The American keiretsu and universal banks: Investing,voting and sitting on nonfinancials’ corporate boards

This paper investigates the equity investments and voting rights that American banks control through their trust business. The paper also studies whether the voting rights American banks control through their trust business help explain their presence on firms’ corporate boards. We find that on average the largest 100 American banks control 10% of the voting rights of S&P 500 firms. We also find that there are several firms in the S&P 500 index in which the top banks control more than 20% of their voting rights, and several firms in the country in which these banks control more than 60% of their voting rights. Our investigation into the presence of American bankers on corporate boards shows that bankers are more likely to join the boards of firms in which they control a large voting stake. We also find that banks’ lending relationships help explain bankers’ board memberships. Our results further show that bankers who have both a voting stake in a firm and a lending relationship with it have a higher likelihood of joining the firm's board of directors.     

Corporate Social Responsibility,Tax Aggressiveness,and Firm Market Value

This paper examines the relationship of corporate social responsibility (CSR), tax aggressiveness, and firm market value. An economic model has been developed to show that profit‐maximization firms are willing to incur additional costs in CSR, such as paying more taxes, as long as they can differentiate their products from non‐CSR firms, and that socially conscious consumers will buy products from CSR firms at prices higher than those of non‐CSR firms. The empirical study in this paper indicates that the higher the CSR ranking of a firm, the less likely a firm is to engage in tax aggressiveness. It also indicates that a reputation of higher CSR will enhance firm market value. Using Canadian companies listed in the S&P/TSX 60 index, I find that both firms’ five‐year effective tax rates and annual effective tax rates are positively associated with their overall CSR scores as well as with their social scores. Firms’ five‐year effective tax rates are also positively associated with their governance index. I also find that firms’ overall CSR ranking and governance scores are positively associated with their market value.     

An analysis of the importance of S&;P 500 discretionary constituent changes

The main purpose of this paper is to investigate the impact of the S&P 500 index committee’s decisions to change the constituent firms in the index on benchmark risk measures. The index is managed and changed discretionally by the index committee to make it as representative of the market condition as possible. In addition, the index constantly changes due to important corporate events such as bankruptcies, mergers and acquisitions, and spin-offs. We reconstruct market portfolios by retaining all discretionally deleted firms in a 3 and 5 year periods. We estimate betas at every deletion date in terms of reconstructed market portfolios; we found that these estimate betas are significantly different from the betas obtained from the constantly updated S&P 500 portfolio. We also found that such portfolios are less representative of the business cycle than the actual S&P 500 portfolio. Finally, we found that the portfolio returns obtained by retaining all discretionally deleted firms deviate significantly from the returns of the actual S&P 500 index over the studied period, October 1989 to December 2007.     

Association Between Borrower and Lender State Ownership and Accounting Conservatism

We examine the association between borrower (firm) and lender (bank) state ownership and accounting conservatism for a sample of Chinese firms. We hypothesize that state‐owned enterprises (SOEs) adopt less conservative accounting than non‐state‐owned enterprises (NSOEs) because lenders are less concerned with downside risk for SOEs than for NSOEs. We also hypothesize a negative relation between conservatism and the fraction of total loans a firm borrows from state‐owned banks (SBs) because SBs have weaker demand for assurance of sufficient net assets to cover loan repayments than non‐state‐owned banks (NSBs). We find support for both hypotheses. Further analyses reveal that: (1) firms that borrow from commercial SBs exhibit more conservative accounting than firms that borrow from policy SBs and (2) firms adopt more conservative accounting as they get more loans from banks with foreign ownership or exclusively foreign banks. However, the results of these additional analyses are to some extent sensitive to alternative measures of accounting conservatism.     

Opacity of young businesses: Evidence from rating disagreements

A conventional wisdom in the contemporary corporate finance literature argues that small and medium-sized enterprises (SMEs) are informationally opaque. We use data from two credit information companies and in particular their disagreements over the creditworthiness of SMEs to study the empirical relevance of this often invoked assumption. Our panel data analysis shows that once unobserved firm-effects are controlled for, the disagreements (i.e., rating splits) are inversely related to the age of firms. We are not able to document such a robust relationship between the disagreements and the size of firms. This finding holds a lesson for empirical corporate finance researchers who need firm-level proxies for informational imperfections and asymmetries: of the two often-used proxies, firm size is not as closely related to informational opacity as firm age is.     

Firm Characteristics as Cross‐sectional Determinants of Adverse Selection

Abstract:   We analyze the role of firm characteristics in determining the extent of adverse selection, and therefore liquidity, in securities markets. After controlling for the effects of the well‐established determinants of adverse selection, we find evidence that a firm's ratio of plant, property, and equipment to total book assets and its status as a public utility have additional explanatory power. To the extent that these variables are reasonable proxies for the firm's transparency of assets and regulatory environment, we assert these factors contribute to the adverse selection cost of transacting for our sample of NYSE listed S&P 500 firms.     

What's in the News? Information Content of S&P 500 Additions

I investigate the information content of S&P 500 index changes by examining the price and volume reaction of the industry and size matched firms. Using a sample of S&P 500 additions between 1976–2001, I find a significantly positive price reaction, but no volume reaction, for the matching firms. In addition, the matching-firm price reaction is negatively related to the added firm's weight in its industry. These findings suggest that the index addition conveys favorable information about the added firm and its industry.     

S&P 500 index addition,liquidity management and Tobin's Q

This study examines the revision in cash holdings and the market valuation of investment opportunities of 475 firms added to the Standard & Poor's 500 (S&P 500) stock market index from 1980 to 2010. We find that newly indexed firms have evolved to significantly lower cash balances, which we partially explain by the decreasing growth opportunities following index inclusion. Consistent with index inclusion loosening financial constraints, we document a larger decrease in cash for index inclusions in sectors with high financial dependence. We sort S&P 500 inclusions by corporate governance quality but do not find any empirical support that changes in cash and Tobin's Q are related to management entrenchment.     

Effects of Firm Size,Financial Leverage and R&D Expenditures on Firm Earnings: An Analysis Using Quantile Regression Approach

As documented in the literature, the effects of firm size, financial leverage, and R&D expenditures on firm earnings are inclusive. Our hypothesis is that the inconsistent empirical results of such effects may be driven by the regression models implemented in data analysis. Using the quantile regression (QR) approach developed by Koenker and Basset (1978), this study analyses S&P 500 firms from 1996 to 2005. We find that the effects of firm size, financial leverage and R&D expenditures on firm earnings differ considerably across earnings quantiles. Comparing the results from the QR approach with those from the ordinary least squares (OLS) and least absolute deviation (LAD) methods, this study further explains the puzzling relationship between firm size, financial leverage, R&D expenditures and firm earnings.     

The competitive effects of S&P 500 Index revisions

Firms added to the S&P 500 Index gain a competitive advantage over their non‐S&P 500 industry competitors. They experience positive stock valuation effects at the expense of competitors. The inclusion is associated with both reductions in financial constraints and the cost of equity and increases in capital investment for the newly added firms. When the increase in capital investment is greater, they gain more market share and enjoy better valuation effects. Rivals’ share price responses are negatively related to the announcement effect of the newly added firm. Deletions from the index, however, do not have symmetric effects.     

Information Complementarities and the Dynamics of Transparency Shock Spillovers

We show that information complementarities play an important role in the spillover of transparency shocks. We exploit the revelation of financial misconduct by S&P 500 firms, and in a “Stacked Difference-in-Differences” design, find that the implied cost of capital increases for “close” industry peers of the fraudulent firms relative to “distant” industry peers. The spillover effect is particularly strong when the close peers and the fraudulent firm share common analyst coverage and common institutional ownership, which have been shown to be powerful proxies for fundamental linkages and information complementarities. We provide evidence that increase in the cost of capital of peer firms is due, at least in part, to “beta shocks.” Disclosure by close peers—especially those with co-coverage and co-ownership links—also increases following fraud revelation. Although disclosure remains high in the following years, the cost of equity starts to decrease.     

Auditor Independence: A Nonparametric Test of Differences Across the Big‐5 Public Accounting Firms

This small sample study provides additional evidence on the unsettled question of auditor independence: Does the provision of non‐audit services by an auditor compromise independence resulting in a poor quality audit? We also examine whether these findings vary across the “Big‐5” public accounting firms. Most prior studies addressing this question, using parametric approaches and various measures of audit quality, have reported conflicting results. Contrary to these studies, we use a non‐parametric approach and the probability of GAAP violation as a new measure of audit quality to address this question. Using data from a sample of Fortune 500 companies for the year 2000, we find that firms whose auditors provide substantial non‐audit services tend to have a higher propensity to violate GAAP. At the firm‐level analysis, we find that these results are more likely driven by few of the Big‐5 public accounting firms. For the remaining firms, the association between non‐audit services and quality of audit could not be established, primarily because of small sample size and lack of power in the test. Our main finding is consistent with other recent studies that provide evidence that the rendering of significant non‐audit services by auditors creates conflict of interest resulting in poor quality audits. Furthermore, our result of differences in these levels of association among the Big‐5 accounting firms represents a new finding, and suggests that there is a need for controlling them separately in research studies examining auditor independence.     

The moderating role of board gender diversity on the relationship between firm opacity and stock returns

In this study, we examine the impact of board gender diversity on the association between firm opacity and stock price crash. We utilize the negative shock of the 2007–2008 financial crisis to capital markets to examine whether firms with gender-diverse boards witnessed lower stock price crashes due to their lower opacity ex ante. Using a sample of S&P 1500 firms spanning the period 2005–2008, we employ a difference-in-differences research design and find that firms with high opacity ex ante witness more negative returns ex post. We also find that gender-diverse firms ex ante witness less negative returns ex post. Finally, our analysis reveals the moderating role that board gender diversity plays in the association between firm opacity and stock returns around the financial crisis. We subject our results to a range of robustness checks, including instrumental variable regressions, matched-sample analyses, and a set of falsification and placebo tests. Overall, we provide evidence that board gender diversity is associated with increased transparency in financial reporting, which pays off in times of crisis.     

Corporate Governance and Expected Stock Returns: Evidence from Germany

Recent empirical work shows evidence for higher valuation of firms in countries with a better legal environment. We investigate whether differences in the quality of firm‐level corporate governance also help to explain firm performance in a cross‐section of companies within a single jurisdiction. Constructing a broad corporate governance rating (CGR) for German public firms, we document a positive relationship between governance practices and firm valuation. There is also evidence that expected stock returns are negatively correlated with firm‐level corporate governance, if dividend yields are used as proxies for the cost of capital. An investment strategy that bought high‐CGR firms and shorted low‐CGR firms earned abnormal returns of around 12% on an annual basis during the sample period.     

Does stardom affect the informativeness of a CEO's insider trades?

This study examines whether the celebrity or star status of a chief executive officer (CEO) affects the informativeness of his insider trades. Using three different measures to identify star CEOs in a sample of S&P 1500 firms, we find that trades of non‐star CEOs predict future abnormal returns and earnings innovations and that trades of star CEOs do not. The predictive power of non‐star CEO trades is mostly attributable to opportunistic trades, not routine trades. We also find evidence suggesting that the abnormal returns associated with non‐star CEO insider trades are due to the lower visibility and consequently less scrutiny of non‐star CEOs compared with star CEOs.     

Cost of Equity and S&P 500 Index Revisions

We examine how the cost of equity changes when firms are added to or removed from the S&P 500 Index during index revisions. Newly added firms experience a significant decline in the cost of equity, while recently removed firms show a significant increase. Liquidity improves for addition firms and declines for removed firms. Addition firms also experience a decline in shadow cost. Changes in cost of equity for included firms are explained by changes in liquidity, shadow cost, and firm size. Finally, included firms with greater investment opportunities benefit more from the reduction in cost of capital.     

A re-examination of the index effect: Gambling on additions to and deletions from the S&P 500's ‘gold seal’

This study examines the abnormal returns, trading activity, volatility and long-term performance of stocks that were added to the S&P 500 index. By using a three-factor pricing model that allows for firm size and value characteristics as well as market risk, we are able to shed new light on the widely observed ‘index effect’. We find that the CAPM tends to overstate the performance of large firms and to understate the performance of small firms. We also find a transitory increase in trading volume between the announcement and a few days after the effective date. In terms of the firm's operating performance, we find a significant increase in earnings per share after inclusion, which combines with the stock price rise to leave the average price-earnings ratio largely unaltered. Examining a unique sample of deletions of international companies and replacements with US companies, we find that deleted stocks experienced a considerable and permanent fall in price, inconsistent with the Investor Recognition Hypothesis. The “seal” of S&P 500 index membership has very long-term effects and inclusion appears not to be an information-free event.     

Market Reaction to Changes in the S&P SmallCap 600 Index

Firms added to (deleted from) the S&P 600 index experience a significant price increase (decrease) at announcement. Firms that newly enter (exit) the S&P universe experience a larger price increase (decrease) than firms that move between S&P indexes. Trading volumes are higher after the announcement and institutional ownership increases (decreases) following index additions (deletions). However, the price and volume effects are temporary and are fully reversed within 60 days, in contrast to the permanent effects reported for S&P 500 changes. Our results support the temporary price‐pressure hypothesis and are similar to results reported for Russell 2000 index changes.     

The Impact of Corporate Social Performance on Financial Risk and Utility: A Longitudinal Analysis

This study focuses on the wealth‐protective effects of socially responsible firm behavior by examining the association between corporate social performance (CSP) and financial risk for an extensive panel data sample of S&P 500 companies between the years 1992 and 2009. In addition, the link between CSP and investor utility is investigated. The main findings are that corporate social responsibility is negatively but weakly related to systematic firm risk and that corporate social irresponsibility is positively and strongly related to financial risk. The fact that both conventional and downside risk measures lead to the same conclusions adds convergent validity to the analysis. However, the risk‐return trade‐off appears to be such that no clear utility gain or loss can be realized by investing in firms characterized by different levels of social and environmental performance. Overall volatility conditions of the financial markets are shown to play a moderating role in the nature and strength of the CSP‐risk relationship.     

Are red or blue companies more likely to go green? Politics and corporate social responsibility

Using the firm-level corporate social responsibility (CSR) ratings of Kinder, Lydenberg, Domini, we find that firms score higher on CSR when they have Democratic rather than Republican founders, CEOs, and directors, and when they are headquartered in Democratic rather than Republican-leaning states. Democratic-leaning firms spend $20 million more on CSR than Republican-leaning firms ($80 million more within the sample of S&P 500 firms), or roughly 10% of net income. We find no evidence that firms recover these expenditures through increased sales. Indeed, increases in firm CSR ratings are associated with negative future stock returns and declines in firm ROA, suggesting that any benefits to stakeholders from social responsibility come at the direct expense of firm value.