Shareholder Value: Principles, Declarations, and Actions

This paper is about shareholder value. We examine whether welfare considerations justify that target and whether competitive markets force firms to pursue it. We also argue that shareholder value is strictly an ill-defined goal. We report evidence from a large sample of listed firms across the world that many managers do not even mention shareholders in their mission statements. However, firms that do disclose a commitment to shareholders seem to perform better in terms of stock price and operating performance.     

Deficits,money and inflation

This paper examines the interrelationships between monetary and fiscal policy. Specifically, it seeks to determine whether Government budget deficits influence monetary growth. Using a money supply model originally developed by Barro, we find that deficits have had a significant impact on the growth of the U.S. money supply throughout most of the period since 1961. Such a relationship need not always hold. It depends on whether government deficits place upward pressure on interest rates and whether the central bank monetizes the debt in an effort to stabilize interest rates.     

Mortgage Redlining: Race,Risk, and Demand

Charges that geographical redlining is widely practiced by mortgage lenders and is associated with racial discrimination have received much attention. However, empirical research in this area has yet to document a convincing answer to the question of whether redlining even exists. Much of the previous research in this area has suffered from failure to account for variations in risk, and/or failure to adequately control for geographical differences in demand. This study addresses these problems in an effort to determine whether the disparity in the flow of mortgage credit can be explained by differences in risk and demand.     

PROFITABILITY, EARNINGS ANNOUNCEMENT TIME LAGS, AND STOCK PRICES

This research addresses (1) whether firms with lower (hgher) than expected earnings fgures released those figures to the public later (earlier) than expected and (2) whether there is a reaction by the capital market to the timing of the earnings announcement. The results indicate that later than expected earnings announcements are likely to contain worse news than early announcements. Also the stock returns of late reporting firms appear to be lower than that of early reporting firms in the days surrounding the earnings announcement date.     

CEO Age,Risk Incentives,and Hedging Strategy

We test whether managerial preferences explain how firms hedge, using hand‐collected data on derivative portfolios in the oil and gas industry. How firms hedge involves choosing between linear contracts and put options, and deciding whether to finance these hedging positions with cash on hand or by selling call options. The likelihood of being a hedger increases with chief executive officer (CEO) age, and near‐retirement CEOs prefer linear hedging instruments. The predictions of the managerial risk incentives theory of hedging strategy, according to which managers with convex compensation schemes avoid hedging strategies that cap upside potential, find no support in the data.     

Labor market search, the Taylor principle, and indeterminacy

In a sticky-price model with labor market search and matching frictions, forecast-based interest rate policy almost always induces indeterminacy when it is strictly inflation targeting and satisfies the Taylor principle. Indeterminacy is due to a vacancy channel of monetary policy that makes inflation expectations self-fulfilling. The effect of this channel strengthens as the sluggishness of the adjustment of employment relative to that of consumption increases. When this relative sluggishness is high, the Taylor principle fails to ensure determinacy, regardless of whether the policy is forecast-based or outcome-based, whether it is strictly or flexibly inflation targeting, or contains policy rate smoothing.     

On the Cross-Sectional Relation between Expected Returns, Betas, and Size

In this paper, I set up scenarios where the mean-variance capital asset pricing model is true and where it is false. Then I investigate whether the coefficients from regressions of population expected excess returns on population betas, and expected excess returns on betas and size, allow us to distinguish between the scenarios. I show that the coefficients from either ordinary least squares or generalized least squares regressions do not allow us to tell whether the model is true or false.     

ACTIVITY STRATEGIES,AGENCY PROBLEMS,AND BANK RISK

We investigate whether diversification affects bank risk taking in the U.S. banking industry, and whether this relation is partially explained by agency theory. Our results show that U.S. banks with a relatively high share of noninterest income become riskier when moving toward non-interest-income-generating activities, especially activities from investment banking, proprietary trading, and so on. Diversification not only affects conditional average risk, but also the dispersion of risk. Moreover, diversified banks that received assistance from the Troubled Asset Relief Program (TARP) become riskier than diversified nonrecipients after TARP capital injections. Our main findings are robust to a battery of robustness tests. The results are partially explained under agency frameworks related to poor corporate governance.     

Oil prices,earnings, and stock returns

Review of Accounting Studies - Research has failed to document a consistent association between oil prices and stock prices. We propose and examine whether that failure is due to the need to link...     

Corporate social responsibility,product market perception,and firm value

We examine whether corporate social responsibility (CSR) is used to signal product quality and whether CSR affects firm value through its positive effect on product market perception. Using a proprietary database, we find that visible CSR, such as environmental and community involvement, positively impacts product market perception, particularly for standardized goods and in competitive industries, and that this impact is more pronounced for product quality attributes. Furthermore, we find that CSR indirectly increases firm value through an improvement in product market perception. We conclude that product market perception is a channel through which CSR creates firm value.     

Audit process,private information,and insider trading

Review of Accounting Studies - While the shareholder benefits of audits are well documented, evidence on whether audits can facilitate opportunistic behavior by corporate insiders is scarce. In...     

Bond Yields, Ratings, and Financial Information: Evidence from Public Utility Issues

This study investigates the relative roles of bond ratings and financial information in the setting of bond yields. Structural equation modeling techniques are used to learn whether ratings determine yields or whether both ratings and yields are determined by a concurrent set of economic and financial factors. Tests of alternative structural model configurations provide evidence regarding the associations between bond ratings, financial information, and bond yields. Both ratings and financial information are found to play an important role in determining bond yields. In addition, yields are consistent with the higher rating in cases of split ratings.     

Earnings Quality, Insider Trading, and Cost of Capital

Previous research argues that earnings quality, measured as the unsigned abnormal accruals, proxies for information asymmetries that affect cost of capital. We examine this argument directly in two stages. In the first stage, we estimate firms' exposure to an earnings quality factor in the context of a Fama‐French three‐factor model augmented by the return on a factor‐mimicking portfolio that is long in low earnings quality firms and short in high earnings quality firms. In the second stage, we examine whether the earnings quality factor is priced and whether insider trading is more profitable for firms with higher exposure to that factor. Generally speaking, we find evidence consistent with pricing of the earnings quality factor and insiders trading more profitably in firms with higher exposure to that factor.     

Deferred taxes,earnings management,and corporate governance: Malaysian evidence

This study examines whether Malaysian public listed companies (PLCs) use deferred taxes to avoid an earnings decline. In addition, this study also examines whether corporate governance mechanisms attenuate the extent to which deferred taxes are used to manage earnings. Using a sample of 221 PLCs listed on the main and second boards of Bursa Malaysia in 2008 with a complete set of data available from 2005 to 2008, this study finds that Malaysian PLCs use both the accrual and valuation allowance components of net deferred tax liabilities to avoid a decline in earnings. The study also finds that ownership structure and board structure affect the extent to which earnings management is associated with a deferred tax component.     

Distress risk,product market competition,and corporate bond yield spreads

Review of Quantitative Finance and Accounting - The purpose of this paper is to examine whether industry-level risk affects corporate bond yield spreads. We use three types of industry risk...     

Foreign Exchange Risk,Hedging, and Tax-Motivated Outbound Income Shifting

Although outbound income shifting to low-tax jurisdictions provides tax savings, it is often accompanied by nontax costs. In this study, I examine whether foreign exchange (FX) risk constrains tax-motivated outbound income shifting by U.S. multinational corporations. My findings indicate that exposure to greater currency volatility is associated with less outbound income shifting, and this effect is stronger for firms with foreign affiliates using foreign functional currencies. I also investigate whether hedging facilitates outbound income shifting. Consistent with hedging lowering costs associated with exchange rate volatility, I find that U.S. firms that use more currency derivatives tend to shift more income to low-tax foreign jurisdictions. Overall, these findings suggest that FX risk is an important cost of outbound income shifting.     

Financial Constraints,Institutions, and Firm Productivity: Evidence from China

ABSTRACT

This paper investigates whether Chinese firms utilize trade credit as an alternative financial intermediation to alleviate financial constraints, and whether trade credit matters for firm productivity. The results show that trade credit significantly affects firm productivity in private and foreign-owned firms but not state-owned enterprises, indicating that trade credit is an efficient financial intermediation for non-state firms. Second, trade credit better helps firms that have severe financial constraints grow. Third, the mechanism of trade credit and TFP is by the substitution effect of cash flow, the smoothing effect of working capital and the drive of innovation. Finally, the impact of trade credit on productivity is driven by the regions under a more institutionally developed environment.     

Securities regulation,household equity ownership,and trust in the stock market

Review of Accounting Studies - Using aggregate data from national accounts, we study whether strengthening and harmonizing securities regulation across the European Union increases household equity...     

CORRELATED BEHAVIOR IN LIMIT ORDER CANCELLATIONS,COMOVEMENT IN ASSET RETURNS,AND COMMONALITY IN LIQUIDITY

We examine whether there is common behavior in limit order cancellation activity, that is, commonality in cancellation activity, on U.S. exchanges. We then examine whether this commonality in cancellation activity is associated with increased levels of return comovement and commonality in liquidity. We document strong evidence of limit order traders exhibiting exchange, industry, marketwide, and stock-level commonality with regard to cancellation activity, which is consistent with limit order traders exhibiting correlated trading behavior. We also find that this correlated behavior in cancellation activity is associated with increased levels of return comovement and commonality in liquidity.