Category Archives: Empirical Research

Market (In)Attention and the Strategic Scheduling and Timing of Earnings Announcements

The following post comes to us from Ed deHaan of the Accounting Area at Stanford University; Terry Shevlin, Professor of Accounting at the University of California, Irvine; and Jake Thornock of the Department of Accounting at the University of Washington.

In our paper, Market (In)Attention and the Strategic Scheduling and Timing of Earnings Announcements, forthcoming in the Journal of Accounting and Economics, we revisit a long-standing but still unresolved question: do managers “hide” bad earnings news by announcing during periods of low market attention? Or, conversely: do managers “highlight” good earnings news by announcing earnings during periods of high market attention? We posit three necessary conditions for an effective hiding/highlighting strategy. First, to be able to hide bad news, managers must change their earnings announcement (“EA”) timing somewhat frequently. A deviation from a long-standing pattern of EA timing could attract attention to the very news the manager is trying to hide. Second, there must be variation in market attention that is predictable to the manager ex-ante—random variation in attention would not allow for strategic timing of bad or good news. Third, we must observe that managers do tend to announce more negative (positive) earnings news during periods of lower (higher) market attention. We also examine an additional potential strategy for reducing attention to bad news: by scheduling EAs with less advance notice or “lead-time.”

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State Contract Law and Debt Contracts

The following post comes to us from Colleen Honigsberg and Sharon Katz, both of the Accounting Division at Columbia Business School, and Gil Sadka of the Department of Accounting at the University of Texas at Dallas.

In our recent JLE paper, State Contract Law and Debt Contracts, we examine the association between state contract law and debt contracts. A recent stream of papers in finance and economics studies the role debt contracts play in mitigating agency problems between equity and debt holders (for example, Baird and Rasmussen, 2006; Chava and Roberts, 2008; Roberts and Sufi, 2009; Nini, Smith, and Sufi, 2009). This area of literature examines both the contract terms and the implications of covenant violations. While these studies generally treat contract law as a uniform product across states and assume that all contracts are enforced in a similar fashion, in practice lenders and borrowers select the state law that will govern the contract. Because the legal rights of both parties vary depending on the law chosen, the state contract law may be associated with enforcement. To examine this relationship, we first categorize each state’s contract law by whether it is favorable or unfavorable to lenders, and then we examine the characteristics of the contracts and the relevant parties across states. Lastly, we test whether the contract terms, frequency of covenant violations, and repercussions of covenant violations are related to the state contract law.

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Intermediation in Private Equity: The Role of Placement Agents

The following post comes to us from Matthew Cain, Financial Economist at the U.S. Securities and Exchange Commission, Stephen McKeon of the Department of Finance at the University of Oregon, and Steven Davidoff Solomon, Professor of Law at the University of California, Berkeley.

In light of recent “pay to play” scandals, placement agents have been portrayed in a negative light, using inappropriate influence to gain business from pension funds and other institutional investors. In our paper Intermediation in Private Equity: The Role of Placement Agents, which was recently made publicly available on SSRN, we examine the determinants of placement agent usage and implications for performance using a dataset of 32,526 investments in 4,335 private equity funds.

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The Influence of Board of Directors’ Risk Oversight on Risk Management Maturity and Firm Risk-Taking

The following post comes to us from Christopher Ittner of the Department of Accounting at the University of Pennsylvania and Thomas Keusch of the Department of Business Economics at Erasmus University Rotterdam.

A variety of external events, including inquiries into the causes of the 2008 financial crisis and changes in regulations and listing rules have fostered rising expectations for boards of directors to exert greater oversight of their organizations’ risk management processes. The primary impetus behind these external pressures is the belief that stronger board oversight over risk management processes will lead to substantive improvements in risk management and more informed risk-taking. Many observers, however, argue that board members often lack the time, skills, and information necessary for effective risk oversight. They contend that the adoption of governance practices that are advocated or mandated by external parties is often window-dressing. This point of view suggests that board risk oversight will have little effect on companies’ risk management practices or risk-taking.

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CEO Contractual Protection and Managerial Short-Termism

The following post comes to us from Xia Chen and Qiang Cheng, both of the School of Accountancy at Singapore Management University; Alvis Lo of the Department of Accounting at Boston College; and Xin Wang of the Accounting Area at the University of Hong Kong.

In our paper, CEO Contractual Protection and Managerial Short-Termism, which was recently made publicly available on SSRN, we investigate whether CEO contractual protection, can address managerial short-termism by reducing managers’ incentives to engage in myopic behavior. Managers generally have incentives to boost short-term performance to increase their welfare, potentially at the expense of long-term firm value. However, CEOs with contractual protection are protected from short-term performance swings and downside risk, and consequently are likely to have weaker incentives to engage in myopic behavior.

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More Corporate Actions, More Insider Trading?

The following post comes to us from Patrick Augustin of the Finance Area at McGill University; Jianfeng Hu of the Finance Area at Singapore Management University; and Menachem Brenner and Marti Subrahmanyam, both of the Finance Department at New York University.

According to Preet Bharara, the U.S. Attorney of the Southern District of New York, insider trading is “rampant” in U.S. securities markets, and his actions in the past few years indicate concrete action by his office to combat such activity. In a similar vein, the Securities and Exchange Commission (SEC) has stepped up efforts to chase down high profile insider traders, and has made it its key priority in pursuing errant behavior. Academic studies, including our own, have previously documented empirical evidence of informed trading ahead of major corporate events such as earnings announcements, mergers and acquisitions (M&A) and corporate bankruptcies.

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The Governance Effect of the Media’s News Dissemination Role

The following post comes to us from Lili Dai of the College of Business and Economics at Australian National University; Jerry Parwada and Bohui Zhang, both of the Finance Area at UNSW Australia.

That the media plays a role in corporate governance is well known. What is less clear is how the governance effect of the media works. Existing evidence supports the notion that the media disciplines managers by creating content that exposes governance problems. In our paper, The Governance Effect of the Media’s News Dissemination Role: Evidence from Insider Trading, forthcoming in the Journal of Accounting Research, we use evidence from a large sample of insider trading filings to investigate whether the media’s news dissemination role directly affects governance.

The SEC requires insiders to report their trading activities on Form 4 filings, which are typically disseminated through the media. This setting provides us with a useful opportunity to examine the effect of the media’s dissemination role on corporate governance, and specifically in restricting insiders’ trading profits. Since news dissemination increases the breadth of coverage and the attention of investors through repetition, we conjecture that the media reduces the profitability of insiders’ future transactions by disseminating regulatory releases of prior insider trading activities. We call this view, which forms our main hypothesis, disciplining via dissemination.

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Suspect CEOs, Unethical Culture, and Corporate Misbehavior

The following post comes to us from Lee Biggerstaff of the Department of Finance at Miami University, David Cicero of the Department of Finance at the University of Alabama, and Andy Puckett of the Department of Finance at the University of Tennessee.

Trust is part of the foundation of public markets. Scandals at firms such as Enron and HealthSouth fractured this foundation and motivated market participants to ask why executives and other employees at these firms misled investors. Some regulators and experts conjecture that the roots of these scandals can be traced to the actions and attitudes of those at the very top of corporate leadership. In the words of Linda Chatman Thomsen (Director, Division of Enforcement, Securities and Exchange Commission) “Corporate character matters—and employees take their cues from the top. In our experience, the character of the CEO and other top officers is generally reflected in the character of the entire company.” In our paper, Suspect CEOs, Unethical Culture, and Corporate Misbehavior, forthcoming in the Journal of Financial Economics, we provide evidence consistent with this perspective by demonstrating an empirical link between CEOs’ revealed character and the misbehaviors of the firms they manage.

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German Stock Market Development, 1870-1938

Brian Cheffins is Professor of Corporate Law at the University of Cambridge. The following post is based on an article co-authored by Professor Cheffins, David Chambers of Cambridge Judge Business School, and Carsten Burhop of Max Planck Institute for Research on Collective Goods.

Since World War II, Germany’s stock market has been mostly an after-thought, despite a highly successful economy. Why might this be the case? Explanations have included the power and influence of banks, the stakeholder-oriented nature of Germany’s economy and Germany’s civil law heritage. In Law, Politics and the Rise and Fall of German Stock Market Development, 1870-1938 we argue, based on statistical analysis of a hand-collected dataset of initial public offerings (IPOs), that a combination of law and politics during the late 19th and early 20th centuries played a significant role in the evolution of German equity markets. For most of this period Germany had, contrary to the present-day pattern, a stock market that was sizeable in comparative terms. The law helped to foster this trend but legal reforms during the Nazi era reversed matters in a way that had lasting consequences.

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The Role of Institutional Investors in Open-Market Share Repurchase Programs

The following post comes to us from Thomas Chemmanur, Professor of Finance at Boston College, and Yingzhen Li of The Brattle Group.

In recent years, the number of firms undertaking stock repurchases has increased dramatically, while the proportion of firms distributing value through cash dividends has declined. The popularity of share repurchases has not been mitigated even after the passage of the Jobs and Growth Tax Relief Act of 2003. In our paper, The Role of Institutional Investors in Open-Market Share Repurchase Programs, which was recently made publicly available on SSRN, we empirically analyze whether institutions have the ability to produce information about firms announcing open-market repurchase (OMR) programs, and how their information interacts with the private information held by firm insiders (which they may attempt to convey to the equity market through a repurchase program).

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