Can media deter management from manipulating earnings? Evidence from China

This study examines the influence of media exposure on managers’ earnings management behavior using China’s publicly traded firms during 2001–2009. We find that firms with more media exposure (both negative and non-negative) manage their earnings less than firms with less media exposure. We also find that “suspect firms” (being specially treated or with refinancing plans like seasoned equity offerings or right offerings) with more media exposure engage in more accrual-based earnings management relative to other firms. These results suggest that Chinese media serve as an external monitor to the majority of firms and place excessive pressure on suspect firms. This paper contributes incrementally to the literature by emphasizing the conflicting role media exposure plays in managerial decisions in earnings management. The findings of this study have practical implications for regulators, auditors, financial analysts, as well as other information intermediaries.     

Who benefits from capital account liberalization? Evidence from firm-level credit ratings data

Using a novel panel data set on corporate foreign-currency credit ratings and capital account restrictions in advanced and emerging economies during 1995–2004, we find a strong positive effect of capital account liberalization on firms' credit risk, as measured by corporate credit ratings. As an identification strategy, we exploit within-country variation in firms' ability to obtain foreign currency and, thus, their ability to repay foreign currency debt. We find that liberalizing the capital account benefits significantly more those firms with more limited foreign currency access, namely, those producing nontradables. Our findings demonstrate a novel channel through which capital account restrictions affect economic outcomes, and they are robust to a broad range of alternative specifications.     

Not Just Help-legal research for the PTSD from female veterans back from Iraq

Ⅰ.Two Stories about Female Soldiers Back From IraqPlappert,47,said she was raped by Iraqi men in 2003 at a store inHillah,when she got separated from her group.By the time the Navy Re-serves commander returned home,she felt like she was"numb.""I didn'tfeel anything,"she said during an interview at her town home in south-central Pennsylvania.When her kids,now ages 10 and 12,hugged her,"Ifelt like I was being suffocated."     

Are firms from developed markets more international than firms from emerging markets?

Regionalist supporters’ claim that most of the world's largest firms are regional rather than global and that managers should be encouraged to ‘think regional, act local and forget global’ (Rugman and Moore, 2004, p. 67). We apply the matrix of multinationality proposed by Aggarwal et al. (2011) to a sample of the world's 500 largest corporations, the Fortune Global 500. We show that these firms range from purely domestic to regional, trans-regional and entirely global with most lying in the trans-regional and global categories. Our results imply that global strategies are essential to international trade and management in today's business environment. We compare multinationality results by market type (developed versus emerging market), industry, size and age. We find that firms from more advanced economies tend to be older, larger and more multinational than firms from emerging markets. We find no relationship between multinationality and age or multinationality and size, and conclude that developed market firms are not more multinational as a result of size, age or industrial structure.     

Does competition from new equity mitigate bank rent extraction? Insights from Japanese data

Previous research shows that bank information production mitigates asymmetric information problems. However, this literature has ignored the concern that firms with better growth prospects are more vulnerable to bank rent extraction. This paper points out that funding competition from new equity as an effective natural mechanism solves this important concern. Using Japanese data from 1983 to 1997, we show that the relationship between loan-to-debt ratio and growth, while starting significantly negative (consistent with holdup theory), turns significantly positive towards the high end of the growth spectrum. We confirm that high-growth firms raise more new equity than do low growth firms and use more equity relative to bonds in external finance. This is consistent with a generalized Myers–Majluf framework. These results suggest that for high growth firms, when competition from public debt lessens due to increased growth-based valuations, competition from new equity steps in to restrain bank rent extraction.     

Constructing Fama–French Factors from Style Indices: Evidence from the Islamic Equity Market

This study has contributed to the analysis of the Fama–French three-factor model by proving the validity of model using the newly constructed Fama–French factors from Malaysian Islamic stock market. With generalized method of moments and robustness tests, our results compliment earlier studies by comparing the results over two sub-periods, before and after the financial crises and the fall of Lehman Bros. The results of the analysis suggest that the reversal of size effects exists after periods of financial crisis. This is the first attempt to create FF factors and test the model from Islamic equity style indices.     

Do Market Makers Suffer from Splitting Headaches?

Studies of transactions surrounding stock split ex-dates often conclude that splitting firms either experience a decline or an improvement in their stock's liquidity, based on independent measures of trading costs and trading activity. In contrast, our evidence suggests that splits from outside into what often is deemed to be the optimal stock price range of $10.00 to $39.99 are nonevents for market makers: The spread-setting behavior of the market does not change after a split. Our analysis accounts for the interdependencies between bid-ask spreads and market microstructure effects and distinguishes between optimal and all other splitting firms.     

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.     

Are Short Sellers Informed? Evidence from REITs

This paper uses intraday short sale data to examine whether short sellers of Real Estate Investment Trusts (REITs) are informed. We find strong evidence that short selling predicts future returns of REITs. Heavily shorted REITs significantly underperform lightly shorted REITs by approximately 1% over the following 20 trading days. This predictive relation holds for both small and large trades, but is stronger for large short trades. We also document a positive relation between shorting activity and volatility. Our results are consistent with the view that short sellers of REITs are informed and contribute to market efficiency by impounding information into prices.     

How Do Capital Structure Policies of Emerging Markets Differ from Those of Developed Economies? Survey Evidence from Korea

We examine the capital structure policies of Korean firms using survey data for business group (chaebol) firms and independent firms. Our results are compared with findings in earlier studies for developed economies: Graham and Harvey (2001) for the United States and Brounen et al. (2004, 2006) for Europe. Korean chief financial officers are concerned about financial flexibility and volatility of earnings when issuing debt; they are concerned about target debt ratio maintenance and recent stock price increases when issuing equity. In contrast to independent firms, chaebol firms are more concerned about differences in corporate tax rates between foreign and domestic markets and the risk of refinancing in bad times. Chaebol firms are less likely to issue debt when faced with insufficient internal funds, which indicates that active internal capital markets are at work among the firms in a business group. Our results suggest that, compared to U. S. and European firms, Korean firms are under more pressure from their peers in formulating capital structure policies, consider equity a cheap source of financing, are less concerned with the dilution of earnings per share, and less frequently provide shares to employees as compensation.     

Aversion to Student Debt? Evidence from Low-Wage Workers

We combine state minimum wage changes with individual-level income and credit data to estimate the effect of wage gains on the debt of low-wage workers. In the three years following a $0.88 minimum wage increase, low-wage workers experience a $2,712 income increase and a $856 decrease in debt. The entire decline in debt comes from less student loan borrowing among enrolled college students. Credit constraints, buffer-stock behavior, and other rational channels cannot explain the reduction in student debt. Our results are consistent with students perceiving a utility cost of borrowing student debt arising from mental accounting.     

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.     

Who Borrows from the Lender of Last Resort?

We analyze lender of last resort (LOLR) lending during the European sovereign debt crisis. Using a novel data set on all central bank lending and collateral, we show that weakly capitalized banks took out more LOLR loans and used riskier collateral than strongly capitalized banks. We also find that weakly capitalized banks used LOLR loans to buy risky assets such as distressed sovereign debt. This resulted in a reallocation of risky assets from strongly to weakly capitalized banks. Our findings cannot be explained by classical LOLR theory. Rather, they point to risk taking by banks, both independently and with the encouragement of governments, and highlight the benefit of unifying LOLR lending and bank supervision.     

Does shareholder coordination matter? Evidence from private placements

We propose a new role for private investments in public equity (PIPEs) as a mechanism to reduce coordination frictions among existing equity holders. We establish a causal link between the coordination ability of incumbent shareholders and PIPE issuance. This result obtains even after controlling for alternative explanations such as information asymmetry and access to public markets. Improved equity coordination following a private placement leads to favorable debt renegotiations within one year of issuance. Mitigating coordination frictions among shareholders ultimately decreases the odds of firm default in half.     

Can science be a business? Lessons from biotech

In 1976, Genentech, the first biotechnology company, was founded by a young venture capitalist and a university professor to exploit recombinant DNA technology. Thirty years and more than 300 billion dollars in investments later, only a handful of biotech firms have matched Genentech's success or even shown a profit. No avalanche of new drugs has hit the market, and the long-awaited breakthrough in R&D productivity has yet to materialize. This disappointing performance raises a question: Can organizations motivated by the need to make profits and please shareholders successfully conduct basic scientific research as a core activity? The question has largely been ignored, despite intense debate over whether business's invasion of basic science-long the domain of universities and nonprofit research institutions- is limiting access to discoveries, thereby slowing advances in science. Biotech has not lived up to its promise, says the author, because its anatomy, which has worked well in other high-tech sectors, can't handle the fundamental challenges facing drug R&D: profound, persistent uncertainty and high risks rooted in the limited knowledge of human biology; the need for the diverse disciplines involved in drug discovery to work together in an integrated fashion; and barriers to learning, including tacit knowledge and murky intellectual property rights, which can slow the pace of scientific advance. A more suitable anatomy would include increased vertical integration; a smaller number of closer, longer collaborations; an emphasis by universities on sharing rather than patenting scientific discoveries; more cross-disciplinary academic research; and more federal and private funding for translational research, which bridges basic and applied science. With such modifications, science can be a business.     

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.     

Are IPO investors rational? Evidence from closed-end funds

Why buy a closed-end fund at IPO, when it is likely to trade at a discount in a few months’ time? One theory suggests that buying a new fund is justified by an initial period of investment outperformance. A second theory is that new funds are launched to provide access to assets that are temporarily illiquid and to exploit the subsequent liquidity gain while a third theory asserts that buyers of new issues are not fully rational but are influenced by time-varying sentiment. This paper tests the three theories using data from UK-traded closed-end equity-fund IPOs over 1984–2006. The empirical results provide strong support for the influence of sentiment but provide little or no support for the two other theories.     

Do firms have leverage targets? Evidence from acquisitions

In the context of large acquisitions, we provide evidence on whether firms have target capital structures. We examine how deviations from these targets affect how bidders choose to finance acquisitions and how they adjust their capital structure following the acquisitions. We show that when a bidder's leverage is over its target level, it is less likely to finance the acquisition with debt and more likely to finance the acquisition with equity. Also, we find a positive association between the merger-induced changes in target and actual leverage, and we show that bidders incorporate more than two-thirds of the change to the merged firm's new target leverage. Following debt-financed acquisitions, managers actively move the firm back to its target leverage, reversing more than 75% of the acquisition's leverage effect within five years. Overall, our results are consistent with a model of capital structure that includes a target level and adjustment costs.     

Should Investors Bet on the Jockey or the Horse? Evidence from the Evolution of Firms from Early Business Plans to Public Companies

We study how firm characteristics evolve from early business plan to initial public offering (IPO) to public company for 50 venture capital (VC)-financed companies. Firm business lines remain remarkably stable while management turnover is substantial. Management turnover is positively related to alienable asset formation. We obtain similar results using all 2004 IPOs, suggesting that our main results are not specific to VC-backed firms or the time period. The results suggest that, at the margin, investors in start-ups should place more weight on the business ("the horse") than on the management team ("the jockey"). The results also inform theories of the firm.     

Why do firms save cash from cash flows? Evidence from firm‐level estimation of cash–cash flow sensitivities

We construct firm‐level estimates for the cash flow sensitivity of cash (CCFS) by modelling heterogeneous slopes in reduced‐form cash equations. This approach allows identifying firms with a high, low or even negative savings propensity. We find that high CCFS firms have higher income variation, suggesting cash buffering is triggered by income shocks. High CCFS firms do not suffer from financing constraints measured by a wide selection of indicators. Our results suggest that the CCFS is not an adequate indicator to capture financing constraints. Rather, a higher CCFS indicates smoothing of income fluctuations by installing a cash buffer that successfully prevents future income shortfall.