Do auditors react to real earnings management?

Prior research has documented an association between audit effort and real earnings management [REM]. Specifically, audit report lags have been shown to be positively associated with REM. We investigate the auditor and firm characteristics underlying this association. Our results indicate that overall, REM is associated with longer abnormal audit report lags [ARLs]. We find, however, that this association is driven largely by non-accelerated filers. This result holds for both suspect firms (those firms just meeting earnings benchmarks) and non-suspect firms, for specialist as well as non-specialist auditors, and for profit as well as loss firms. Together our results indicate that when auditors are not constrained by the time pressure of accelerated filing, encountering REM is associated with greater audit effort. Our results may indicate, however, that with respect to accelerated filers, abnormal ARLs may be an imperfect proxy for additional effort. These results have implications for both future research and for the impact of accelerated filing deadlines on audit quality.     

How do stocks react to extreme market events? Evidence from Brazil

This paper studies the short-term (21 trading days) behavior of Brazilian stocks in the event of extreme movements in the Brazilian market index. Using cumulative abnormal returns, we find that stocks tend to overreact after both positive and negative events, as well as global and domestic shocks. Interestingly, this behavior is particularly intense when the events are not clustered. This counterintuitive finding can be explained by the Contrast Hypothesis, since shocks during calm circumstances can be viewed by investors as more surprising. In fact, when we split events according to market volatility, we document a stronger overreaction when volatility is low.     

Do measurement-related fair value disclosures affect information asymmetry?

Using a sample of European real estate firms over the 2007–2010 period, this study provides some evidence that measurement-related fair value disclosures reduce information asymmetry. We find a negative association between the extent of fair value disclosures and the bid-ask spread, but no association with two additional measures of information asymmetry (zero returns and price impact). Contrary to our expectation, we fail to find evidence that firms using model estimates exclusively benefit the most from such additional disclosure. Analysing measurement errors (the absolute difference between the selling price of an asset and its fair value prior to sale), we find that firms that use model estimates exclusively and provide more measurement-related disclosures have lower errors and more accurate fair value estimates. In other words, if our lack of results is due to investors not using this additional disclosure this is to their detriment.     

Information asymmetry,leverage and firm value: Do crisis and growth matter?

Drawing on pecking order and agency cost theories, we assess the extent to which information asymmetry is an important determinant of firm value and the extent to which this relationship is conditional on the leverage level of firms. We also assess the impact of information asymmetry on firm value during the pre and post 2007/09 financial crisis period and for high and low growth opportunity firms. Using a large sample of UK firms, our empirical findings suggest that information asymmetry adversely impacts firm value, and that this effect decreases with firm's leverage. We also find that leverage has a negative effect on firm value, and that the marginal effect of leverage is lower for information asymmetric firms. Further, we find that the relation between information asymmetry and firm value is more pronounced in the post-crisis period than the pre-crisis period. Finally, we show that the impact of information asymmetry on firm value is higher (lower) for firms with high (low) growth opportunities.     

Do higher value firms voluntarily disclose more information? Evidence from China

This paper examines the effect of guanxi on the relation between firm value and voluntary disclosure of information about new investment projects in China's institutional setting. We find a negative relation between firm value and voluntary disclosure for firms that rely heavily on guanxi in their value creation (e.g. non-high-tech firms, and firms located in regions with underdeveloped institutions). By contrast, for firms that rely less heavily on guanxi and more on other sources of core competencies (e.g. high-tech firms, and firms in high-marketisation regions), we find a positive relation between firm value and voluntary disclosure. The moderating role of guanxi on the relation between firm value and voluntary disclosure is explained by firms conscientiously balancing the costs and benefits of voluntary disclosure relative to guanxi. Specifically, high guanxi-dependence firms refrain from detailed voluntary disclosures for fear of revealing sensitive information that may harm their guanxi. In contrast, low guanxi-dependence firms rely more heavily on voluntary disclosures to reduce information asymmetry and financing cost, with such incentives being particularly strong for high value firms. Our evidence has implications for research on motives for disclosure and regulation of financial reporting.     

Do market capitalization and stocks traded converge? New global evidence

In this paper, we examine convergence of stock markets. Our empirical exercise is based on 11 different panels, which together consist of 120 countries. The richness of the dataset allows us to disaggregate countries into panels, such as high income, middle income, low income, OECD, CSI, and developing country panels. In addition, we construct regional panels, such as those representing the Arab States, East Asia and the Pacific, South Asia, Latin America and the Caribbean, and Sub-Saharan Africa. Our main finding is that, based on the conditional convergence model, convergence of stock market capitalization and stocks traded is found for four panels, namely the high and low-income panels, the OECD panel, and the Sub-Saharan African panel. The speed of convergence is high, in most cases between 20% and 30%.     

Does ESG matter to investors? ESG scores and the stock price response to new information

We examine how a third-party assessment of a firm's relative ESG attractiveness affects investor demand for the firm's equity in the presence of new information. Utilizing an event-study methodology, with credit-rating change events as proxies for new positive and negative information, we find evidence supporting a high ESG score as a significant factor in determining how investors respond to new positive information. Specifically, after controlling for relevant fixed effects, we find that the highest quartile of ESG scores amplifies the positive stock-price reaction to credit-rating upgrades by 130 basis points, providing evidence of confirmation bias.     

Do artificial income smoothing and real income smoothing contribute to firm value equivalently?

This paper examines the potential impacts of artificial smoothing (abnormal accruals) and real smoothing (derivatives) on firm value. We find that the value of the firm decreases with the magnitude of abnormal accruals and increases with the level of derivative use. Moreover, the accrual discount is more pronounced in firms with weak investor protection and the hedging premium is greater for poorly governed firms. These results suggest that although managers can engage in real smoothing to improve the informativeness of firms’ earnings and thus reduce agency costs, they might use artificial techniques to cosmetically improve the income stream in order to expropriate minority shareholders. In further support of agency theories, we report that poor corporate governance motivates the use of abnormal accruals and discourages derivative use.     

Do hedge funds trade on private information? Evidence from syndicated lending and short-selling

This paper investigates an important contemporary issue relating to the involvement of hedge funds in the syndicated loan market. In particular, we investigate the potential conflicts of interest that arise when hedge funds make syndicated loans and take short positions in the equity of borrowing firms. We find evidence consistent with the short-selling of the equity of the hedge fund borrowers prior to public announcements of both loan originations and loan amendments. We also find that hedge funds are more likely to lend to highly leveraged, lower credit quality firms, where access to private information is potentially the most valuable and where trading on such information could lead to enhanced profits. Overall, our results have important implications for the current debate regarding regulating the hedge fund industry.     

Where to turn? The influence of information source on belief and behavior

When individuals face risks, they seek information to reduce uncertainty. This study examines where people turn for information and the effects this information seeking has on belief and behavior. Genetically, modified organisms pose a perceived environmental and health risk to society, creating worry and fear (negative affect) in many individuals. Though many people turn to personal sources, such as friends and family, for risk-relevant information, others turn to the news. Using structural equation modeling, the current research is able to analyze direct and indirect effects to construct a model of risk information seeking that differentiates these two forms of information seeking behavior. The results are intriguing, as personal information seeking and news information seeking have significantly different impacts on policy belief and avoidance behavior.     

Role of bank credit on local growth: Do politics and crisis matter?

Although state-owned banks are expected to promote the growth of less-developed regions, especially in developing economies, several cross-country studies report that lending by state banks is associated with the inefficient allocation of credit and low levels of development. Further, state banks have been found to lend to their cronies, especially around elections. In this paper, we study the lending activities of state-owned and private banks during the period 1992–2010 and analyze the relationship between the credit these banks provide and local economic growth in Turkey during crisis periods and in election years. We find that the share of state-owned banks in the credit market in crisis periods and local election years is significantly higher than their share in non-crisis and non-election periods. The per capita real credit that state-owned banks provide during crisis years is found to be positively associated with local growth in all provinces. Our results suggest that although state-owned banks might issue loans for political reasons in election periods, they also seem to play an important role in offsetting the adverse effects of economic shocks, especially in developed provinces.     

Do more mergers and acquisitions create value for shareholders?

Review of Quantitative Finance and Accounting - How does an investor value the announcement of new business integration? The history of acquirer’s acquisition may matter for investors....     

Do firms underreport information on cyber-attacks? Evidence from capital markets

Firms should disclose information on material cyber-attacks. However, because managers have incentives to withhold negative information, and investors cannot discover most cyber-attacks independently, firms may underreport them. Using data on cyber-attacks that firms voluntarily disclosed, and those that were withheld and later discovered by sources outside the firm, we estimate the extent to which firms withhold information on cyber-attacks. We find withheld cyber-attacks are associated with a decline of approximately 3.6% in equity values in the month the attack is discovered, and disclosed attacks with a substantially lower decline of 0.7%. The evidence is consistent with managers not disclosing negative information below a certain threshold and withholding information on the more severe attacks. Using the market reactions to withheld and disclosed attacks, we estimate that managers disclose information on cyber-attacks when investors already suspect a high likelihood (40%) of an attack.     

Do mega-mergers create value? The acquisition experience and mega-deal outcomes

Existing literature shows that mega-M&A deals valued over $500mil end up destroying the shareholder value of acquirers on a significant scale. Our paper considers mega-deal as a dependent event and examines the role of acquirer’s previous acquisition experience playing in the outcome of mega-deals. We find that mega-deals conducted by firms with a high level of acquisition experience, i.e. a firm completed at least 12 transactions before, are more likely to be completed. In addition, more experienced acquirers of mega-deals generate positive abnormal stock returns for shareholders in both short-run and long-run, with a dollar value gain of $50.6 million around deal announcement. We also find that more experienced acquirers are better at managing the post-acquisition integration process and enjoy a significant improvement in operating performance.     

Trader see,trader do: How do (small) FX traders react to large counterparties’ trades?

We show that information about the counterparty of a trade affects the future trading decisions of individual traders. The effect is such that traders tend to reverse their order flow in line with the better-informed counterparties. Informed traders primarily incorporate their own private as well as publicly available information into prices, whereas uninformed traders mainly magnify the effect of the informed. This pattern of interaction among traders extends to different order types: traders treat their own and others’ market orders as more informative than limit orders.     

Do firms use the trade credit channel to manage growth?

While many theories of accounts payable and receivable are related to firm performance, there has not been a direct test whether firms actively use them to manage their growth. We argue that it is not just the accounts payable but also the accounts receivable that matter. While the former help to alleviate imperfections in the financial market, the latter do so in the product market. Using over 2.5 million observations for 600.000 firms in 8 euro area countries in the period 1993–2009, we show that firms use the trade credit channel to manage growth. In countries where the trade credit channel is more present, the marginal impact is lower, but the total impact is still higher. Further, firms that are more vulnerable to financial market imperfections, rely more on the trade credit channel to manage growth. Finally, we show that also the overall conditions of the financial market matter for the importance of the trade credit channel for growth.     

Do joint ventures and strategic alliances create value for bondholders?

This paper investigates whether joint ventures and strategic alliances create value for bondholders by examining the bond market’s reaction to announcements of these two types of cooperative business activities. Based on 2964 announcements from 1985 to 2011, we find that joint ventures and strategic alliances create significant value for bondholders. The average two-month abnormal bond return is 0.64% for joint ventures and 0.70% for strategic alliances. We find no evidence of a wealth transfer between the bondholders and stockholders. We further explore the determinants of bond value creation through hypotheses on the synergy effect, the alleviation of financial constraints, and real options. The results of our study show that financial synergy is a main driver of bondholder wealth effects in joint ventures, while operating synergy is a dominant factor in strategic alliances. We also find evidence to support the real option hypothesis for both events. Finally, we show that the structure of bond contracts plays an important role in the link between synergy and abnormal bond returns.     

Do capital buffers matter? Evidence from the stocks and flows of nonperforming loans

This paper investigates the determinants of the stocks and flows (both in- and outflows) of nonperforming loans (NPLs) by considering a bank-specific factor that is not adequately analysed in the literature, namely, bank capital buffers. Using unbalanced panel data with 6,087 bank-year observations for the 2006–2018 period and a two-step system generalised method of moments (GMM) estimation, we find that banks with higher levels of capital buffers (both in terms of Tier 1 and total capital) have fewer NPL stocks and generate fewer NPL inflows. When we control for the characteristics of the loan portfolio, real guarantees collected by the bank increase the stocks and flows of new, impaired loans, while personal guarantees favour the outflow of bad loans.     

Do economic reforms and human capital explain post-reform growth?

By employing a conventional production function, this study advances theoretical and empirical research on the role of economic reforms and human capital on the post-reform economic growth. We construct two unique indices – a composite economic reform index and a human capital index – to perform a comparative analysis of a panel data model and to demonstrate that human capital and economic reforms have had a significant positive effect on economic growth in India and South Korea in the post-reform period. This positive effect is revealed in both contemporaneous and lagged estimations. The impact of reforms is found to be much stronger in South Korea than in India. This study also demonstrates the importance of time-invariant country-specific characteristics, and suggests that policies aimed to improve human capital accumulation have complementary effects on the efficacy of economic reforms.