tool for bank managers and a beneficial regulatory instrument to enhance bank stability.
TL;DR: In this paper, the authors propose the "dichotomous expectations hypothesis" which posits that insider trading following share repurchase announcements reveals private information concerning the future operating performance of announcing firms.
Abstract: The long-run performance of equity securities subsequent to announcements of open market repurchases (OMR) remains a contentious topic. In this paper we propose the �dichotomous expectations hypothesis� which posits that insider trading following share repurchase announcements reveals private information concerning the future operating performance of announcing firms. In particular, insider abnormal purchases (abnormal sales) should predict an improvement (decline) in operating performance that leads to higher (lower) long-run stock returns. Our hypothesis offers a credible economic link between insider trading and subsequent long-run stock performance through the intervening variable of operating performance. The empirical results show consistency with this linkage.
TL;DR: In this article, the authors examined whether corporate transparency also impacts the relationship between gender and ethnic diversity of directors and firm performance, and they found that the interaction of corporate information environment and social concentration on boards is more important for operationally complex firms.
Abstract: Prior evidence on the relationship between demographic diversity in corporate boards and firm performance is mixed. Some studies have found that the relationship between board attributes and firm performance is driven by a firm's information environment. This study examines whether corporate transparency also impacts the relationship between gender and ethnic diversity of directors and firm performance. To test this hypothesis, I use a Herfindahl Index based on directors� gender and ethnicity to measure board diversity, and an opacity index based on analyst following, analyst forecast error, bid-ask spread, and share turnover to measure corporate transparency. I find that the cost of capital is positively associated with social concentration on corporate boards and that this premium is larger for highly opaque firms. In further analysis, I find that the interaction of corporate information environment and social concentration on boards is more important for operationally complex firms. Compared with simple firms, operationally complex firms pay a greater premium on their capital if they have a socially concentrated board and an opaque information environment.
TL;DR: In this paper, the authors investigated the effects of a borrowing firm's CEO risk-taking incentives on the structure of the firm's syndicated loans and found that when CEO risk taking incentives are high, syndicates are structured to facilitate better due diligence and monitoring efforts.
Abstract: This paper investigates the effects of a borrowing firm's CEO risk-taking incentives on the structure of the firm's syndicated loans. When CEO risk-taking incentives are high, syndicates are structured to facilitate better due diligence and monitoring efforts. These syndicates have a smaller number of total lenders and are more concentrated, and lead arrangers will retain a greater portion of the loan. Moreover, CEO risk-taking incentives have a lesser effect on the syndicate structure when lead arrangers have a good reputation and a prior lending relationship with a borrowing firm, while they have a greater effect on the syndicate structure when borrowing firms have low information transparency, are financially distressed or have low growth prospects.