Financial Reporting Quality,Structural Problems and the Informativeness of Mandated Disclosures on Internal Controls

Even before firms report internal control weaknesses under the Sarbanes–Oxley Act (SOX), they are characterized by structural problems, are prone to internal control weaknesses, and have low financial reporting quality. If the stock market incorporates much of this information during the pre‐disclosure years, investors are less surprised when firms subsequently report internal control weaknesses under SOX. We find that for the pre‐disclosure period, firms reporting internal control weaknesses under SOX, (1) had structural problems, (2) were prone to internal control problems, and (3) had low financial reporting quality. Further, we provide direct evidence that stock prices during pre‐disclosure years incorporate much of the information about structural problems, the likelihood of internal control weaknesses, and low reporting quality. Finally, we find that many of these value‐relevant factors are not related to announcement period returns when firms eventually disclose such problems under SOX and that limited new information about structural problems is generated around this date. Our results provide a compelling explanation for the muted stock price reaction around the mandatory disclosure date.     

Managerial Ownership, the Method of Payment for Acquisitions, and Executive Job Retention

This study investigates how acquiring and target firm managers' preferences for control rights motivate the payment for corporate acquisitions. We expect that managers of target firms who value influence in combined firms will prefer to receive stock. One reason top managers desire influence is to enhance their chances of retaining jobs in the combined firm. Our analysis shows a strong, positive association between managerial ownership of target firms and the likelihood of acquisitions for stock. We also find that managers of target firms are more likely to retain jobs in combined firms when they receive stock rather than cash.     

On someE-optimal block designs

Summary TheE-optimality of block designs is the concern of this paper. Bounds for the smallest positive eigenvalue of theC-matrix of block designs are obtained in some general classes of connected designs with equal or unequal block sizes. Use of these bounds is made to obtainE-optimal block designs in various classes.     

Financial leverage changes associated with corporate mergers

We empirically examine whether firms increase financial leverage following mergers. Firms could increase financial leverage either because of an increase in debt capacity or because of unused debt capacity from pre-merger years. We find that financial leverage of combined firms increases significantly following mergers. A cross-sectional analysis shows that the change in financial leverage around mergers is significantly positively correlated with the announcement period market-adjusted returns. Further tests indicate that the increase in financial leverage is an outcome of an increase in debt capacity, although there is weak evidence that some of the increase in financial leverage is a result of past unused debt capacity.     

Efficient paired choice designs with fewer choice pairs

For paired choice experiments, two new construction methods of designs are proposed for the estimation of the main effects. In many cases, these designs require about 30–50% fewer choice pairs than the existing designs and at the same time have reasonably high D-efficiencies for the estimation of the main effects. Furthermore, as against the existing efficient designs, our designs have higher D-efficiencies for the same number of choice pairs.     

CEO Ownership and Discretionary Investments

Abstract:  This study investigates empirically the relationship between CEO ownership and discretionary investments such as R&D and capital expenditures. We assert that the under-investment problem is high for R&D-intensive projects, while the over-investment problem is high for capital expenditures because of differences in risk between the two types of investments. Building on the linkages between investments and investment-related agency problems, we hypothesize that the relationship between CEO ownership and investments depends on whether increasing ownership mitigates or exacerbates the under- or over-investment problem. We find a non-linear association between CEO stock ownership and R&D investments; R&D investments increase and then decline across increasing levels of ownership. Further, we find that R&D investments and CEO stock options are positively associated at high levels of option holdings. In contrast, capital expenditures do not vary with CEO ownership (stock or options). Finally, consistent with our underlying assumption, we find that the influence of R&D investments on future firm risk is significantly larger than that of capital expenditures. Our findings indicate that managerial risk aversion affects discretionary investments.     

On a property of orthogonal arrays and optimal blocking of fractional factorial plans

It is shown that fractional factorial plans represented by orthogonal arrays of strength three are universally optimal under a model that includes the mean, all main effects and all two-factor interactions between a specified factor and each of the other factors. Thus, such plans exhibit a kind of model robustness in being universally optimal under two different models. Procedures for obtaining universally optimal block designs for fractional factorial plans represented by orthogonal arrays are also discussed. Acknowledgements. The authors wish to thank the referees for making several useful comments on a previous version.     

Distributions characterized through conditional expectations

Using conditional expectations, we present results that lead to the characterization of several distributions. Both absolutely continuous random variables and discrete random variables are considered. In the case of absolutely continuous random variables, the results lead to the characterization of a family of distributions while in the case of discrete random variables, the distribution is almost uniquely determined under the stated conditions.     

Increasing Market Share as a Rationale for Corporate Acquisitions

This study examines the relative importance of market share in acquisitions because anecdotal evidence and economic theory suggest that merging firms benefit from larger market share. Firms might focus on market share to improve shareholder value through improved efficiency, which benefits consumers. Alternatively, higher market share could generate greater market power, which adversely affects consumers. I find that market share of merging firms increases by more than 30%, relative to the pre‐acquisition level, and the increase is even larger after I account for industry changes. Abnormal returns are positively correlated with changes in market share around acquisitions, but not with changes in industry concentration, which suggests stock market's expectation of future benefits from efficiency rather than market power. More directly, I find that merging firms' long‐run profitability increases with market share, and the increase in profitability primarily results from better asset management.     

The effect of CEO ownership on the information content of reported earnings

This paper examines the relation between capital market perceptions of earnings quality and CEO equity ownership. Using the earnings response coefficients (ERCs) from annual returns–earnings regressions as a proxy for investor perceptions of earnings quality, we find that ERCs first increase and then decline across higher levels of CEO ownership with an inflection point around 25% ownership. Using analyst behavior as another proxy for the perceptions of financial analysts, we find that earnings forecasts are more accurate as ownership increases, but once ownership levels reach about 25%, accuracy declines with further increases in ownership. Forecast dispersion, forecast revision volatility, and analyst following decline and then increase across increasing levels of CEO ownership. Our results suggest that, for low levels of CEO ownership, earnings are perceived as being more informative about future firm performance as ownership increases. However, once ownership levels are high, earnings are perceived as being less informative with further increases in ownership.