Political connections and preferential access to finance: The role of campaign contributions

Using novel indicators of political connections constructed from campaign contribution data, we show that Brazilian firms that provided contributions to (elected) federal deputies experienced higher stock returns than firms that did not around the 1998 and 2002 elections. This suggests that contributions help shape policy on a firm-specific basis. Using a firm fixed effects framework to mitigate the risk that unobserved firm characteristics distort the results, we find that contributing firms substantially increased their bank financing relative to a control group after each election, indicating that access to bank finance is an important channel through which political connections operate. We estimate the economic costs of this rent seeking over the two election cycles to be at least 0.2% of gross domestic product per annum.     

The impacts of parent’s listing status on subsidiary’s financial constraint and cost of equity capital: the case of equity carve‐outs

We find that listed parents’ carve‐outs have investment‐cash‐flow sensitivities 70 per cent lower than unlisted parents’ carve‐outs, on average. Such a finding is stronger when we consider only equity carve‐outs in technological industries. The finding suggests that listed parents are more capable of alleviating the financial constraint of their carved‐out units than private parents. Our further analysis shows that listed parents’ carve‐outs also have a lower cost of equity than their counterparts, but such difference cannot be explained by corporate transparency, as implied by analyst coverage and analysts’ forecast dispersion. Therefore, we argue that the benefits from affiliation with a listed parent to the carve‐out come mainly from the parent’s financial support rather than an increase in corporate transparency.     

The effect of SFAS 131 on the stock market’s ability to predict industry‐wide and firm‐specific components of future earnings

This study examines the impact of SFAS 131 on the extent to which stock prices incorporate industry‐wide and firm‐specific components of future earnings. By decomposing earnings into industry‐wide and firm‐specific components, this paper finds that the firms that aggregated segments under the old rule experience significant acceleration in the incorporation of future earnings into current stock prices upon adoption of SFAS 131. However, the acceleration of future earnings is mostly driven by the improved incorporation of industry‐wide components of future earnings, which indicates the market’s ability to predict firm‐specific components is not significantly changed. Supplemental analysis suggests that the reduced geographic earnings information is one possible reason for lack of improvement in incorporating firm‐specific earnings into price.     

Commemorating the 50‐Year Anniversary of Ball and Brown (1968): The Evolution of Capital Market Research over the Past 50 Years

We commemorate the 50th anniversary of Ball and Brown [1968] by chronicling its impact on capital market research in accounting. We trace the evolution of various research paths that post–Ball and Brown [1968] researchers took as they sought to build on the foundation laid by Ball and Brown [1968] to create a body of research on the usefulness, timeliness, and other properties of accounting numbers. We discuss how those paths often link back to the groundwork laid and questions originally posed in Ball and Brown [1968].