Dividends and Profits: Some Unsubtle Foreign Influences

American corporations earn a significant share of their profits from foreign sources, out of which they appear to pay dividends at rates that are three times higher than their payout rates from domestic profits. Why firms do so is unclear, although this behavior is consistent with the use of dividends to signal profitability. This payout behavior implies that a significant part of the U.S. tax revenue generated by the foreign profits of U.S. corporations arises through the taxation of dividends received by individuals, and that the cost of capital may be higher for foreign than for domestic operations.     

Stockholder returns and international acquisitions of financial firms: An emphasis on banking

The wealth effects for shareholders of American financial firms involved in foreign acquisitions and also the wealth effects for shareholders of U.S. target firms acquired by foreign concerns are the topics of this study. The findings indicate that stockholders of U.S. bidding financial firms (and its subset of banks) earn neither abnormal gains nor suffer abnormal losses upon the announcement of an acquisition or regulatory approval. On the other hand, stockholders of U.S. target financial firms (and its subset of banks) earn significant abnormal profits at both the announcement of the proposed acquisition and the announcement of regulatory approval of the acquisition. The wealth effects for these two samples are also compared to samples in which both parties to the acquisition are U.S. firms. The research suggests that there is no significant difference in the size of the announcement gains or losses for either stockholders of the target or bidding firms based on whether the acquisition is foreign or domestic. These findings conflict with prior research which indicates that, for firms in general, stockholders of U.S. targets earn significantly greater wealth benefits when they are acquired by foreign firms than by domestic firms. Overall, these results are consistent with a competitive market for acquisitions of financial firms in which buyers do not earn or lose at the announcement of an acquisition, and in which abnormal gains are received only by the sellers.     

Accounting Choice, Home Bias, and U.S. Investment in Non-U.S. Firms

This paper examines the relation between accounting choice and U.S. institutional investor ownership in non‐U.S. firms. We predict that U.S. investors exhibit home bias in their preference for accounting methods conforming to U.S. Generally Accepted Accounting Principles (GAAP) because such methods are more familiar, reduce information processing costs, and are perceived as higher quality. We find that firms exhibiting higher levels (changes) of U.S. GAAP conformity have greater levels (changes) of U.S. institutional ownership. Lead‐lag regressions suggest that increases in U.S. GAAP conformity precede increases in U.S. investment, but changes in U.S. institutional holdings do not precede changes in accounting methods. We also find that the positive relation between U.S. GAAP conformity and U.S. investment holds regardless of a firm's visibility to U.S. investors (e.g., American Depositary Receipt listing, stock index membership, analyst following, firm size). However, we find that U.S. GAAP conformity has a significantly greater impact among firms already visible to U.S. investors.     

The fleeting nature of permanent reinvestment: Accounting for the undistributed earnings of foreign subsidiaries

Over the last decade, an increasing percentage of the profits reported by U.S. corporations were earned by their foreign subsidiaries and retained outside the United States resulting in the deferral of income taxes. The American Jobs Creation Act of 2004 provided a temporary federal tax incentive to remit such earnings, which resulted in the repatriation of $140 billion by the 30 firms comprising the Dow Jones Industrial Average. An analysis of the financial reporting disclosures made by these firms reveals that a tax expense was not fully recognized on a substantial portion of the earnings until repatriation because of an exception for foreign reinvestments deemed to be essentially permanent in duration. The implications of the currently acceptable accounting for undistributed foreign earnings are discussed as well as recommendations to improve the relevancy and reliability of the disclosures required for this exception to comprehensive recognition of deferred taxes.     

Income shifting and U.S. international trade in goods statistics

Intrafirm trade represents greater than one-third of total U.S. international trade in goods. Since these are not arm’s-length transactions, trade policymakers have voiced concerns that income shifting may distort international trade in goods statistics through the manipulation of transfer prices. Using country-level data on intrafirm exports and imports, we estimate a path analysis that simultaneously tests how and to what extent tax-motivated transfer pricing and real investment decisions affect intrafirm trade in goods statistics. Contrary to speculation, we do not find an economically significant relation between transfer pricing and intrafirm trade in goods statistics. In contrast, we find that tax-motivated location decisions create a 21 (20) percent or $819.7 ($927.1) million difference in mean intrafirm exports (imports) between the U.S. and a low- and high-tax country. This study provides trade policymakers with relevant information about the extent to which real investment decisions and accounting manipulations affect intrafirm trade in goods statistics and contributes to the international trade and income shifting literatures.     

How different is Japanese corporate finance? An investigation of the information content of new security issues

This article studies the shareholder wealth effects associatedwith 875 new security issues in Japan from January 1, 1985,to May 31, 1991. The announcement of convertible debt issueshas a significant positive abnormal return of 1.05 percent.There is an abnormal return of 0.45 percent at the announcementof equity issues that is off-set by an abnormal return of 1.01percent on the issue day. Abnormal returns are negatively relatedto firm size, so that large Japanese firms have abnormal returnsless different from those of U.S. firms than small Japanesefirms. Our evidence is consistent with the view that Japanesemanagers decide to issue shares based on different considerationsthan American managers.     

The valuation properties of earnings and book values reported under IAS,domestic GAAP and U.S. GAAP: Evidence from China,Hong Kong,Japan, Korea and Singapore

This paper examines whether earnings or book value is the dominant valuation accounting measure for companies reporting under alternative accounting standards — International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS), U.S. Generally Accepted Accounting Principles (U.S. GAAP) or domestic accounting standards of China, Hong Kong, Japan, Korea and Singapore. Our sample consists of domestic firms in the five Asian countries and firms from these countries cross-listed in the United States as American Depositary Receipts (ADRs) from 2002 to 2011. For domestic firms, book value is more informative than earnings for firms from Hong Kong, Singapore, China, Japan and Korea during 2002–2011 although their accounting standards are influenced by different systems. For the ADR sample, book value is more informative than earnings for U.S. GAAP reporters and reconcilers during 2002–2007. However, earnings are more informative than book value for U.S. GAAP reconcilers from China. After 2007, ADRs in our sample from Hong Kong, Japan and Korea continued to file under U.S. GAAP. Some ADRs from China filed under U.S. GAAP and some filed under IFRS. Earnings are more informative than book value for IFRS users; however, book value has higher incremental value relevance than earnings for U.S. GAAP users. We contribute to prior research by providing evidence on the valuation properties based on accounting measures reported under different GAAPs for the Asian countries.     

Oil Currency and the Dollar Standard: A Simple Analytical Model of an International Trade Currency

The U.S. dollar is the central reference currency for international trade pricing and the main invoicing currency for primary commodities. This paper links these two observations within a stylized theoretical framework, and shows how to obtain a quantitative estimate of the gain to the U.S. economy when the dollar is a reference currency. With dollar invoicing of primary commodities, U.S. firms bear less exchange rate risk than foreign firms. This asymmetry leads to a dollar standard in international goods pricing. We then derive a simple analytical formula to calculate the gains and find that they are extremely small.     

Is the Mean Return of Hotel Real Estate Stocks Apt to Overreact to Past Performance?

This study examines the return patterns of hotel real estate stocks in the U.S. during the period from 1990 to 2007.We find that the magnitude and persistence of future mean returns of hotel real estate stocks can be predicted based on past returns, past earnings surprise, trading volume, firm size, and holding period. The empirical evidence found from this paper confirms that short-horizon contrarian profits can be partially explained by the lead-lag effects, while in the intermediate-term price momentum profits and long-term contrarian profits can be partially attributed to the firms’ overreaction to past price changes. Our results support the contrarian/overreaction hypothesis, and they are inconsistent with the Fama-French risk-based hypothesis or the underreaction hypothesis. The study also confirms the earning underreaction hypothesis and finds the high volume stocks tend to earn high momentum profits in the intermediate-term. The study finds that the earning momentum effect for hotel stocks is more short-lived and smaller in magnitude than the market average. Price momentum portfolios (or contrarian portfolios) of big hotel firms underperform small hotel firms and the hotel price momentum portfolio (or contrarian portfolios) significantly underperform the overall market over the intermediate-term (or the long-term). These findings imply that the U.S. hotel industry, particularly the big hotel firms, have experienced relatively conservative growth in the sample period. It suggests that a conservative hotel growth strategy accompanied by an internal-oriented financing policy is proper in a period of prosperity.     

The Effects of Market Segmentation and Investor Recognition on Asset Prices: Evidence from Foreign Stocks Listing in the United States

Non-U.S. firms cross-listing shares on U.S. exchanges as American Depositary Receipts earn cumulative abnormal returns of 19 percent during the year before listing, and an additional 1.20 percent during the listing week, but incur a loss of 14 percent during the year following listing. We show how these unusual share price changes are robust to changing market risk exposures and are related to an expansion of the shareholder base and to the amount of capital raised at the time of listing. Our tests provide support for the market segmentation hypothesis and Merton's (1987) investor recognition hypothesis.