Looking Attractive until You Sell: Earnings Management,Lockup Expiration,and Venture Capitalists

Earnings management occurs when managerial discretion allows managers to influence reported earnings and thus mislead some investors about the underlying economic performance and quality of the firm. This study considers how potential investors may guard against earnings management by observing negative stock price reaction at the lockup expiration period of initial public offering (IPO) firms as a negative signal. Findings from a sample of 160 newly public firms show that earnings management behaviour is stronger in IPO firms backed by venture capitalists (VCs). Moreover, VC reputation negatively moderates this relationship such that IPO firms backed by reputable VCs are less likely to manage earnings, suggesting that reputable VCs serve an auditing function following an IPO. Overall, we provide insights into signalling theory by examining negative signals arising from the behaviour of multiple agents in an IPO firm.     

Early internet IPOs versus subsequent entrants

This paper examines whether investors in early Internet IPOs earned superior returns to those who invested in later entrants. We document three differences between early public firms in a new Internet technology and their followers: underpricing, operating characteristics at the IPO, and stock price performance after the IPO. We find that there is value in going public relatively early in a new Internet technology. Specifically, long-term returns are significantly higher for the early entrants. We also find evidence, consistent with previous studies that examine hot IPO markets, that the early public firms have better operating characteristics at the IPO than later entrants.     

Long-run underperformance following private equity placements: The role of growth opportunities

Our results show that the post-offering performance of private equity issuers is related to growth opportunities. We find significant long-run underperformance in stock returns following private placements only for firms with high Tobin's q. High-q firms experience not only poor stock price performance but also poor operating performance. Low-q firms, in contrast, do not display significant stock price or operating underperformance. We further examine three potential explanations for this relation: over-investment in assets by managers, investor skewness preference, and over-optimism about earnings prospects. Our results are consistent with the view that investors are overly optimistic about the prospects of high growth firms.     

Industry clustering of initial public offerings

Extant empirical evidence has documented both a temporal variation in the number of initial public offerings (IPOs) and an industry clustering effect in these offerings. This article attempts to provide insights into this phenomenon by: (i) identifying industry conditions that influence IPO clustering, (ii) analyzing differences in characteristics of clustered versus non‐clustered IPOs, and (iii) studying the impact of IPO clustering on long‐run operating performance. We find that IPO clustering is more likely to occur in high‐growth fragmented industries that are characterized by strong investment opportunities, favorable investor sentiment, and which require high levels of investments in R&D. Further, we document a negative relation between post‐IPO operating performance and whether the IPO firm goes public in its industry cluster period. We conclude that the relatively poor post‐IPO operating performance of firms that go public in industry cluster periods likely reflects industry overinvestment arising from too many firms within that industry chasing the same investment opportunities. Copyright © 2005 John Wiley & Sons, Ltd.     

The Information Content of Earnings Components: Evidence from the Chinese Stock Market

China's listed firms report substantial non-operating revenues and expenses. We argue that these non-core earnings should have different properties and different valuation implications than operating or core earnings. Furthermore, the different types of firm ownership may have differential impacts on the information content of earnings components. Based on data from 1996 to 2008, we find that core earnings are more persistent than non-core earnings. Because of this, core earnings have a greater association with contemporaneous stock returns. However, the stock market does not fully incorporate all the information in earnings; we find that core earnings are undervalued and non-core earnings are overvalued. This effect is much reduced for privately controlled listed firms. We develop an investment trading strategy to exploit these market inefficiencies.     

An Investigation of Stock Price Declines Following Corporate Financing Events: Further Evidence

Prior research documents a large downward drift in stock prices following issuances of debt and equity by US firms. We conduct tests based on both stock price and trading volume to provide evidence on the reasons for this apparent market anomaly. We document evidence of earnings management through accruals prior to external financing and lower operating performance afterward that is associated with the amount of capital raised. The earnings management that precedes external financing and the amount of capital raised are associated with both the post-financing decline in stock price and trading volume around earnings announcements that follow for a period of three years. This evidence is consistent with the proposition that firms raise external capital prior to predictable declines in their operating performance and they release upward biased earnings before these events to manage investor expectations. The failure of many investors to incorporate this information into their trading decisions in a timely manner consistent with limited attention and over-confidence appears to drive stock mispricing. Our evidence does not support the conjecture that the financing anomaly is primarily a statistical artifact or that it is a manifestation of the accrual anomaly.     

Donating Money to Get Money: The Role of Corporate Philanthropy in Stakeholder Reactions to IPOs

This study examines how stakeholders' investment time horizons interact with information about corporate giving in initial public offering (IPO) firms. Specifically, we build a model that explains how corporate philanthropy affects IPO performance. We find that at the IPO‐preparation stage, corporate giving is negatively related to underwriter prestige, venture capital investment, and IPO financing costs. We also find that at the IPO‐issuance stage, negative media coverage of IPOs moderates the U‐shaped relationship between corporate giving and market premiums. At the IPO‐trading stage, we find that corporate giving only positively influences the market premiums for IPO firms that are the subject of negative media reports. Our findings contribute to the signalling theory by showing how various stakeholders interpret the same signals differently, and they have implications for understanding how the relationship between corporate philanthropy and corporate financial performance materializes in the IPO markets.     

IPO performance and the size effect: Evidence for the US and Canada

This study provides new evidence on the interaction between firm size and IPO underpricing in the US and Canadian markets. We find a size effect on IPO underpricing in both Canada and the US, which is larger for Canadian firms. Canadian small firms show more underpricing than US small firms (19.32% vs. 13.87%). Large Canadian firms also exhibit more underpricing than their US counterparts over the sample period (12.83% vs. 10.09%). A size effect on performance is not apparent for holding periods beyond six months from the IPO in both countries, consistent with seasoning effects that reduce information asymmetries across firms over longer investment horizons.     

The long-term performance following dividend initiations and resumptions revisited

Previous studies have documented that an announcement of dividend initiation and resumption is associated with an increase in stock price, while Boehme and Sorescu (J Finance 47:871–900, 2002) argue that the dividend anomaly only occurs by chance. However, their sample contains firms listed within 3 and/or 5 years of their respective initial public offering (IPO) dates, as well as regulated firms. We conjecture that the confounding effects of IPOs and regulated firms may interfere with the increase in stock prices due to dividend initiations and resumptions and bias their results. We thus reexamine the long-term stock performance following dividend initiations and resumptions by excluding newly IPO firms and regulated firms. We find no evidence that the non-robust positive price drifts for firms, which initiate or resume cash dividends, is due to the confounding effects of IPOs and regulated firms. Therefore the price drifts after dividend initiation and resumption announcements may be a sample-specific result of chance, even after controlling for possible sample selection biases.     

Multinationals' Offshore Operations,Tax Avoidance,and Firm‐Specific Information Flows: International Evidence

Using a large sample of multinational enterprises (MNEs) over the period 1999–2009, this study investigates whether and how offshore operations via offshore financial centers (OFCs) impact the extent to which firm‐specific information is incorporated into stock price, relative to common information. Our analyses show that, irrespective of whether a firm is a Type I offshore firm (directly having headquarters registered in OFCs) or a Type II offshore firm (indirectly setting up subsidiaries in OFCs), the amount of firm‐specific information flowing into stock price is lower for offshore firms than for non‐offshore firms. We also find that as offshore firms become more aggressive in their tax avoidance strategies, their stock prices impound a lower amount of firm‐specific information relative to common information. Finally, we find that a strong offshore proclivity also deters firm‐specific information flows, thereby driving up stock price synchronicity. Our results suggest that the opaque and complex nature of business and financial transactions in OFCs, coupled with their institutional characteristics, that is, weak and flexible legal enforcement, zero or extremely low taxation, and low litigation risk, provide offshore firms with not only stronger incentives but also the opportunities and means to adopt opaque disclosure policies and aggressive earnings management.     

Shareholder Activism and Earnings Management Incentives: An Empirical Examination of Shareholder Proposals in the United States

In this article, we investigate the effect of shareholder activism on earnings management. Using a US sample of shareholder pay‐for‐performance proposals sponsored by institutional investors, we find that when compared to control firms, firms targeted by shareholder proposals have a greater magnitude of discretionary accruals (DA) in their reported earnings. In addition, we find that the likelihood of meeting or beating earnings benchmarks through the use of DA is higher for targeted firms whose managers have job security concerns due to the firms’ inferior stock performance in the past or have plans to sell company stock. Our results are consistent with the notion that pay‐for‐performance proposals have unintended consequences by introducing or exacerbating incentives to manage earnings for short‐term gains. The results also indicate that, for financial reporting, the short‐termism effect may dominate the alignment and/or disciplinary effect of shareholder monitoring.     

Payout initiation by IPO firms: The choice between dividends and share repurchases

This study evaluates the economics of the choice of form of payout initiation mechanism adopted by IPO firms. Our results suggest that IPO firms demonstrate a preference for repurchases over dividends as the specific form of payout initiation mechanism. We however, find that while the market views post-IPO payout initiations favorably, it is indifferent to the specific form of payout mechanism adopted. Further, we find that dividends and repurchases represent distinct payout mechanisms adopted by IPO firms with fundamentally different characteristics and motivation to initiate payouts during the post-IPO phase. Our results suggest that while dividend initiations are primarily driven by life cycle and catering theory considerations, signaling theory provides the more likely explanation for payout initiations through share repurchases.     

Biting the hand that fed it: Did the stock market boom of the late 1990s impede investment in manufacturing?

The stock market increase in the 1990s may have diverted funds from fixed investments in manufacturing to other investiments, such as share repurchases, and to firms with faster stock price gains. We find that overall investment remained lower than it could have been without the stock price appreciation. We also find that manufacturing investment was impeded by the developments in the stock market. Based on our results, the policy focus should be on offering incentives for corporate decision makers to prioritize productive investments over other uses of funds instead of means to entice lenders to increase lending to manufacturing firms.     

中国上市公司送转行为动因研究——基于高送转样本的检验

关于中国上市公司大量进行股票送转的动机,学术界尚存争论。本文将不同送转理论纳入同一个计量模型,利用2006～2010年进行高送转公司的样本对不同送转理论进行了验证,为解决关于股票送转动机的争论提供了经验证据。实证结果支持了"最适价格假说"与"股本扩张假说",而拒绝"信号传递假说"、"价格幻觉假说"与"股利迎合假说"。此外,本文模型对高送转公司的预测准确度达90%,基于模型预测建立高送转公司的投资组合可以获取较稳定的超额收益。     

盈余管理:创业板风险投资与ipo后市场表现的实证研究

文章以2009年10月30日到2010年12月31日期间上市的152家深圳创业板公司为研究样本,研究有无风险投资背景前提下,创业板公司IPO前是否存在正向盈余管理与IPO后市场表现之间的关系。实证结果显示:有风投背景上市公司盈余管理程度较无风投公司盈余程度低,差异显著;有风投背景的上市公司短期市场表现强于无风投公司,中期市场表现则与之相反。创业板公司存在正向盈余管理行为,且IPO前盈余管理和IPO后中短期市场表现呈负相关且差异显著。     

Long-term industry performance following IPOs

While firms are more likely to go public when the corresponding industry prospects are favorable, they may also serve as formidable threats to pull market share from the industry. In addition, if IPOs are timed when industry valuations are unusually high, there may be an aftermarket correction in the industry. We find that the corresponding industry rival portfolios experience unfavorable price performance on average over the 36-month period following an IPO. The dispersion in long-term industry effects following the IPOs can be partially explained by competitive effects and the timing of the IPO. The adverse industry effects are more pronounced when the IPOs are small, and when the IPO is the first in the industry within the last 2 years. Furthermore, the adverse industry effects are more pronounced when the IPOs are in regulated industries, and when prevailing industry multiples are relatively high at the time of the IPO. Overall, these characteristics document the influence of competitive effects and timing signals on industry effects associated with IPOs.     

The financial investment decision of non-financial firms in China

This paper constructs a portfolio model to analyze the determinants of the financial investment decision of non-financial firms in China. Unlike the literature assuming that financial investments are riskless, our model allows risks in both fixed and financial investments. We show that this extension provides an analytically similar but economically different model from the literature. In particular, it is relative risk and risk-adjusted return gap, not pure risk and simple return gap that enter into firms’ financial investment decision model. Using firm-level panel data of 1902 firms listed in Chinese stock market over the period from 2006 to 2016 with semi-annual frequency, we find that the ratio of fixed investment risk over total risk dominates financial investment decisions of non-financial firms. However, rates of risk-adjusted return gap between financial and fixed investments play no role in Chinese firms’ financial investment decisions, which is in stark contrast to the results using a model assuming riskless financial investments. The baseline findings are robust to alternative measures of financialization and investment risk and different firm sizes, ownership structures and time periods.     

An investigation of causality between insider transactions and stock returns

Prior research shows that corporate insiders engage in profitable transactions by trading securities of their own firms. The main purpose of this study is to examine whether insider transactions and stock returns have causality relationships at the firm level for a sample of 2,521 firms during the period 1988 to 1998. We find a large impact of stock returns on subsequent insider transactions at both the aggregate and firm levels. The impact appears to be negative which suggests that insiders buy after stock price decreases and sell after stock price increases. Our findings on the predictive content of insider transactions for subsequent stock returns are primarily consistent with prior literature. We observe a positive but weak relationship between insider transactions and future stock returns.     

Earnings announcements and the variability of stock returns

This article is concerned with the dissemination process of firm-specific annual earnings information in the Norwegian capital market. We find a significant reduction in stock price volatility in the post-announcement period relative to the pre-announcement period for companies traded on the Oslo Stock Exchange in the period 1990–1995. Potential explanations for this phenomenon are tested by relating the observed return volatility to changes in the volatility of the underlying business, the speed at which information is incorporated into stock prices, and the amount of noise in the price process. The empirical analyses reveal no significant changes in either the underlying business variance or the price adjustment coefficients. However, we find a significant decline in the noise term for the largest companies after the earnings release date, supporting the hypothesis that earnings announcements reduce informational asymmetries among investors.     

The Effect of CEO Stock-Based Compensation on the Pricing of Future Earnings

This paper examines whether CEO stock-based compensation has an effect on the market’s ability to predict future earnings. When stock-based compensation motivates managers to share their private information with shareholders, it will expedite the pricing of future earnings in current stock prices. In contrast, when equity-compensated managers attempt to temporarily manipulate the stock price to maximize their own benefit rather than that of shareholders, the market may not fully anticipate future performance. We find that a CEO’s stock-based compensation strengthens the association between current returns and future earnings, indicating that more information about future earnings is reflected in current stock prices. In addition, we find that the positive effect is weaker for firms that have a high level of signed discretionary accruals or a low management forecast frequency. Overall, our study suggests that on average, equity-based compensation improves the informativeness of stock prices about future earnings, while opportunistic discretionary accruals or lowered earnings guidance hamper this improvement.