Incentive effects of executive compensation and the valuation of firm assets

This paper examines how executive compensation influences the market value of the firm's assets. After controlling for endogeneity, we find that boards have set the incentive to incur risk (vega) to maximize shareholder value, but that incentives to increase returns (delta) do not maximize shareholder value. We also find that current levels of cash compensation do not maximize shareholder value. Finally, we consider the moneyness of stock options. We find that the level of at- and out-of-the money options maximize shareholder value, but the level of in-the money options do not maximize shareholder value.     

Do Analysts and Auditors Use Information in Accruals?

Existing research indicates that firms with high accruals are more likely to experience future earnings problems, but that investors' expectations, as reflected in stock prices, do not appear to anticipate these problems. In this paper, we directly examine the published opinions of two types of professional investor intermediaries to see if they provide investors with information concerning the future earnings problems experienced by firms with high accruals. First, we examine the earnings forecasts of sell-side analysts. We show that analysts' earnings forecasts do not incorporate the predictable future earnings declines associated with high accruals. Second, we examine the behavior of independent auditors. We find no evidence that auditors signal the future earnings problems associated with high accruals through either their audit opinions or through auditor changes. Overall, our evidence indicates that analysts and auditors do not alert investors to the future earnings problems associated with high accruals, thus corroborating previous findings that investors do not appear to anticipate these problems.     

Investor reactions to derivative use and outcomes

How do investors evaluate managers who choose whether or not to use derivatives once the outcomes of those decisions become known? Different theories offer different predictions, and we test these in three experiments. Results show that investors are more satisfied with firm managers and assign a higher value to firms when managers use derivatives (that address firm risks) than when they do not. This result occurs even though we hold constant the economic differences typically present when comparing derivative use versus non-use (that is, ex ante risk and ex post outcome), suggesting that investors reward firms that use derivatives. Additional tests reveal that investors believe that managers who use derivatives in these situations exhibit a higher level of decision-making care than those who do not use derivatives. We also document that these inferences about greater decision-making care do not apply to the speculative use of derivatives. Overall, our study adds to our understanding of how investors judge companies that use derivatives, given the resulting outcomes of such use.     

Equity Capital Flows and Demand for REITs

REITs are attractive to investors due to their unique characteristics such as high dividend yields, low correlation with common stocks, and a potential hedge against inflation. Thus the market demand curve of REIT equities may not be horizontal. This paper examines the shape of the market demand curve for REIT equities by employing REIT equity capital flows as a proxy for REIT aggregate demand. Our results do not support a downward demand curve for REIT equities. That is, we do not find evidence for the price-pressure effect in REIT returns. Instead, we find it is REIT returns that affect REIT equity capital flows rather than REIT equity flows that affect REIT returns. The results are consistent when we allow for the presence of market fundamental variables in our analysis. In addition, a variance decomposition analysis suggests that REIT equity capital flows do not cause revisions in expected cash flows (dividends) that are strong enough to impact REIT returns. Thus our findings are consistent with implications that the market demand curve for REIT equities is horizontal.     

What determines output losses after banking crises?

We examine the output costs associated with 150 banking crises using cross country data for years after 1970. Many banking crises do not lead to contractions and most banking crises do not lead to large contractions, a result that holds for developed and developing economies. We examine which variables help to predict output changes after a banking crisis using Bayesian Model Averaging. For developed economies, we find that the output losses are positively related to prior economic conditions such as credit growth. For low-income economies, we find that other factors such as having a stock market and deposit insurance are more important.     

Are we prepared for world population implosion?

Recent United Nations’ statistics show that because people in developing as well as developed countries do not want to have many babies like previously, the world population is fast aging and ultimately, around 2050, expected to begin to decline. However, unfortunately, we do not have a clear idea about the economic consequence of depopulation yet. In this paper, we tried to solve this puzzle with the model deduced from the second law of thermodynamics, what is called, entropy theory. By analyzing the economies of the Russian Federation and North Korea that have experienced rapid reduction in population, we could prove that in a closed system, like the world or a country that is isolated or has a stagnating foreign sector, depopulation not only stops the economic growth completely but also reverses it.     

Debate: Arm's- length bodies and alternative models of service delivery

What behaviours do public servants regard as representing publicness? Do those same behaviours allow us to meet the challenges of an increasingly diverse and testing civicness? The authors think not. They argue that the existing psychological contract needs to be examined and collectively redefined, initiating a reinvention in how we behave when we do public service.     

Preferencing, Internalization, Best Execution, and Dealer Profits

The practices of preferencing and internalization have been alleged to support collusion, cause worse execution, and lead to wider spreads in dealership style markets relative to auction style markets. For a sample of London Stock Exchange stocks, we find that preferenced trades pay higher spreads, however they do not generate higher dealer profits. Internalized trades pay lower, not higher, spreads. We do not find a relation between the extent of preferencing or internalization and spreads across stocks. These results do not lend support to the "collusion" hypothesis but are consistent with a "costly search and trading relationships" hypothesis.     

Short selling around dividend announcements and ex-dividend days

We examine short selling around dividend announcements and ex-dividend dates. Contrary to our initial expectation, we do not find abnormally high short-selling activity prior to announced dividend decreases, which runs counter to the argument that short sellers have the ability to acquire private information before its public dissemination. However, we find that the common negative relation between current short selling and future daily returns prior to unfavorable dividend announcements is similar to the negative relation during non-event times, suggesting that dividend announcements do not provide unusual trading opportunities for informed traders (Gonedes, 1978, and Benartzi et al., 1997). Around ex-dividend dates, we do find abnormal short selling, which may be explained by the return pattern around ex-dividend days documented by Lakonishok and Vermaelen (1986), who suggest that demand for a particular stock by dividend capture traders drives stock prices above their fundamental value thus providing a profitable trading opportunity for short sellers. Consistent with this conjecture, we find that both the level of short selling and the return predictability of short selling is markedly higher on and after the ex-dividend day than during non-event times.     

The long-term performance of acquiring firms: A re-examination of an anomaly

In this paper, we investigate the long-term stock return performance of Canadian acquiring firms in the post-event period by using 1300 M&A events in the 1993–2002 period. We use both event-time and calendar-time approaches and conduct robustness tests for benchmarks, methodological choices, statistical techniques and other related factors such as payment methods. We also assess the role of governance variables. Contrary to stylized facts reported in US studies, neither do we find negative abnormal long-term abnormal stock market returns once we account for methodological discrepancies nor do we find negative long-term operating performance in the post-acquisition periods for the acquirer following an acquisition event. We also find that the Canadian market reacts positively to acquisition announcements but corrects for this reaction within a short period of time. Overall we find that Canadian acquisitions do not show value destruction or overpayment.     

Data Revisions Are Not Well Behaved

We document the empirical properties of revisions to major macroeconomic variables in the United States. Our findings suggest that they do not satisfy simple desirable statistical properties. In particular, we find that these revisions do not have a zero mean, which indicates that the initial announcements by statistical agencies are biased. We also find that the revisions are quite large compared to the original variables and they are predictable using the information set at the time of the initial announcement, which means that the initial announcements of statistical agencies are not rational forecasts.     

The efficiency of compensation contracting in China: Do better CEOs get better paid?

Over recent years, China adopted a number of ‘western-style’ reforms of corporate governance and executive compensation. We investigate whether boards of Chinese firms evaluate CEO ability and remunerate their CEOs accordingly, an essential tenet of efficient compensation contracting. Using Data Envelopment Analysis to measure CEO ability, we do not find any evidence that CEO ability matters in compensation contracting decisions—it does not lead to either higher pay, stronger pay-for-performance sensitivity, or a higher likelihood of equity grants. This is surprising, since we find evidence that higher ability CEOs achieve superior firm performance. In contrast, we find that powerful CEOs do not overperform, while they enjoy large abnormal pay. Overall, our results suggest that Chinese firms fail to embrace new corporate governance reforms and are unable to fully utilize the reforms’ benefits.

     

Emerging market hedge funds: Do they perform like regular hedge funds?

In this study, we investigate whether the performance of emerging market hedge funds (EMHFs) follow a pattern similar to that reported for advanced market hedge funds. In contrast to the pre-2007 period, our results for the post-2006 period show that EMHFs exhibit performance patterns similar to those reported for hedge funds that focus on the developed markets. Unlike in the pre-2007 period, EMHFs in general do not exhibit significant exposure to specific asset classes in the post-2006 period. On a risk-adjusted basis, we find that EMHFs do not consistently outperform the benchmarks. The reported performance patterns may provide useful insights to both academics and portfolio managers.     

Intra–day Behavior of Treasury Sector Index Option Implied Volatilities around Macroeconomic Announcements

If option implied volatility is an unbiased, efficient forecast of future return volatility in the underlying asset, then we should be able to predict its path around macroeconomic announcements from responses in cash markets. Regressions show that volatilities rise the afternoon before announcements that move cash markets, and that post–announcement volatilities return to normal as rapidly as cash prices do. Although implied volatilities are predictable, the Treasury options market is efficient since informed traders do not earn arbitrage profits once we account for trading costs.     

The mediating effect of REM on the relationship between CEO overconfidence and subsequent firm performance moderated by IFRS adoption: A moderated-mediation analysis

The present paper is pursuing a new direction in the analysis of behavioral finance based on examining whether future performance of the firm is related to overconfidence displayed by the Chief Executive Officer (CEO). We suggest two channels for this relationship, real earnings management (REM) and the mandatory IFRS adoption. First, examining the impact of IFRS adoption on firms’ future performance, we find that overconfident CEOs who do not adopt IFRS exhibit poorer future performance. Other interactions related to overconfidence and IFRS are not significant. Second, examining the relationship between overconfidence and IFRS adoption on REM, we find that overconfident CEOs indulge in higher REM than non-overconfident CEOs. Further, overconfident CEOs who adopt IFRS display greater REM than do those who not adopt IFRS. Therefore, we prove that the indirect effect of CEO overconfidence on the subsequent firm performance through REM is contingent on the mandatory IFRS adoption.     

The informativeness and ability of independent multi-firm directors

Motivated by SEC regulations requiring a majority of independent directors on corporate boards, we examine director informativeness and ability by observing the trading performance of independent directors who serve on multiple boards. As a proxy for informativeness, we find positive trading performance relative to purchases and sales. More impressive, these performance opportunities appear to be available to market participants who observe directors' Form 4 trades. We do not find evidence that diversification motives or busyness affects director trading performance. On the other hand, we do find that audit and compensation committee memberships enhance director trading performance on the sales side but that committee membership does not affect the profitability of director purchases. In comparison, multi-firm directors out-perform single-firm directors and this performance differential seems to be more attributable to superior ability than to better information.     

Monitoring and Controlling Bank Risk: Does Risky Debt Help?

We examine whether mandating banks to issue subordinated debt would enhance market monitoring and control risk taking. To evaluate whether subordinated debt enhances risk monitoring, we extract the credit‐spread curve for each banking firm in our sample and examine whether changes in credit spreads reflect changes in bank risk variables, after controlling for changes in market and liquidity variables. We do not find strong and consistent evidence that they do. To evaluate whether subordinated debt controls risk taking, we examine whether the first issue of subordinated debt changes the risk‐taking behavior of a bank. We find that it does not.     

Pricing of off‐balance sheet debt: how do bond market participants use the footnote disclosures on operating leases and postretirement benefit plans?

In this study, we examine whether the public debt market prices information on off‐balance sheet debt arising from operating leases and postretirement plans. We find that bond‐rating agencies price off‐balance sheet debt arising from operating leases and the coefficient on off‐balance sheet debt measure of operating leases is similar to that of capital leases on the balance sheet. Regarding postretirement benefit plans, we find that bond‐rating agencies do price postretirement benefit obligations that are reported in balance sheet but do not price such obligations disclosed in footnotes. We find similar results when we examine corporate bond yields on new debt issues.     

An analysis of earnings management by European private firms

This paper addresses the questions of whether private firms in eight European countries engage in earnings management, and if so, whether tax incentives affect such practices. To measure earnings management, we analyze the earnings distributions of private firms and compare these distributions with those of public firms in the same countries. The empirical evidence suggests that in absence of capital market pressures, firms still have incentives to manage earnings, as we find that private firms avoid reporting small losses. We further find that private firms in some countries where tax regulation strongly influences financial accounting do not avoid reporting small losses. We attribute this finding to tax incentives reducing firms’ benefits of (upward) earnings management. Finally, our results suggest that some types of earnings management are due to capital market pressures and are specific to public firms since we do not find evidence that private firms avoid earnings decreases.     

Investment restrictions and fund performance

We examine the effect of investment restrictions on mutual fund performance. Utilizing a unique panel of mutual fund contract changes, we explore several ways these changes affect a fund, including: performance, funding risk, and managerial contracting. We find that the general shift towards fewer restrictions over the period 1996–2011 has provided little benefit to mutual funds. Specifically, neither performance nor flow increased and we observe no changes in risk on average. We do find, however, an increased likelihood of management turnover when restrictions are removed. We conclude that contract restrictions do not explain the general underperformance of mutual funds, and that these investment restrictions are not binding.