Tag: Earnings announcements


The Real Effects of Share Repurchases

Mathias Kronlund is Assistant Professor of Finance at the University of Illinois at Urbana-Champaign. This post is based on an article authored by Professor Kronlund; Heitor Almeida, Professor of Finance at the University of Illinois at Urbana-Champaign; and Vyacheslav Fos, Assistant Professor of Finance at Boston College.

Companies face intense pressure from activist shareholders, institutional investors, the government, and the media to put their cash to good use. Existing evidence suggests that share repurchases are a good way for companies to return cash to investors, since cash-rich companies tend to generate large abnormal returns when announcing new repurchase programs. However, some observers argue that the cash that is spent on repurchase programs should instead be used to increase research and employment, and that the recent increase in share repurchases is undermining the recovery from the recent recession and hurting the economy’s long-term prospects. Repurchases have also been cited as an explanation for why the increase in corporate profitability in the years after the recession has not resulted in higher growth in employment, and overall economic prosperity.

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Public Audit Oversight and Reporting Credibility

Christian Leuz is the Sondheimer Professor of International Economics, Finance and Accounting at the University of Chicago Booth School of Business. He is also an Economic Advisor to the PCAOB. This post is based on an article authored by Professor Leuz; Brandon Gipper, Ph.D. Candidate in Accounting at the University of Chicago Booth School of Business and Economic Research Fellow at the PCAOB; and Mark Maffett, Assistant Professor of Accounting at the University of Chicago Booth School of Business.

As the accounting scandals in the early 2000s illustrated, reliable financial reporting is a cornerstone of trust in the stock market, which in turn plays a key role for investor participation (Guiso et al., 2008). In an effort to restore trust in financial reporting after the scandals, the U.S. Congress passed the Sarbanes-Oxley Act (hereafter, “SOX”). One of its core provisions was the creation of the Public Company Accounting Oversight Board (hereafter, the “PCAOB”) and the requirement that the PCAOB inspect all audit firms (hereafter, “auditors”) of SEC-registered public companies (hereafter, “firms” or “issuers”). The introduction of the PCAOB represents a major regime shift, replacing self-regulation with public oversight.

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Information, Analysts, and Stock Return Comovement

Allaudeen Hameed is a Professor of Finance at National University of Singapore. This post is based on an article authored by Professor Hameed; Randall Morck, Professor of Finance at the University of Alberta; Jianfeng Shen, Senior Lecturer in Finance at the University of New South Wales; and Bernard Yeung, Professor of Finance at National University of Singapore.

Stocks followed by more analysts should be priced more accurately, yet their returns are unusually prone to co-move with market and industry indexes. Stocks that co-move more are often thought to be related to herding. This is because more informed trading ought to make a firm’s stock price move with the changing fortunes of that specific firm, as well as with market and industry trends. More firm-specific price variation in less-followed stocks seems counterintuitive, yet this is what we observe.

In our paper, Information, Analysts, and Stock Return Comovement, forthcoming in The Review of Financial Studies, we resolve this seeming paradox. Stocks covered by more analysts co-move more precisely because they are priced more accurately and their price movements help investors update the prices of less-followed stocks. This “information spillover” makes most price movement in highly-followed stocks look like comovement with industry or market trends, but in fact investors are using information about highly-followed stocks to deduce how other stocks ought to move.

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Are Institutions Informed About News?

Norman Schürhoff is Professor of Finance at the Swiss Finance Institute. This post is based on an article authored by Professor Schürhoff; Terrence Hendershott, Professor of Finance at the University of California, Berkeley; and Dmitry Livdan, Associate Professor of Finance at the University of California, Berkeley.

Who is informed on the stock market? There are plenty of reasons to believe that institutional investors possess value-relevant information. Unlike retail investors, institutions often directly communicate with publicly traded firms as well as brokerage firms through their investment banking, lending, and asset management divisions. Most mutual funds and hedge funds employ buy-side analysts and enjoy better relationships with sell-side analysts. Their economies of scale allow institutions to monitor many sources of information. Last but not least, institutions employ professionals and technologies with superior information processing skills. Yet, the academic literature has struggled to identify the information channel in institutional trading. There is some evidence that institutional investors are informed, but studies examining institutional order flow around specific events provide mixed evidence.

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Opportunism as a Managerial Trait

David Hirshleifer is Professor of Finance at the University of California, Irvine. This post is based on an article authored by Professor Hirshleifer and Usman Ali, Portfolio Manager at MIG Capital. Related research from the Program on Corporate Governance includes Insider Trading via the Corporation by Jesse Fried (discussed on the Forum here.)

In trading their firms’ stocks, insiders must balance the profits of informed trading before news, the scrutiny by regulators that such trading can engender, formal policy restrictions by firms of insider trading activities, and diversification and liquidity motivations for selling shares after vesting of equity-based compensation. This mixture of motivations and constraints makes it is hard to decipher the information content of insider trades, especially because different trades may be intended to exploit news arriving at short or long horizons. This noise makes it feasible, up to a point, to conceal deliberate opportunism from regulators such as the SEC.

Empirically, there are some indications that insiders do exploit private information. Past research finds that insider purchases positively predict subsequent abnormal returns. On the other hand, effects are much harder to identify for insider sales, presumably because such sales are often performed for non-informational reasons, such as to reduce risk or to consume.

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Firms and Earnings Guidance

Kristian Allee is Assistant Professor of Accounting at the University of Wisconsin. This post is based on an article authored by Professor Allee; Ted Christensen, Professor of Accounting at Brigham Young University; Bryan Graden, Assistant Professor of Accounting at Illinois State University; and Ken Merkley, Assistant Professor of Accounting at Cornell University.

Understanding the formation of firms’ disclosure practices is of significant interest to regulators, managers, and investors. Anecdotal evidence and prior disclosure research generally conclude that firms’ current disclosure practices are often tightly connected to prior disclosure practices. However, prior disclosure practices must have a beginning in their own right, begging the questions of when and why disclosure practices begin. In our paper, When Do Firms Initiate Earnings Guidance? The Timing, Consequences, and Characteristics of Firms’ First Earnings Guidance, we examine when firms initiate earnings guidance (i.e., establish an earnings guidance policy) after an Initial Public Offering (IPO) and what factors are associated with the initiation decision.

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Corporate Use of Social Media

James Naughton is Assistant Professor of Accounting at Northwestern University. This post is based on an article authored by Professor Naughton; Michael Jung, Assistant Professor of Accounting at New York University; Ahmed Tahoun, Assistant Professor of Accounting at London Business School; and Clare Wang, Assistant Professor of Accounting at Northwestern University.

Social media has transformed communications in many sectors of the U.S. economy. It is now used for disaster preparation and emergency response, security at major events, and public agencies are researching new uses in geolocation, law enforcement, court decisions, and military intelligence. Internationally, social media is credited for organizing political protests across the Middle East and a revolution in Egypt. In the business world, social media is considered a revolutionary sales and marketing platform and a powerful recruiting and networking channel. Little research exists, however, on how firms use social media to communicate financial information to investors and how investors respond to investor disseminated through social media, despite firms devoting considerable effort to creating and managing social media presences directed at investors. Motivated by this lack of research, in our paper, Corporate Use of Social Media, which was recently made publicly available on SSRN, we provide early large-sample evidence on the corporate use of social media for investor communications. More specifically, we investigate why firms choose to disseminate investor communications through social media, whether investors and traditional media outlets respond to social media disclosures, and whether potential adverse consequences to the firm exist from the use of social media to disseminate investor communications.

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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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How Foreign Firms Communicate with US Investors

The following post comes to us from Russell Lundholm, Rafael Rogo, and Jenny Li Zhang, all of the Accounting Division at the University of British Columbia.

Foreign companies that trade their equity in the US face serious obstacles. They must navigate a complex set of SEC disclosure requirements, while at the same time satisfying US investor expectations about the frequency and content of voluntary disclosures. Their home country may be far from the US, speak a different language, use different accounting rules, and offer different types of investor protection than the US, and each of these differences presents a friction that must be mitigated in order to attract US investors. Given these cultural, procedural, and linguistic differences, one might expect that the disclosures of foreign firms would be of lower quality than their US firm counter-parts. Nonetheless, in our paper, Restoring the Tower of Babel: How Foreign Firms Communicate with US Investors, forthcoming in The Accounting Review, we find that foreign firms traded in the US present more numerical data and write more readable text in the Management Discussion and Analysis (MD&A) section of their 10-K, and write more readable text in their earnings press releases, than comparable US firms. More importantly, we find that the readability of text and amount of numerical data in both the MD&A and earnings press releases increase with the foreign firm’s distance from the US. Finally, we find that within a country, firms with relatively more readable disclosures attract relatively more US institutional investment.

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Curbing Short-Termism in Corporate America: Focus on Executive Compensation

Robert Pozen is a senior lecturer at Harvard Business School and a senior fellow at the Brookings Institution.

The protest against short termism in corporate America is rising. Business and political leaders are decrying the emphasis on quarterly results—which they claim is preventing corporations from making long-term investments needed for sustainable growth.

However, these critics of short termism have a skewed view of the facts and there are logical flaws in their arguments. Moreover, their proposals would dramatically cut back on shareholder rights to hold companies accountable.

The critics of short termism stress how much the average daily share volume has increased over the last few decades. Although this is factually correct, this sharp average increase is caused primarily by a tremendous rise in intraday trading.

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