Stock market reaction to COVID-19: Evidence from U.S. Firms’ International exposure

We examine the U.S. stock market reaction to the World Health Organization's announcement declaring COVID-19 a global health emergency, with a focus on firms' international exposure. We find that while international exposure through foreign sales, foreign assets, imports and exports are significant and negatively associated with standardized cumulative abnormal returns in the short-run, the effect reverses in the long-run. In the long-run, internationalization contributes to multinational firms being more resilient to economic shocks caused by COVID-19.     

Why Do Foreign Firms Leave U.S. Equity Markets?

Foreign firms terminate their Securities and Exchange Commission registration in the aftermath of the Sarbanes–Oxley Act (SOX) because they no longer require outside funds to finance growth opportunities. Deregistering firms’ insiders benefit from greater discretion to consume private benefits without having to raise higher cost funds. Foreign firms with more agency problems have worse stock‐price reactions to the adoption of Rule 12h‐6 in 2007, which made deregistration easier, than those firms more adversely affected by the compliance costs of SOX. Stock‐price reactions to deregistration announcements are negative, but less so under Rule 12h‐6, and more so for firms that raise fewer funds externally.     

Do Banks Value Innovation? Evidence from US Firms

This study evaluates how innovation within companies alleviates the information asymmetry problems in relationship lending. We hypothesize that patenting activities could reveal favorable private information and, hence, reduce the information asymmetry between innovative borrowers and banks. Using a sample of US patenting firms from 1987 to 2004, we show that borrowers with higher innovation capability (revealed by having more patent applications, higher research & development (R&D) productivity, or higher‐quality patents) enjoy lower bank‐loan spreads and better nonprice‐related loan terms. Our evidence further suggests that the information benefits of patenting activities on loan spreads is more pronounced for small or less R&D‐intensive firms.     

Why Do Firms Switch Banks? Evidence from China

This article uses a sample of matched firms-banks data in China over the period 1999–2012 to determine the drivers of firms switching behavior from one bank relationship to another. The results show that the principal driver of a switching action is the credit needs of the firm. The binding force of the Communist Party in state-owned banks and enterprises would suggest that switching should be a rare phenomenon in Chinese commercial relations. But switching occurs. The findings support the extant literature that transparent firms are able to switch more readily than opaque firms. The results also suggest that banks that develop their fee income services are more effective in locking-in their borrowers and that firms tend to switch from state-owned banks to smaller non-state owned banks. However, in other areas switching does not conform with the mainstream explanations.     

How do corporate websites contribute to the information environment? Evidence from the U.S. and Taiwan

We study corporate website disclosures in the U.S. and Taiwan, two countries with different regulatory and market environments, to provide insights into the uniformity of website content and its contribution to the information environment. We observe significant variation in content both within and between the two countries. U.S. firms with higher analyst following tend to create more transparent financial information environments and provide disclosures that are complementary to analysts’ analyses through their corporate websites. They also tend to provide easier access to investor relations (IR) services if analyst coverage is light or nonexistent. However, neither effect is true in Taiwan where the securities analysis industry is less mature. Individual investors have greater ownership share in U.S. firms with more information about IR services on their websites; however, their ownership share drops as financial disclosure on the firm’s website increases, consistent with institutions diluting individual ownership in firms with more transparency in financial reporting. In Taiwan, however, institutions dilute individual ownership share in firms with less financial information and more trading information on their websites. These results are consistent with Barber et al.’s (2009) findings that institutions find Taiwan firms that attract the aggressive, speculative trading of individuals to be extremely profitable investments. Website disclosures in both countries have some effect on the stock-price response to mandatory earnings releases, but their impact is greater in the U.S. Our findings indicate that website disclosures contribute to the information environment and are related to the degree of interest in the firm by sophisticated market participants. Thus, they provide insights to regulators of both countries as they seek to improve disclosure and “level the information playing field.”     

Are They Hedgers or Speculators? Evidence from South Korea's Political Elections

This study uses a simultaneous equation model based on a three-stage least squares estimation to offer new empirical evidence that investors are hedgers or speculators during South Korea's elections. Major investor groups include individuals, securities companies, and foreigners in the Korea Composite Stock Price Index (KOSPI 200) market. The results show that cash market volatility and futures market activity have lead behaviors with one another. However, the contemporaneous variables of cash market volatility and options market activity have only unidirectional causality. Most investors will trade futures and options contracts for speculating within the entire sample period. During political election periods, investors prefer to trade options contracts for hedging rather than futures contracts.     

Do Private Placements Turn Around Firms? Evidence from Taiwan

We analyze the stock and operating performance of firms issuing private placements in Taiwan. Issuing firms have poor pre‐issue performance and earn significantly positive returns at announcement. Placements with an owner‐manager or with nonexecutive directors are associated with better post‐issue stock and operating performance, suggesting that an increase in insiders’ stakes leads to better alignment of managerial incentives and an increase in monitoring by insiders. In contrast, placements made to outside investors are unlikely to turn around the issuing firms.     

How local is local? Evidence from bank competition and corporate innovation in U.S.

Review of Quantitative Finance and Accounting - This paper aims to fill in a research gap in the effects of bank competition on corporate innovation. In addition to the evidence on the favorable...     

Do Firms Strategically Internalize Disclosure Spillovers? Evidence from Cash-Financed M&As

We investigate whether managers internalize the spillover effects of their disclosure on the stock price of related firms and strategically alter their disclosure decisions when doing so is beneficial. Using data on firm-initiated disclosures during all-cash acquisitions, we find evidence consistent with acquirers strategically generating news that they expect will depress the target's stock price. Our results suggest the disclosure strategy leads to lower target returns during the negotiation period when the takeover price is being determined and results in a lower target premium. These findings are robust to a battery of specifications and falsification tests. Our results are consistent with expected spillovers influencing the timing and content of firms’ disclosures in M&A transactions.     

Do multiple credit ratings reduce money left on the table? Evidence from U.S. IPOs

Using credit ratings as an uncertainty-reducing mechanism, we provide evidence of the beneficial impact of multiple credit ratings on reducing IPO underpricing and filing price revision. We find that the acquisition of multiple ratings in the pre-IPO period mitigates uncertainty more than the acquisition of a single rating. Multi-rated firms also have higher probabilities of survival than those with a single rating, whereas credit rating levels matter only for IPOs with more than one rating. The IPOs that are awarded the first rating on the borderline between investment and non-investment grades are more likely to seek an additional rating.     

Does accounting quality change following a switch from U.S. GAAP to IFRS? Evidence from Germany

This study examines whether accounting quality changed following a switch from U.S. GAAP to IFRS. Using a sample of German high tech firms that transitioned to IFRS from U.S. GAAP in 2005, we find that accounting numbers under IFRS generally exhibit more earnings management, less timely loss recognition, and less value relevance compared to those under U.S. GAAP. In addition, after analyzing the accounting quality of firms that applied IFRS throughout the entire sample period, we find that, for the metrics suggesting a decline in accounting quality for both groups of firms, the change is significantly more pronounced for firms switching to IFRS from U.S. GAAP. Overall, our findings indicate that the application of U.S. GAAP generally resulted in higher accounting quality than application of IFRS, and a transition from U.S. GAAP to IFRS reduced accounting quality. Our findings provide the first evidence on the potential consequences of a switch from U.S. GAAP to IFRS.     

Does risk management matter? Evidence from the U.S. agricultural industry

This article constructs triple-difference tests around shifts in the supply of risk management instruments available to agricultural producers to reveal a positive relation between risk management and productivity. This relation is more robust when producers adopt instruments with payoffs linked to group performance and weaker when payoffs are linked to individual performance. Additionally, productivity is particularly high among risk-managing producers in counties containing high levels of bank deposits, a proxy for access to finance. Overall, this article illuminates the relation between hedging and real firm outcomes as well as the interaction between access to finance and firms' risk management choices.     

Why Do U.S. Firms Hold So Much More Cash than They Used To?

The average cash-to-assets ratio for U.S. industrial firms more than doubles from 1980 to 2006. A measure of the economic importance of this increase is that at the end of the sample period, the average firm can retire all debt obligations with its cash holdings. Cash ratios increase because firms' cash flows become riskier. In addition, firms change: They hold fewer inventories and receivables and are increasingly R&D intensive. While the precautionary motive for cash holdings plays an important role in explaining the increase in cash ratios, we find no consistent evidence that agency conflicts contribute to the increase.     

Do Political Connections Affect Firm Performance? Evidence from a Developing Country

We investigate how politicians serving on the boards of directors influence firm performance. The results show a negative relationship between political connections and firm performance. Specifically, politically connected firms underperform nonconnected firms directors by almost 17 percent and 15 percent based on return on assets and return on equity, respectively. By stratifying the sample duration into two periods based on the political environment, we find that this effect is more pronounced in autocratic as opposed to democratic regimes. Finally, our results also suggest that the performance of connected firms with more growth opportunities is not affected by political connections.     

Are family and friends the wrong investors? Evidence from U.S. start-ups

This paper investigates the effects of funding from family and friends (i.e., informal funding) on subsequent access to venture capital for start-up firms. We retrieve information on financing activity of young U.S. firms from a novel dataset based on private placements filings (Form Ds). To address potential endogeneity issues, we use an instrument that hinges on the family size of founders as an exogenous constraint on the supply of informal funds. Our results show that informal finance significantly reduces the probability of future financing events. We provide suggestive evidence that this is due to conflicts of interests between informal stakeholders and professional investors.     

Do U.S. Insurance Firms Offer the “Wrong” Incentives to Their Executives?

We examine the relation between executive compensation and market‐implied default risk for listed insurance firms from 1992 to 2007. Shareholders are expected to encourage managerial risk sharing through equity‐based incentive compensation. We find that long‐term incentives and other share‐based plans do not affect the default risk faced by firms. However, the extensive use of stock options leads to higher future default risk for insurance firms. We argue that this is because option‐based incentives induce managerial risk‐taking behavior, which seeks to maximize managerial payoff through equity volatility. This could be detrimental to the interests of shareholders, especially during a financial crisis.     

Do Transparent Firms Pay out More Cash to Shareholders? Evidence from International Cross‐Listings

This paper examines the relation between agency costs and payout policy using a sample of 755 firms that cross‐list shares abroad. Firms increase cash payouts to shareholders by about 9% of earnings after cross‐listing on exchanges with high standards of transparency and shareholder protection. The shift in payout policy is more pronounced in firms controlled by management. No shift is observed if shareholder protection in the country of incorporation is already strong, or if the host exchange does not mandate additional disclosure. The findings support the theory that high corporate payouts are the outcome of transparency and shareholder protection.     

Do Corporate Venture Capitalists Add Value to Start-Up Firms? Evidence from IPOs and Acquisitions of VC-Backed Companies

We present evidence that corporate venture capitalists (CVCs) add value to start-up companies only when the start-ups have a strategic fit with the parent corporations of CVCs. We find that CVCs provide a variety of services and support that suit the specific needs of start-ups operating in different industries. CVC-backed start-ups are able to obtain higher valuations at the IPO than non-CVC-backed ones, and the value added by CVCs concentrates in start-ups with a strategic overlap with CVC parents. Entrepreneurial companies with strategic CVC backing also receive higher takeover premiums when they become acquisition targets .     

Does U.S. CEO connectedness in China matter? Evidence from Chinese import penetration

Review of Quantitative Finance and Accounting - I study whether U.S. CEOs well connected in China better capture investment opportunities from China. I find that Chinese connected CEOs realize...     

Do Short Sellers Target Firms with Poor Earnings Quality? Evidence from Earnings Restatements

We study the behavior of short sellers around earnings restatements. We find that short sellers accumulate positions in restating firms several months in advance of the restatement and subsequently unwind these positions after the drop in share price induced by the restatement. The increase in short interest is larger for firms with high levels of accruals prior to restatement. We document that heavily shorted firms experience poor subsequent performance and a higher rate of delisting. Overall, these results suggest that the motive for short selling is, at least in part, related to suspect financial reporting and that short sellers pay attention to information being conveyed by accruals.