Multimarket Trading and Liquidity: Theory and Evidence

We develop a new model of multimarket trading to explain the differences in the foreign share of trading volume of internationally cross‐listed stocks. The model predicts that the trading volume of a cross‐listed stock is proportionally higher on the exchange in which the cross‐listed asset returns have greater correlation with returns of other assets traded on that market. We find robust empirical support for this prediction using stock return and volume data on 251 non‐U.S. stocks cross‐listed on major U.S. exchanges.     

To Guide or Not to Guide? Causes and Consequences of Stopping Quarterly Earnings Guidance

In recent years, quarterly earnings guidance has been harshly criticized for inducing “managerial short‐termism” and other ills. Managers are, therefore, urged by influential institutions to cease guidance. We examine empirically the causes of such guidance cessation and find that poor operating performance — decreased earnings, missing analyst forecasts, and lower anticipated profitability — is the major reason firms stop quarterly guidance. After guidance cessation, we do not find an appreciable increase in long‐term investment once managers free themselves from investors’ myopia. Contrary to the claim that firms would provide more alternative, forward‐looking disclosures in lieu of the guidance, we find that such disclosures are curtailed. We also find a deterioration in the information environment of guidance stoppers in the form of increased analyst forecast errors and forecast dispersion and a decrease in analyst coverage. Taken together, our evidence indicates that guidance stoppers are primarily troubled firms and stopping guidance does not benefit either the stoppers or their investors.     

Corporate Control and the Choice of Investment Financing: The Case of Corporate Acquisitions

We test the proposition that corporate control considerations motivate the means of investment financing—cash (and debt) or stock. Corporate insiders who value control will prefer financing investments by cash or debt rather than by issuing new stock which dilutes their holdings and increases the risk of losing control. Our empirical results support this hypothesis: in corporate acquisitions, the larger the managerial ownership fraction of the acquiring firm the more likely the use of cash financing. Also, the previously observed negative bidders' abnormal returns associated with stock financing are mainly in acquisitions made by firms with low managerial ownership.     

Expectations of Inflation: The Role of Demographic Variables,Expectation Formation,and Financial Literacy

When financial decisions have consequences beyond the immediate future, individuals' economic success may depend on their ability to forecast the rate of inflation. Higher inflation expectations have been reported by individuals who are female, poorer, single and less educated. Our results suggest that these demographic differences in inflation expectations may be partially explained by variations in expectation formation and financial literacy. Specifically, higher inflation expectations were reported by individuals who focused more on how to cover their future expenses and on prices they pay (rather than on the US inflation rate) and by individuals with lower financial literacy.     

Organization Capital

We develop a firm-specific measure of the most important intangible asset—organization capital—and document that organization capital is associated with five years of future operating and stock return performance, after controlling for other factors. Thus, our organization capital measure captures firms' fundamental ability to generate abnormal performance. We also find that executive compensation is positively associated with our measure of organization capital, showing that the measure indeed reflects managerial ability.     

Annoncer ou ne pas annoncer? Causes et conséquences de l’abandon des annonces de résultats trimestriels prévisionnels

Depuis quelques années, les annonces de résultats trimestriels prévisionnels font l’objet de sévères critiques, leurs détracteurs affirmant qu’elles incitent à la gestion à courte vue et à d’autres péchés. C’est pourquoi les institutions influentes enjoignent aux dirigeants de cesser la publication de résultats trimestriels prévisionnels. Les auteurs examinent empiriquement les causes de cet abandon de la publication de résultats trimestriels prévisionnels et constatent que la piètre performance opérationnelle — bénéfices à la baisse, résultats inférieurs aux prévisions des analystes et rentabilité prévue plus faible — est le principal motif pour lequel les entreprises abandonnent les annonces de résultats trimestriels prévisionnels. Dans les entreprises qui ont abandonné ces annonces, les auteurs n’observent pas de croissance appréciable de l’investissement à long terme après que les dirigeants se soient libérés de la myopie des investisseurs. Contrairement à l’affirmation selon laquelle les entreprises publieraient davantage d’autres informations à caractère prévisionnel en remplacement des annonces de résultats trimestriels et prévisionnels, les auteurs constatent que les entreprises se dérobent. Ils observent également une détérioration de l’environnement informationnel des entreprises qui cessent la publication de résultats trimestriels prévisionnels, détérioration qui se manifeste par un plus grand nombre d’erreurs dans les prévisions des analystes et une plus grande dispersion des prévisions et par une diminution de l’intérêt des analystes. Ces constatations révèlent, dans leur ensemble, que les entreprises qui abandonnent les annonces de résultats trimestriels prévisionnels sont principalement des entreprises en difficulté, et que la décision d’abandon n’est avantageuse ni pour les entreprises qui la prennent ni pour leurs investisseurs.     

Competitive Costs of Disclosure by Biotech IPOs

This study empirically examines the impact of various competitive cost proxies on the extent of product‐related information disclosed by biotech initial public offerings (IPOs) in their prospectuses. The choice of biotech companies, which operate in a fiercely competitive environment, crystalizes the importance of competitive disclosure costs. The focus on product‐related information is aimed at a disclosure set for which potential competitive harm is a priori substantial. Our empirical analyses establish three disclosure determinants: the stage of product development, availability of patent protection, and venture capital backing. Additionally, we find the relative size of ownership retained by pre‐IPO owners to be negatively related to the extent of disclosure, as predicted by signaling models. We also document the expected inverse relation between the extent of information conveyed by the biotech IPOs and widely used measures of information asymmetry: the bid‐ask spread and quoted depth, as well as stock return volatility.     

Stock Splits and Stock Dividends: Why,Who, and When

This study investigates empirically why firms split their stock or distribute stock dividends and why the market reacts favorably to these distributions. The findings suggest that stock splits are mainly aimed at restoring stock prices to a “normal range.” Some support can also be found for the oft-mentioned signalling motive of stock splits. Stock dividends are altogether different from stock splits, and they appear to be a decreasing phenomenon. The clue to stock dividend distributions may lie in their perceived substitution for relatively low cash dividends.     

Nonlinearity in the Returns-Earnings Relation: Tests of Alternative Specifications and Explanations*

Abstract. Several authors recently challenged the linearity of the returns-earnings relation. In this article, we test the adequacy of alternative nonlinear specifications and examine the validity of various explanations put forth for the returns-earnings nonlinearity. Our main findings are (1) that the nonlinearity persists even when the returns-earnings relation is estimated on annual data (most previous studies used quarterly data) and by a nonparametric procedure that does not impose a specific functional form on the relation; (2) that some nonlinearity exists in the relation between stock returns and earnings levels (previous studies have considered earnings surprises), although it is much less pronounced than the returns-earnings surprise nonlinearity; (3) that the main nonlinear estimation methods used in previous studies and in the current one appear to characterize equally well the underlying returns-earnings relation; predictions of subsequent stock returns based on each of the three specifications the authors examined are largely indistinguishable with respect to their accuracy; (4) that although “special items,” usually identified as transitory by the accountants, appear to contribute to the nonlinearity, there are probably additional contributing factors; the authors find that when all extraordinary items and “special items” are removed from earnings, the returns-earnings relation still exhibits nonlinearity, (5) that the inclusion of cash flow or accrual information also does not eliminate the nonlinearity; and (6) that the returns-cash flow relation is also nonlinear. The authors conclude that nonlinearity of the returns-earnings relation is quite robust across several alternative specifications. However, the candidate explanations they examined do not fully explain the observed nonlinearity. The search for the underlying cause of nonlinearity must therefore continue. Résumé. Plusieurs auteurs remettaient récemment en question la linéarité de la relation rendements-bénéfices. Les auteurs de l'article qui suit vérifient, pour leur part, si les formes non linéaires envisageables sont appropriées et examinent la validité de diverses explications mises de l'avant pour éclairer la non-linéarité de la relation rendements-bénéfices. Leurs principales observations sont les suivantes: (1) la non-linéarité persiste même lorsque la relation rendements-bénéfices est estimée à partir de données annuelles (la plupart des études précédentes s'appuyaient sur des données trimestrielles) et au moyen d'un procédé non paramétrique qui n'impose pas de forme fonctionnelle précise à la relation; (2) une certaine non-linéarité existe dans la relation entre le rendement des actions et les niveaux de bénéfice (les chercheurs avaient, jusque-là, pris en considération les bénéfices inattendus), bien que cette non-linéarité soit beaucoup moins accentuée que la non-linéarité des rendements-bénéfices inattendus; (3) les principales méthodes d'estimation non linéaire utilisées dans les études précédentes et dans la présente étude semblent définir tout aussi bien la relation sous-jacente rendements-bénéfices; les prédictions relatives aux rendements subséquents des actions en fonction de chacune des trois formes que les auteurs ont examinées sont, dans la majorité des cas, impossibles à différencier en ce qui a trait au degré d'exactitude; (4) bien que des éléments ? exceptionnels ?, habituellement définis comme étant provisoires par les comptables, semblent contribuer à la non-linéarité, d'autres facteurs y contribuent probablement aussi; selon les auteurs, lorsque tous les éléments extraordinaires et les ? éléments exceptionnels ? sont exclus des bénéfices, la relation rendements-bénéfices demeure non linéaire; (5) la relation demeure aussi non linéaire si l'on tient compte de l'information relative aux flux de trésorerie ou aux engagements; et (6) la relation rendements-flux de trésorerie est également non linéaire. Les auteurs concluent que la non-linéarité de la relation rendements-bénéfices, envisagée sous plusieurs formes différentes, résiste assez bien à l'analyse. Toutefois, les causes possibles qu'ils ont choisi d'examiner n'expliquent pas entièrement la non-linéarité observée, et les recherches doivent se poursuivre.     

Working Orders in Limit Order Markets and Floor Exchanges

We analyze limit order markets and floor exchanges, assuming an informed trader and discretionary liquidity traders use market orders and can either submit block orders or work their demands as a series of small orders. By working their demands, large market order traders pool with small traders. We show that every equilibrium on a floor exchange must involve at least partial pooling. Moreover, there is always a fully pooling (worked order) equilibrium on a floor exchange that is equivalent to a block order equilibrium in a limit order market.