Does the Specialist Matter? Differential Execution Costs and Intersecurity Subsidization on the New York Stock Exchange

This article tests for differences in execution costs among specialist firms for New York Stock Exchange listed securities. Execution cost differences provide a measure of the relative performance of specialist firms. We find a substantial difference in effective spreads and order processing costs across specialist firms, controlling for stock characteristics. While economically significant, the differences in execution costs between specialist firms are much smaller than the cross-market differences reported by Huang and Stoll (1996). Within a specialist firm, there is a positive relation between order processing costs and trading activity that is consistent with the hypothesis that active stocks subsidize inactive stocks.     

Cleaning house: Stock reassignments on the NYSE

A frequently occurring, yet unexplored, phenomenon of the New York Stock Exchange specialist system is that of reassignments of stocks by specialist firms on the floor of the Exchange. These events change the portfolios at the individual specialist level by reassigning one or more stocks from one individual specialist portfolio to another. We find that reassigned stocks have unusually wide spreads before reassignments and experience a decline in spreads to levels comparable to matched stocks after the reassignment. This improvement in liquidity is associated with a reduced cost of capital for the reassigned firms. We find that portfolio size, and industry and size concentration of the individual specialist portfolios are associated with the decision of specialist firms to reassign stocks.     

Future Events—A Conceptual Study of their Significance for Recognition and Measurement A Review Article

A number of research papers present evidence of fee premiums paid to specialist auditors. In this paper, we explore for listed and unlisted New Zealand firms not only the question of whether such premiums exist, but perhaps more importantly why they exist. We find evidence of fee premiums for auditor specialisation defined at the city level but not at the national level. We extend testing to examine the issue of self-selection of auditors by clients; we examine several different industry classification schemes and a number of different specialisation measures; and we consider the issue of portfolio specialists. We find from these additional tests that self-selection does not account for the existence of specialisation premiums; various alternative classification schemes all result in premiums at the city level; and portfolio specialists also earn fee premiums when portfolio specialisation is measured at the city level. We find that these specialist premiums apply most consistently to larger client firms and to low-risk firms. We consider various explanations and conclude that this result is consistent with non-specialist auditors providing discounts to attract desirable clients. Desirable clients – those that are large or low risk – are not able to negotiate fees as successfully with auditors who have differentiated themselves via industry specialisation.     

Effects of audit committee chair characteristics on auditor choice,audit fee and audit quality

We investigate whether the characteristics of audit committee (AC) chairs are associated with decisions about auditor choice, audit fees and audit quality. Using hand-collected Australian data, firms with AC chairs who have longer tenure and multiple AC memberships across several boards are found to be more likely to choose Big 4 and/or industry specialist auditors, pay higher audit fees and have lower discretionary accruals. Those AC chairs with higher business qualifications are more likely to hire a Big 4 auditor, pay higher audit fees and have lower discretionary accruals, while AC chairs with professional qualifications are more likely to hire a Big 4 and/or industry specialist auditor. In contrast, firms with AC chairs who are executive directors are less likely to hire a Big 4 auditor and have higher discretionary accruals. Our findings contribute to the literature by documenting that various characteristics of AC chairs are important for enhancement of auditor selection and audit quality.     

Generalists versus specialists: Lifetime work experience and chief executive officer pay

We show that pay is higher for chief executive officers (CEOs) with general managerial skills gathered during lifetime work experience. We use CEOs' résumés of Standard and Poor's 1,500 firms from 1993 through 2007 to construct an index of general skills that are transferable across firms and industries. We estimate an annual pay premium for generalist CEOs (those with an index value above the median) of 19% relative to specialist CEOs, which represents nearly a million dollars per year. This relation is robust to the inclusion of firm- and CEO-level controls, including fixed effects. CEO pay increases the most when firms externally hire a new CEO and switch from a specialist to a generalist CEO. Furthermore, the pay premium is higher when CEOs are hired to perform complex tasks such as restructurings and acquisitions. Our findings provide direct evidence of the increased importance of general managerial skills over firm-specific human capital in the market for CEOs in the last decades.     

Simple formulas for standard errors that cluster by both firm and time

When estimating finance panel regressions, it is common practice to adjust standard errors for correlation either across firms or across time. These procedures are valid only if the residuals are correlated either across time or across firms, but not across both. This paper shows that it is very easy to calculate standard errors that are robust to simultaneous correlation along two dimensions, such as firms and time. The covariance estimator is equal to the estimator that clusters by firm, plus the estimator that clusters by time, minus the usual heteroskedasticity-robust ordinary least squares (OLS) covariance matrix. Any statistical package with a clustering command can be used to easily calculate these standard errors.     

Evaluating the effect of industry specialist duration on earnings management

This study examines whether auditor industry specialist duration (i.e., the cumulative number of years an audit firm can be deemed an industry specialist) affects earnings management. Using a sample of 17,546 observations during the period of 2006 to 2014, we find that audits performed by firms with longer industry specialist durations are associated with lower levels of earnings management, as proxied by the absolute value of discretionary accruals. This finding enhances the industry specialization literature by showing that, in the long run, specialist auditors constrain the accrual management activities of their clients. However, we also find that audits performed by firms with longer industry specialist durations are associated with greater levels of real earnings management. In turn, this is consistent with real earnings management surfacing as an unintended consequence of specialist auditors being able to better constrain the accrual management activities of their clients (Chi, Lisic, & Pevzner, 2011).     

Industry specialist auditors, outsider directors, and financial analysts

This study investigates the relationships among industry specialist auditors, outside directors, and financial analysts. Specifically, we examine the effect of analyst coverage on the association between auditor industry specialization and outside directorship. We find that outside directors are less likely to hire industry specialist auditors for firms with high analyst coverage than for firms with low analyst coverage. Our findings suggest that analyst coverage moderates outside directors’ demand for industry specialist auditors, that is, financial analysts may compete with industry specialist auditors to some extent in monitoring financial reporting process.     

Bank and Nonbank Financial Intermediation

Conglomerates, trade credit arrangements, and banks are all instances of financial intermediation. However, these institutions differ significantly in the extent to which the projects financed absorb aggregate intermediary risk, in whether or not intermediation is carried out by a financial specialist, in the type of projects they fund and in the type of claims they issue to investors. The paper develops a simple unified model that both accounts for the continued coexistence of these different forms of intermediation, and explains why they differ. Specific applications to conglomerate firms, trade credit, and banking are discussed.     

Auditor selection and corporate social responsibility

This study examines the association between the selection of an industry‐specialist auditor and corporate social responsibility (CSR). We find that firms with higher CSR ratings are more likely to hire industry‐specialist auditors (national‐level industry leaders, city‐level industry leaders or joint city‐national industry leaders). Moreover, firms with better CSR performance related to product quality and the environment in controversial industries are found to select non‐specialized auditors. The results suggest that such firms may overinvest in CSR activities associated with the environment and product issues to disguise the sin nature of their manufactured goods, and simultaneously engage low quality auditors perhaps to avoid full disclosure of potential environmental and legal liabilities. Overall, we conclude that CSR is associated with the non‐controversial firms ensuring high quality financial reporting in response to societal expectations, and thus CSR firms in such industries have strong incentives to engage industry‐specialist auditors.     

Capability satisficing in high frequency trading

This paper explains the capability theory of how HFT firms make allocation decisions under uncertainty, and shows how capability maximization is precisely consistent with utility theory. The issue, however, is how these firms actually make allocation decisions in practice. Using the Gioia methodology, this paper presents evidence from interviews with HFT professionals and specialist media that suggest that these firms are capability satisficers. Capability theory is also consistent with bounded rationality and the adaptive markets hypothesis, and defines the point at which these firms reach a satisfactory solution. Thus, capability reconciles mainstream theory and the more realistic, behavioral theories based on observation of industry practice. The methodology developed can be applied to any firm that makes algorithmic decisions under uncertainty.     

How do independent directors view generalist vs. specialist CEOs? Evidence from an exogenous regulatory shock

Exploiting the passage of the Sarbanes-Oxley Act as a quasi-natural experiment, we explore how independent directors view generalist vs. specialist CEOs. Generalist CEOs possess the general managerial skills that can be applied across firms and industries. Our difference-in-difference estimates show that independent directors view generalist CEOs unfavorably. Firms forced to raise board independence experience a lower increase in CEO general ability than those not required to change board composition. Additional analysis confirms the results, including fixed- and random-effects regressions, propensity score matching, instrumental-variable analysis, and Oster's (2019) technique for testing coefficient stability.     

Asymmetric information and liquidity constraints: A new test

Using a novel measure of the degree of information asymmetry across firms, this study shows that information-related financial market imperfections do matter for a firm’s access to external finance. Prior studies of the importance of liquidity constraints faced by nonfinancial firms have suffered from a glaring weakness. They have been based on a sample of publicly traded firms, omitting precisely those firms most likely to be liquidity constrained. Furthermore, they have tended to rely on indirect measures of the degree of information asymmetry, such as firm size. We overcome these limitations by focusing on the banking sector. Unlike the nonfinancial sector, the banking sector has balance sheet and income data available for all firms, whether or not they are publicly traded. This allows the use of a superior measure of the degree of information asymmetry across firms by distinguishing between publicly traded and non-publicly traded banks.     

Inter-corporate loans: the Indian experience

We examine transactions of inter-corporate loans among Indian non-financial firms during 1999–2014. We find that the consolidated amount of these loans is not small and comparable to total short-term bank loans transacted in a year. Over the years, a number of such loan providers/receivers has increased. Both group and stand-alone firms across different industries receive and provide inter-corporate loans and these transactions are not one-off events. Larger and older firms grant these loans to smaller and younger firms. Loan receivers report higher leverage, accounts payable and lower cash balance than non-receivers and about thirty percent of loan receivers are financially distressed.     

Credit Management: An Examination of Policy Choices, Practices and Late Payment in UK Companies

A central element in developing credit management policy involves design choices on the extent to which credit activities are best managed internally or through specialist market intermediaries. This paper draws on the findings of a survey on the credit management practices and policies of large UK companies to: (1) Examine the type of firm most likely to enter into specialist external credit management structural arrangements; and (2) Identify contextual and credit policy choices influencing the credit period taken and late payment of debts. The study found that specialist intermediaries are not particularly common in large firms. The paper also identifies a number of contextual and policy variables that help explain variation in debtor days and late payment by customers.     

Why firm access to the bond market differs over the business cycle: A theory and some evidence

This paper presents a theory of firm access to the bond market in which information gathering agencies are valuable but alter the relative cost of bond financing across firms and over the business cycle. The theory builds on the assumption that information frictions prevent these agencies from rating firms correctly all of the time. As a result, the cost of bond financing becomes dependent on the state of the economy and the “quality” of the signal provided by these agencies’ ratings. In addition, when the mix of bond issuers becomes riskier, as happens in recessions, bond financing becomes more expensive for mid-quality firms. Bond financing may even become more expensive to all firms, in which case mid-quality firms will be affected the most. The analysis of the bonds issued in the last two decades by American firms shows that split ratings, our proxy for the “quality” of the rating agencies’ signal, do not affect the relative cost of bond financing across firms in expansions, but they do increase the relative cost of this funding source for mid-credit quality issuers in recessions.     

Institutional Ownership and the Selection of Industry Specialist Auditors

This study provides evidence linking corporate governance mechanisms to the choice of auditor, namely industry specialists. Given that institutional investors are likely to prefer higher quality financial reports to lower quality reports, we theorize that institutional investors will influence managers of companies in which they invest to improve reporting quality by using higher quality, industry specialist auditors. Our findings indicate that firms having relatively greater levels of institutional ownership tend to employ industry specialist audit firms. The results of this study contribute to an understanding of an important facet of corporate governance, the selection of a high quality audit firm.     

Engagement partner specialization and corporate disclosure transparency

This paper explores the association of audit partners' industry specialization with corporate disclosure transparency and the latter's informativeness. The distinctive institutional designs of partner signature requirement and Information Disclosure and Transparency Ranking System (IDTRS) adopted in Taiwan allow us to empirically address the issue. We posit and find that the rankings from the IDTRS are higher for firms audited by industry specialist engagement partners than for firms audited by non-specialist engagement partners. Additionally, the results show that the probability of informed trade (PIN) proxy for information asymmetry is negatively associated with the rankings for clients of industry specialist engagement partners, but not for clients of industry non-specialist engagement partners. The results are robust with respect to alternative estimation method and alternative measures of industry specialization. Overall, the evidence suggests that industry specialist engagement partners enhance the credibility of corporate disclosure transparency, through which information asymmetry is further declined. The evidence provides policy implications to the partner signature requirement adopted in Taiwan and China.     

Investment efficiency,state-owned enterprises and privatisation: Evidence from Viet Nam in Transition

Our research firstly tests the difference in investment efficiency between state-owned enterprises (SOEs) and private firms and secondly evaluates the effect of privatisation and equitisation policies on the investment efficiency of former state owned enterprises (SOEs). We use a novel dataset from Viet Nam which covers large and non-listed SMEs across construction, manufacturing, and service sectors. Our methodology uses a structural model to test the relationship between Tobin's Q and capital spending. While evident differences in investment efficiency are found across heterogeneous groups of private firms (size, industry, financially constrained and location), we find no evidence of investment spending being linked to marginal returns by SOEs across all sectors and size classes. However, former SOEs that have been privatised and equitized with a minority state shareholding display positive links between Q and investment. In fact, the link is stronger for these firms than for private firms. Differences are also evident across size and sector highlighting that the method of divestment chosen by government shareholders has a differential impact on efficiency across groups of firms and industries.     

Financing patterns around the world: Are small firms different?

Using a firm-level survey database covering 48 countries, we investigate how financial and institutional development affects financing of large and small firms. Our database is not limited to large firms but includes small and medium-size firms and data on a broad spectrum of financing sources, including leasing, supplier, development, and informal finance. Small firms and firms in countries with poor institutions use less external finance, especially bank finance. Protection of property rights increases external financing of small firms significantly more than of large firms, mainly due to its effect on bank finance. Small firms do not use disproportionately more leasing or trade finance compared with larger firms, so these financing sources do not compensate for lower access to bank financing of small firms. We also find that larger firms more easily expand external financing when they are constrained than small firms. Finally, we find suggestive evidence that the pecking order holds across countries.