Showing papers in "The Journal of Business in 1999"
TL;DR: In this article, the authors introduce behavioral thresholds for earnings management and show how thresholds induce specific types of earnings management, such as reporting positive profits, sustaining recent performance, and meeting analysts' expectations.
Abstract: Earnings provide important information for investment decisions. Thus, executives--who are monitored by investors, directors, customers, and suppliers--acting in self-interest and at times for shareholders, have strong incentives to manage earnings. The authors introduce behavioral thresholds for earnings management. A model shows how thresholds induce specific types of earnings management. Empirical explorations identify earnings management to exceed each of three thresholds: report positive profits, sustain recent performance, and meet analysts' expectations. The positive profits threshold proves predominant. The future performance of firms suspect for boosting earnings just across a threshold is poorer than that of control group firms. Copyright 1999 by University of Chicago Press.
2,064 citations
TL;DR: In this paper, the authors examined the performance of the Small Business Innovation Research program and found that program awardees grew significantly faster than matched firms over a decade and were more likely to attract venture financing.
Abstract: Government programs to finance small firms have attracted little empirical attention. This article examines the largest U.S. initiative, the Small Business Innovation Research program. Using a unique database, the author shows that program awardees grew significantly faster than matched firms over a decade and were more likely to attract venture financing. The superior performance of awardees was confined to firms in regions with substantial venture capital activity and was pronounced in high-technology industries. Multiple awards did not increase performance. These results suggest that awards played an important role in certifying firm quality but also that distortions of the award process occur. Copyright 1999 by University of Chicago Press.
816 citations
TL;DR: This paper examined the performance of the off-shore hedge fund industry over the period 1989 through 1995 using a database that includes defunct as well as currently operating hedge fund funds and found that repeat-winner and repeat-loser patterns in the data are largely due to style effects in that data.
Abstract: We examine the performance of the off-shore hedge fund industry over the period 1989 through 1995 using a database that includes defunct as well as currently operating funds. The industry is characterized by high attrition rates of funds and little evidence of differential manager skill. We develop endogenous style categories for relative fund performance measures and find that repeat-winner and repeat-loser patterns in the data are largely due to style effects in that data.
618 citations
TL;DR: In this article, two alternative explanations for the role of stars in motion pictures are presented: informed insiders signal project quality by hiring an expensive star, or stars capture their expected economic rent.
Abstract: This article presents two alternative explanations for the role of stars in motion pictures. Either informed insiders signal project quality by hiring an expensive star, or stars capture their expected economic rent. These approaches are tested on a sample of movies produced in the 1990s. Means comparisons suggest that star-studded films bring in higher revenues. However, regressions show that any big budget investment increases revenues. Sequels, highly visible films and "family oriented" ratings also contribute to revenues. A higher return on investment is correlated only with G or PG ratings and marginally with sequels. This is consistent with the "rent capture" hypothesis. Copyright 1999 by University of Chicago Press.
467 citations
TL;DR: In this paper, the authors examine the financial effects of shareholder pressure in what activists consider the visible and successful instance of social activism in investment policies, the boycott of South Africa designed to speed the end of the apartheid regime.
Abstract: This article examines the financial effects of shareholder pressure in what activists consider the visible and successful instance of social activism in investment policies, the boycott of South Africa designed to speed the end of the apartheid regime. It seems that socially activist shareholder pressure on corporations has become a fact of life. In 1987, the American Medical Association called on medical schools and their parent universities to divest tobacco holding stocks. The demand for stocks may be sufficiently elastic so that pressures by social activists merely redistribute ownership from socially active investors to other investors without affecting stock prices. South Africa itself may have switched to trading with other countries not participating in the boycotts at low cost. The alternative hypothesis is that activism and sanctions imposed measurable costs and constrained unique investment opportunities so that firm value was affected adversely. This alternative predicts that banks and corporations with South African operations and the South African financial markets experienced negative stock price reactions on the announcement of legislative and private investor sanctions.
386 citations
TL;DR: In this article, a systematic investigation of the performance of managed portfolios across multiple asset classes is presented, showing evidence of slow mean reversion in the funds' portfolio weights toward a common, time-varying strategic asset allocation.
Abstract: Using a data set on more than 300 U.K. pension funds' asset holdings, this article provides a systematic investigation of the performance of managed portfolios across multiple asset classes. We find evidence of slow mean reversion in the funds' portfolio weights toward a common, time-varying strategic asset allocation. We also find surprisingly little cross-sectional variation in the average ex post returns arising from the strategic-asset-allocation, market-timing, and security-selection decisions of the fund managers. Strategic asset allocation accounts for most of the time-series variation in portfolio returns, while market timing and asset selection appear to have been far less important. Copyright 1999 by University of Chicago Press.
316 citations
TL;DR: In this article, the authors developed a theory of mergers and divestitures, where the motivation stems from inability to finance marginally profitable projects as stand-alones due to agency problems.
Abstract: This article develops a theory of mergers and divestitures. The motivation stems from inability to finance marginally profitable projects as stand-alones due to agency problems. A conglomerate merger is a technology that allows these projects to survive a period of distress. If profitability improves, the financing synergy ends and the acquirer divests the assets. The authors' theory reconciles two seemingly contradictory empirical findings. Mergers increase the combined values of acquirers and targets by financing positive net present value (NPV) projects that cannot be financed as stand-alones. At the same time, because these projects are only marginally profitable, conglomerates are less valuable than stand-alones. Copyright 1999 by University of Chicago Press.
203 citations
TL;DR: In this article, the authors examine the hypothesis that sentimental bettors can affect the path of prices in football betting markets and show that a betting strategy of betting against the predicted movement in the point spread is borderline profitable.
Abstract: We examine the hypothesis that sentimental bettors can affect the path of prices in football betting markets. We hypothesize that sentimental traders follow the advice of false experts, believe excessively in momentum strategies, bet excessively on teams that are well known and covered in the media. We generate proxies for these sources of sentiment and show that point spreads move predictably over the course of the week, partially in response to variables known prior to the opening of betting. We show that a betting strategy of betting against the predicted movement in the point spread is borderline profitable. Copyright 1999 by University of Chicago Press.
174 citations
TL;DR: The Campbell-Mei hypothesis has important implications for capital budgeting, particularly at high-technology companies that have long duration, idiosyncratic investment projects as discussed by the authors, and they evaluate the impact of the hypothesis with a case study of Amgen Corporation.
Abstract: In a provocative article John Y. Campbell and Jianping Mei (1993) suggest that systematic risk arises not because of correlation between a company's cash flow and the market return but primarily because of common variation in expected returns. If true, the Campbell-Mei hypothesis has important implications for capital budgeting, particularly at high-technology companies that have long duration, idiosyncratic investment projects. This article presents some new evidence related to the Campbell-Mei hypothesis and then evaluates the impact of the hypothesis with a case study of Amgen Corporation. Copyright 1999 by University of Chicago Press.
110 citations
TL;DR: In this paper, the authors investigated whether analysts' recommendations in the "Dartboard" column of the Wall Street Journal have an impact on stock prices and whether this impact is temporary or long-lived.
Abstract: The author investigates whether analysts' recommendations in the 'Dartboard' column of the Wall Street Journal have an impact on stock prices and whether this impact is temporary or long-lived. He documents a significant two-day announcement effect that is reversed within fifteen days. This announcement effect is intertwined with the pros' track record. The author's study supports the price pressure hypothesis: abnormal returns and trading volumes around the announcement day are mainly driven by noise trading from naive investors. On average, investors following the experts' recommendations lose 3.8 percent on a risk-adjusted basis over a six-month holding period. Copyright 1999 by University of Chicago Press.
103 citations
TL;DR: In this paper, it was shown that changes in Business Week and U.S. News graduate business school rankings have a strong tendency to revert and that reversals of this noise are the most likely cause of reversibility in the rankings.
Abstract: Changes in Business Week and U.S. News graduate business school rankings have a strong tendency to revert. It seems that existing rankings are essentially simple aggregations of 'noisy' information and reversals of this noise are the most likely cause of reversibility in the rankings. Additionally, there is an almost puzzling lack of correlation between the contemporaneous changes of the two rankings, suggesting that most changes are not driven by common revisions of information. Thus, existing rankings should be probably viewed as useful but noisy and one-sided signals, rather than as comprehensive and efficient measures of the unobservable 'school quality.' Copyright 1999 by University of Chicago Press.
TL;DR: In this paper, performance evaluation using stochastic discount factors and relate it to traditional mean-variance analysis is discussed. But the authors do not discuss the performance evaluation of Swedish-based mutual funds.
Abstract: The authors first discuss performance evaluation using stochastic discount factors and relate it to traditional mean-variance analysis. They then use Monte Carlo experiments to examine the properties of various general method of moment (GMM) estimators. The test statistics are fairly well behaved although serious size distortions are found in some cases. The simulations also show that a significant excess return, or a long sample, is needed to reject neutral performance. Finally, the authors offer an evaluation of Swedish-based mutual funds. The conditional evaluation indicates that funds have had nonneutral performance as revealed by the predictability of the unconditional performance measure. Copyright 1999 by University of Chicago Press.
TL;DR: In this article, the authors empirically examine how relationships between individual households and their creditors affect the probability of being credit-rationed, and show that relationship duration and the number of activities between a family and a potential lender significantly lower the probability that a family will be credit-rated.
Abstract: We empirically examine how relationships between individual households and their creditors affect the probability of being credit-rationed. Using a data set where the credit-rationing of individual households is observed directly, we show that relationship duration and the number of activities between a family and a potential lender significantly lower the probability of being credit-rationed. Additionally, we examine the relative role of relationships in determining the interest rates of two consumer loans--a mortgage loan and a "special purposes" loan--and show that mortgage loan rates are driven less by relationship factors than the special purposes loan rates. Copyright 1999 by University of Chicago Press.
TL;DR: In this paper, a three-factor, repeated-measures experiment was conducted to test the effect of leadership style (charismatic, structuring, and considerate) on performance improvement on a manufacturing task.
Abstract: A three-factor, repeated-measures experiment tests the effect of leadership style (charismatic, structuring, and considerate) on performance improvement on a manufacturing task over four trials. Findings from a repeated-measures multivariate analysis of variance indicates that individuals exposed to considerate leadership have superior initial performance but that this difference fades over time. Further analysis indicates that self-efficacy fully mediates the relationship between leadership style and performance. Copyright 1999 by University of Chicago Press.
TL;DR: In this article, the authors examined whether consumers actively evaluate the brands on every occasion and proposed a multistate choice model with varying levels of evaluation and estimate the model with scanner data.
Abstract: Brand choice models implicitly assume that consumers incorporate all relevant marketing information such as price, display, and feature for key brands on each purchase occasion. The authors examine whether consumers actively evaluate the brands on every occasion. They propose a multistate choice model with varying levels of evaluation and estimate the model with scanner data. In addition, the authors study the effect of household demographics, occasion-specific factors, as well as unmeasured household and purchase occasion factors on the extent of evaluation. The results indicate that consumers do not evaluate brands on all occasions. The authors discuss the implications of such limited evaluation. Copyright 1999 by University of Chicago Press.
TL;DR: In this article, the authors present a model of timing of seasonal sales in which stores choose several designs before the season without knowing which, if any, is fashionable, and as the season approaches the end with goods still unsold, stores have sales to capture the discount market.
Abstract: We present a model of timing of seasonal sales in which stores choose several designs before the season without knowing which, if any, is fashionable. Stores begin by charging high prices to capture the fashion market. As the season approaches the end with goods still unsold, stores have sales to capture the discount market. More designs and greater price competition in the discount market induce earlier sales. The results are consistent with the observation that the trend toward earlier sales since the mid-1970s coincides with increasing product varieties in fashion goods markets and increasing store competition. Copyright 1999 by University of Chicago Press.
TL;DR: In this paper, the authors consider a duopolistic market where ex ante identical firms sequentially position their products prior to competing on prices and show that the unique equilibrium outcome involves (1) firms choosing Stackelberg pricing over Bertrand-Nash pricing; and (2) the positioning first mover acting as the price leader.
Abstract: Prior empirical work shows that different markets are characterized by different pricing patterns, such as Bertrand-Nash pricing or Stackelberg leader-follower pricing. The author considers a duopolistic market where ex ante identical firms sequentially position their products prior to competing on prices (in a single- or multiperiod setting) and show that the unique equilibrium outcome involves (1) firms choosing Stackelberg pricing over Bertrand-Nash pricing; and (2) the positioning first mover acting as the price leader. An attractive property of this model is that the ex post larger firm acts as the price leader, which is consistent with prior empirical evidence. Copyright 1999 by University of Chicago Press.
TL;DR: In this article, the authors consider whether a monopolist is able to deter more efficient entrants through contracting with buyers, and they show that vertical contracts can be antic-competitive if there exists product-market competition.
Abstract: This article considers whether a monopolist is able to deter more efficient entrants through contracting with buyers. In the antitrust literature, the Chicago School's stand is that such contracts cannot be anticompetitive; hence vertical contracts should be accorded per se legal status. In a four-stage game with the following features: (1) the incumbent enjoys a first-mover advantage, (2) the entrant must incur some sunk cost to enter the market, and (3) entry is uncertain, the author shows that vertical contracts can be anticompetitive if there exists product-market competition. Thus, the author advocates caution in treating all contracts as per se legal. A three-factor, repeated-measures experiment tested the effect of leadership style (charismatic, structuring, and considerate) on performance improvement on a manufacturing task over four trials. Findings from a repeated-measures multivariate analysis of variance indicated that individual exposed to considerate leadership had superior initial performance but that this difference faded over time. Further analysis indicated that self-efficacy fully mediated the relationship between leadership style and performance. Copyright 1999 by University of Chicago Press.
TL;DR: In this article, the authors illustrate the value to shareholders when closed-end funds repurchase shares at a discount from net asset value, even when there is no asymmetric information concerning the value of the underlying assets and the percentage discount remains unchanged following the repurchase.
Abstract: The authors illustrate the value to shareholders when closed-end funds repurchase shares at a discount from net asset value. Repurchases increase share price even when there is no asymmetric information concerning the value of the underlying assets and the percentage discount remains unchanged following the repurchase. Expected gains to shareholders are derived from capturing the discount on the assets associated with the shares repurchased. In an analysis of twenty-seven open market repurchase announcements by closed-end funds, the regression coefficient estimate that measures the association between the actual excess return and the expected increase in share price is essentially 1.0. Copyright 1999 by University of Chicago Press.