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.     

An Analysis of the Underreported Magnitude of the Total Indirect Costs of Financial Distress

In this paper we examine 1,041 ongoing firms over the time period 1982–92. Using quarterly data for the detection and measurement of the magnitude of the indirect costs of financial distress, we find three important explanatory factors: (a) the distinctiveness of the pattern of increasing financial distress over time, (b) the degree of leverage in the capital structure and (c) the size of the firm. For those firms with a distinctive pattern of increasing financial distress over time, the average annual losses as a percentage of market value is –10.3%. The maximum loss is –76%. Even if the firm never fails, its market value can be severely impacted by the presence of the indirect costs of bankruptcy over time. This study finds a significantly positive relationship between Altman's Z-score and the firm capital investment growth rate. This relation holds after controlling for other variables such as leverage, firm size and market/book ratio. This implies that lost investment opportunities may be also an important part of the total indirect costs of financial distress, which appear now to be much larger than previously recorded.     

Human capital investment,new firm creation and venture capital

This paper studies the relation between firm investment in general human capital, new firm creation and financial development for new firm financing, such as the existence of a venture capital industry. On one hand, firm investment in general human capital leads employees to generate new innovative ideas for starting their own firm. Since employees need a venture capitalist to start their new firm, firm investment in general human capital encourages the creation of venture capitalists by increasing the need for their services, such as providing advice and monitoring. On the other hand, as new firm financing becomes available, firms’ willingness to invest in general human capital increases, and as a by-product, the creation of employee-founded and venture capital-backed new firms increases in the economy. Hence, our model provides a rational explanation for the emergence of new firms created by employees of established firms, which represents one of the most common type of new firms in many industries.     

Dynamic Models of Investment Distortions

This paper studies the interaction between corporate financing decisions and investment decisions in a dynamic framework. When the production decision involves an expansion option, the firm trades off tax benefits of debt against two costs of debt financing, namely the investment distortion related to exercise of the expansion option and the loss of a valuable expansion opportunity if the firm defaults. The optimal capital structure is all equity for firms with more value in growth options (or intangible assets) and tends to involve debt financing for firms with more value in tangible assets. JEL Classification: D81, G13, G31, G32     

Investor Protection,Investment Efficiency and Value: The Case of Cross‐Listed Firms

We examine the impact of improved investor protection due to cross‐listing on foreign firms’ investment decisions and firm value. While we find that cross‐listing increases firms’ capital expenditures and mergers and acquisitions activities, cross‐listed firms also invest more in research and development, make better acquisition decisions, and have higher profitability compared to non‐cross‐listed firms. Moreover, cross‐listing is associated with better cash utilization by foreign firms for investments. These improvements in investments and cash utilization are more pronounced for firms cross‐listed on US exchanges and for firms from countries with weak investor protection laws.     

Financial reporting quality and corporate innovation

This paper examines the relationship of financial reporting to corporate innovation. Given the importance of a high‐quality information system and coordination to innovation, I predict a positive association between financial reporting quality and future innovation. My empirical evidence is consistent with this prediction. I also find some evidence that the positive association between financial reporting quality and innovation is more pronounced for firms with intensive internal research and development activities and for firms in competitive industries. The main findings are robust to using an instrumental variable approach as well as controlling for alternative explanations. I find that firms with high‐quality financial reporting transform investment inputs into greater innovation outcomes and firm value. This study provides additional insight into the role of financial reporting quality and its relation to the real economy.     

IPO activity and information in secondary market prices

This paper explores the link between IPO underpricing and financial markets. In my model the IPO is a mean for a capital constrained initial investor to exit and thereby to raise funds for a new investment opportunity. This investor is privately informed vis-a-vis outside investors about the profitability of the new opportunity and the quality of the firm to be offered in the IPO. He can then use the offer price and the fraction of shares sold as signals of his private information. The model shows that underpricing is not only linked to firm’s characteristics, i.e. firm value, but to elements external to the firm, i.e. new investment profitability and financial markets characteristics. In particular higher market efficiency reduces the cost of listing. This results in lower underpricing and the listing of more valuable firm. Similarly, a higher lower bound of the new investment’s profitability reduces the information asymmetry and hence reduces underpricing and widens the range of firms listed.     

The curious case of Canadian corporate emissions valuation

This study examines the relevance to investors of the greenhouse gas (GHG) emissions of publicly-traded Canadian firms over 2006–2018. Based on two independent datasets, we document that firm value varies positively in the level of emissions. This result suggests that the Canadian setting differs from those studied previously, notably because of low climate litigation risk and national and subnational expenditure policies to offset climate impacts on the economy. While national and subnational expenditures to mitigate emissions affect firms' on-balance-sheet costs and profits, investors price the future payoffs to these expenditures into firm value. Supporting this view, we find that the positive relation between emissions and firm value in Canada is amplified for high GHG-intensity firms (mainly energy firms in Alberta), whose future payoffs to environmental policies and spending exceed those of low GHG-intensity firms. Our results are consistent with investors’ recognition of the benefits to firm value of national and subnational policies to decarbonize the Canadian economy.     

The effects of anticipated future investments on firm value: evidence from mergers and acquisitions

I examine the long-term valuation consequence of investment in mergers and acquisitions on acquiring firms through the “anticipation effect,” in which forward-looking prices embed investors’ expectations about the profitability of firms’ future acquisitions. Using a sample of firms with past acquisitions, I find that their market valuations depend on both the profitability of their past acquisitions and their current free cash flow. Among firms with positive free cash flow (when future acquisitions are likely), those with a worse history of value-destroying acquisitions experience lower market valuations. Among firms with negative free cash flow (when future acquisitions are less likely), firm value is not systematically related to acquisition history. These findings are consistent with investors forming expectations about the profitability of future acquisitions based on realized acquisition outcomes and valuing these firms based on their likelihood of making future acquisitions. They also provide support for using observed market prices as a proxy for investors’ expectations about future investment opportunities.     

上市公司综合盈利水平与股票收益

本文基于2000-2017年上市公司的财务及股票交易数据,研究了上市公司综合盈利水平与股票收益之间的关系。我们使用目前资产定价文献中较新的偏最小二乘法和组合预测法,从12个衡量公司盈利能力的指标中提取了一个测度上市公司综合盈利水平的指标。研究结果显示,上市公司综合盈利水平能够显著预测未来股票收益。使用单因子偏最小二乘法、取12个月斜率的平均值构造的综合盈利水平最有效,以其构建的多空对冲投资组合能产生15%的年平均收益,夏普比率达到0.75。与此对应,组合预测法提取的上市公司综合盈利水平的预测能力稍低,但依然显著。在控制了其他公司特征变量后,综合盈利水平对于股票收益的解释能力依然稳健。本文还从经济机制的角度出发,探讨了综合盈利水平对收益的预测来源。我们发现,上市公司综合盈利水平与股票预期回报的正向关系在投资摩擦更低的组中更高,而在错误定价程度更高的组通常更低。这些结果支持了基于投资摩擦的Q理论,而与行为金融的错误定价理论相悖。     

Empirical Evidence of Risk Shifting in Financially Distressed Firms

This paper provides evidence of risk‐shifting behavior in the investment decisions of financially distressed firms. Using a real options framework, I show that shareholders' risk‐shifting incentives can reverse the expected negative relation between volatility and investment. I test two hypotheses that are consistent with risk‐shifting behavior: (i) volatility has a positive effect on distressed firms' investment; (ii) investments of distressed firms generate less value during times of high uncertainty. Empirical evidence using 40 years of data supports both hypotheses. I further evaluate the effect of various firm characteristics on risk shifting, and estimate the costs of the investment distortion.     

The Investment Opportunity Set and Capitalization versus Expensing Methods of Accounting Choice

This paper examines the effects of the investment opportunity set (IOS) on management's decision to capitalize or expense significant costs in two diverse settings: (1) in accounting for exploration and development (E&D) costs by firms in the oil-and-gas industry, and (2) in accounting for research and development (R&D) costs by firms (across industries) prior to 1974. We argue that the relation between the IOS and the decision to capitalize versus to expense is based upon managerial incentives to reduce the variance of accounting earnings. High-growth firms are more likely to have more variable earnings, which therefore creates greater incentives to reduce earnings variability. Because the capitalization method generally results in a lower variance of reported earnings than does the expensing method, high-growth firms are more likely to select capitalization. Our results show that, after controlling for firm size and for the indirect effects of the IOS mediated by debt contracts, high-growth firms (firms with fewer assets-in-place) are more likely than low-growth firms to select the capitalization method of accounting for E&D and R&D expenses.
JEL classification: M41; G31     

利率市场化、信贷资源配置与民营企业增长期权价值——基于贷款利率上、下限放开的准自然实验证据

利率市场化对于提高资金配置效率、推动经济高质量发展具有重要意义,来自企业的经验证据有助于理解利率市场化影响经济发展的微观路径。本文基于我国贷款利率上限与下限的放开,借助双重差分模型检验了利率市场化如何影响民营企业的信贷资源获取、投资灵活性与增长期权价值。研究表明:贷款利率市场化使得银行能够通过调节利率来匹配企业风险,相比于中等风险企业,高风险(低风险)企业在贷款利率上限(下限)放开后以更高(更低)的融资成本获得了更多信贷资源;信贷资源的增加为企业把握投资机会提供了资金支持,贷款利率上限(下限)放开后,高风险(低风险)企业的投资灵活性与增长期权价值显著提升。本文的研究发现有助于理解利率市场化促进经济增长的微观机制,为进一步健全市场化利率体系、推进经济高质量发展提供参考。     

Understanding the Endogeneity Between Firm Value and Shareholder Rights

I explore the relation between firm value and the shareholder rights-based Governance Index "G," which has become a popular measure of governance quality among researchers and investors. I show that the relation is not spuriously driven by unobservable firm heterogeneity or an assortment of observable firm characteristics, such as firm growth potential and profitability. The causality seems to run from G to firm value, rather than from firm value to G. My results suggest that granting more rights to shareholders could be an effective way to reduce agency costs and enhance firm value.     

Does external uncertainty matter in corporate sustainability performance?

Motivated by the prevalence of corporate sustainability and the rise of uncertainty at the national level, we investigate the impact of three sources of uncertainty; namely, economic policy, climate change, and political instability, on firms' sustainability performance. Using a sample of 6804 firms from 72 countries spanning 15 years, our study revealed that uncertainty due to climate change, economic policy, and political instability negatively affects firms' sustainability performance. This finding is in line with the real options theory that uncertainty in an external environment discourages firms' long-term investment (e.g. investment in corporate sustainability). In addition, the results show that the option for delay in sustainability investment moderated the relation between uncertainty at the national level and firms' sustainability performance. Firms with better sustainability performance had higher firm value when facing uncertainty. Interestingly, firms with higher profitability performed better in sustainability when facing uncertainty at the national level.     

Does Hedging Affect Firm Value? Evidence from the US Airline Industry

Does hedging add value to the firm, and if so, is the source of the added value consistent with hedging theory? We investigate jet fuel hedging behavior of firms in the US airline industry during 1992–2003 to examine whether such hedging is a source of value for these companies. We illustrate that the investment and financing climate in the airline industry conforms well to the theoretical framework of Froot, Scharfstein, and Stein (1993). In general, airline industry investment opportunities correlate positively with jet fuel costs, while higher fuel costs are consistent with lower cash flow. Given that jet fuel costs are hedgeable, airlines with a desire for expansion may find value in hedging future purchases of jet fuel. Our results show that jet fuel hedging is positively related to airline firm value. The coefficients on the hedging variables in our regression analysis suggest that the “hedging premium” is greater than the 5% documented in Allayannis and Weston (2001), and might be as large as 10%. We find that the positive relation between hedging and value increases in capital investment, and that most of the hedging premium is attributable to the interaction of hedging with investment. This result is consistent with the assertion that the principal benefit of jet fuel hedging by airlines comes from reduction of underinvestment costs.     

Uncertainty about average profitability and the diversification discount

The diversification discount (multiple segment firm value below the value imputed using single segment firm multiples) is commonly thought to be generated by agency problems, a lack of transparency, or lackluster future prospects for diversified firms. If multiple segment firms have lower uncertainty about mean profitability than single segment firms, rational learning about mean profitability provides an alternative explanation for the diversification discount that does not rely on suboptimal managerial decisions or a poor firm outlook. Empirical tests which examine changes in firm value across the business cycle and idiosyncratic volatility are consistent with lower uncertainty about mean profitability for multiple segment firms.     

Estimating dynamic R&D choice: an analysis of costs and long‐run benefits

This article estimates a dynamic structural model of discrete Research and Development (R&D) investment and quantifies its cost and long‐run benefit for German manufacturing firms. The model incorporates linkages between R&D choice, product and process innovations, and future productivity and profits. The long‐run payoff to R&D is the proportional difference in expected firm value generated by the investment. It increases firm value by 6.7% for the median firm in high‐tech industries but only 2.8% in low‐tech industries. Simulations show that reductions in maintenance costs of innovation significantly raise investment rates and productivity, whereas reductions in startup costs have little effect.     

So far away from me: Firm location and the managerial ownership effect on firm value

We examine the relation between CEO delta, firm locality, and firm value for a sample of 7749 firm-year observations. We find that CEO delta is more value-enhancing for rural firms, those associated with exacerbated agency conflicts resulting from decreased observability of managerial investment decisions and higher levels of information asymmetry. Further, the positive relation between CEO delta and firm value is stronger for rural firms with higher levels of information asymmetry or in less religious areas. Our findings imply that managerial ownership is more effective in mitigating agency conflicts in rural areas with higher levels of information asymmetry and lower degrees of local trustworthy constituents. Our results are robust to alternative definitions of urban/rural firms, the inclusion of additional control variables, and various tests controlling the endogeneity between firm location and value. Finally, the results do not appear to be driven by reverse causality.     

Corporate governance and capital allocations of diversified firms

We examine how various aspects of corporate governance structures affect the capital allocation inefficiency that drives the value discounts of diversified firms. Diversified firms with more effective internal or external governance mechanisms experience more efficient investment allocations at both the firm and segment levels and show less of a diversification discount. The efficiency of the investment allocation process is better for diversified firms with high board independence, low board busyness, high institutional ownership, high outside director ownership, high CEO equity-based pay, high audit quality, and strong shareholder rights. The results hold after controlling for other potential influences. Our evidence suggests that corporate governance considerations are important in assessing the relation between investment efficiency and firm value for diversified firms.