Mandated Recognition of Employee Stock Option Expense – The Case of Canada

On December 18, 2003 the Accounting Standards Board of Canada announced that all firms registered in Canada would be required to expense stock options‐based compensation effective January 1, 2004. While a few firms had voluntarily opted to expense stock options prior to this date, the vast majority of firms had not. This study investigates the market reaction to this announcement by listed firms in the Toronto Stock Exchange that continued to disclose option expense rather than report it in the financial statement. We find no average market reaction by our sample firms affected by this mandate around the announcement date, but a significantly negative market reaction during the 5‐day window around the issuance date of the exposure draft. However, in cross‐sectional tests around the mandated expense announcement date, we find a significant negative relationship between the cumulative abnormal returns and the Black–Scholes value (and number) of options outstanding and of options granted the previous year. These results suggest that the magnitude of the market reaction to the mandated expense announcement is related to the firm's usage of options. Our results provide further evidence that stock prices may not fully impound information disclosed in footnotes.     

The effect of operational slack,diversification, and vertical relatedness on the stock market reaction to supply chain disruptions

This paper empirically examines whether operational slack, business diversification, geographic diversification, and vertical relatedness influence the stock market reaction to supply chain disruptions. The results are based on a sample of 307 supply chain disruptions announced by publicly traded firms during 1987–1998. Our analysis shows that firms with more slack in their supply chain experience less negative stock market reaction. The extent of business diversification has no significant effect on the stock market reaction. Firms that are more geographically diversified experience a more negative stock market reaction. We find that firms with a high degree of vertical relatedness experience a less negative stock market reaction. These results have important implications on how firms design and operate their supply chains to mitigate the negative effect of supply chain disruptions.     

Analysis of the effects of settlement of interfirm lawsuits

This study examines the effects of news on settlement of interfirm lawsuits. We hypothesize that the defendant firms suffer damaged reputation as news on the interfirm lawsuit remains in the ‘public eye’, as such ending the litigation process through settlement is good news for the defendant firms. Thus, the stock market will react positively to the defendants when news of a settlement is announced. On the other hand, settlements end the free publicity that the plaintiffs enjoy. In addition the plaintiffs settle for less money than they initially seek. Thus, the implication of a reduced cash flow expectations that the announcement of settlements brings to the plaintiffs will cancel out the positive reputation effect. Therefore, there will be no significant stock market reaction to the plaintiffs when a settlement is announced. Furthermore, the stock market will show no significant reaction to the defendants who have been the subject of more than one lawsuit in a relatively short period of time prior to a settlement because their reputation is too severely damaged to be remedied through removal of their name from the limelight. The results of our analysis support the hypotheses and offer some insight for strategy development. Copyright © 2006 John Wiley & Sons, Ltd.     

How Do Financial Constraints Relate to Financial Reporting Quality? Evidence from Seasoned Equity Offerings

This paper examines how constraints on firms’ financing capacity relate to managers’ discretionary accounting choices. Three hypotheses of earnings management – the opportunism hypothesis, the rational expectations hypothesis, and the signaling hypothesis – predict that constrained firms engage in greater upward earnings management than unconstrained firms when selling equity. Using a sample of seasoned equity offerings (SEOs) announced between 1983 and 2014, I find support for this prediction. The relation between financial constraints and earnings management is robust to including controls such as offer size, growth opportunities, analyst following, and chief executive officer equity holdings, as well as to using the instrumental variable approach. Investors’ reaction around and following the SEO announcement supports the rational expectations hypothesis. I find that aggressive earnings management by constrained issuers is associated with lower SEO announcement returns but is not followed by negative abnormal returns in the long run. The evidence suggests that constrained issuers’ aggressive use of income-increasing accruals is an outcome of managerial myopia caused by capital market pressure, not managerial opportunism intended to mislead investors.     

国有控股上市公司股权激励市场效应的实证分析

本文采集了21家国有控股上市公司实施股权激励首次披露日前后三十个交易日的股票收盘价,并对这些股价进行了统计分析。实证结果显示,国有控股上市公司股票价格在股权激励方案首次披露日之后给投资者带来了超额收益,国有控股上市公司实施股权激励给个股股价带来正面的市场效应,并且能够提高国有控股上市公司的短期融资能力。分析认为,广大证券投资者没有过分担心因国有控股上市公司实施股权激励可能带来的国有资产流失问题,多数投资者持积极认同态度。     

The changing relationship between job loss announcements and stock prices: 1970–1999

We study the reaction of stock prices to announcements of reductions in force (RIFs) using a sample of 4273 such announcements in 1160 large firms during the 1970–99 period collected from the Wall Street Journal. We note that the total number of actual announcements for the firms in our sample follows the business cycle quite closely. We then examine changes over time in standard summary statistics (means, medians, fraction positive) of the distribution of stock market reactions, measured by the cumulative excess returns (CER) of firms' stock prices over a 3-day event window centered on the announcement date, as well as changes over time in kernel density estimates of this distribution. We find clear evidence that the distribution of stock market reactions shifted to the right (became less negative) over time. One possible explanation for this change is that, over the last three decades, RIFs designed to improve efficiency have become more common relative to RIFs designed to cope with reductions in product demand. We estimate multivariate regression models of the CER controlling for the stated reason for the announced layoff, industry, and other characteristics of the announced layoff. We find that almost none of the decline in the negative average stock price reaction between the 1970s and 1990s can be explained by these factors.     

Relative information asymmetry as a determinant of the market reaction to corporate financing announcements

Information-asymmetry-based models predict that the market should react negatively to unanticipated external financing. Previous empirical studies lend limited support to these conjectures. This study examines the anticipation issue using financial analysts' earnings-forecast errors as a proxy for information available prior to the external-financing announcement. The conjecture is that external financing would be less anticipated for firms which financial analysts cannot accurately predict their earnings. Event study results indicate that high-prediction-error firms exhibit significantly lower announcement period returns than lowprediction-error firms for non-convertible debt, convertible debt, and common stock offerings.     

Radical innovations in new product development and their financial performance implications: An event study of US manufacturing firms

At the dawn of the 21st century, global competition continues to increase at an accelerating rate and radical innovation is recognized as a potent weapon for firms to achieve sustainable competitive advantages. Academics, practitioners and consultants share the view that radical innovation is important to the long-term financial success of firms. Nevertheless, empirical studies on the relationship between radical innovation and firm performance have been dominated by survey research, which provided little concrete evidence on the financial impact of radical innovation. In this study we traced the financial performance of publicly traded manufacturing firms in the United States that introduced radical innovations over the period 1986-2000 and examined whether radical innovation could lead to superior financial performance in these firms. We employed the event-study method, matching each sample firm with a control group of firms in the same industry with similar pre-event performance and firm size. Our results show that while radical innovation helps firms maintain sales growth and return on sales (ROS), firm profitability in terms of return on assets (ROA) is not significantly improved. In fact, manufacturers suffer from a decline in profitability upon the introduction of radical innovations in new product development.     

Partners of USEPA Climate Leaders: an Event Study on Stock Performance

This research utilized an event study method to assess how the stocks of publicly traded companies responded before and after announcing their partnership with the United States Environmental Protection Agency (USEPA) Climate Leaders program. Although the stocks exhibited an average non‐significant positive abnormal return of 0.56% on the day of the announcement, the cumulative abnormal returns for the stock prices of the firms for two of the three event windows showed statistically significant negative returns. These results suggest that these firms' public announcements of joining the USEPA Climate Leaders partnership did not have a positive impact on stock performance. While no immediate financial benefit was found in this research, the practices implemented by these firms to reduce their greenhouse gas emissions may still bode well for long‐term corporate earnings and attractiveness to investors. Copyright © 2011 John Wiley & Sons, Ltd and ERP Environment.     

财务报表重述与公司非效率投资行为

以在2006—2010年的年报附注中披露会计差错更正的上市公司为重述样本,运用倾向得分匹配等两种方法产生控制样本,实证检验财务报表重述公告前后公司投资效率的变化,为财务报告信息质量与公司投资效率间的因果联系提供了更为直接的证据。结果发现：（1）财务报表重述之前,存在融资约束的重述公司会投资不足,不存在融资约束的重述公司倾向于投资过度;（2）报表重述公告后,重述公司投资效率显著提高。     

RISE OF THE FIDUCIARY STATE: A SURVEY OF SOVEREIGN WEALTH FUND RESEARCH

We survey the literature documenting the rise of sovereign wealth funds (SWFs), which, with assets under management of over $5.4 trillion at year‐end 2014, are a major force in global finance. Research papers have analyzed the evolution of SWFs from stabilization funds to stand‐alone wealth management funds; we both survey this research and show that more than 25 countries have launched or proposed new SWFs since January 2008. The most salient and controversial feature of SWFs is that they are state‐owned; we survey the existing literature on state ownership and discuss what this predicts about the efficiency and beneficence of government control of SWF assets. We discuss the documented importance of SWF funding sources (oil sales revenues versus excess reserves from export earnings) and survey the normative literature describing how SWFs should allocate funds. We then summarize the empirical literature studying how SWFs actually do allocate funds—across asset classes, geographically, and across industries. We document that most SWF equity investments in publicly traded firms involve cross‐border purchases of sizeable minority stakes (median around 20%) in target firms, with a strong preference for investments in the financial sector. Next, we assess empirical studies examining the impact of SWF stock investments on target firm financial and operating performance, and find universal support for a positive announcement period stock price increase of 1–3%. This, however, is significantly lower than the 5% abnormal return documented for stock purchases by comparable privately owned financial investors in recent studies, indicating a “sovereign wealth fund discount.” We conclude by summarizing the lessons of SWF research and pointing out unresolved issues.     

REAL OPTIONS AND THE CROSS‐SECTION OF EXPECTED STOCK RETURNS

This paper surveys the theoretical literature investigating the effect of firms’ investment flexibility on the cross‐section of expected stock returns. Real options analysis derives firms’ value‐maximizing investment policies as functions of exogenous fundamental drivers of profitability and calculates firms’ market values as functions of the same variables. These functions yield the relationship between expected stock returns and firm fundamentals. Several plausible explanations for the value premium – the high average stock returns earned by firms with high book‐to‐market ratios – emerge from this literature.     

Firm value and investment in R&D

This paper employs Canadian stock market and corporate financial data to test the hypothesis that the market places a positive value on reported research and development spending of firms as an indicator of expected profitability and growth. The empirical results show a positive, statistically significant relationship between R&D spending and market value. The magnitudes of estimated coefficients are consistent with those reported in several published US studies. These results suggest that investment in R&D is a rational allocation of resources, contrary to the undervaluation hypothesis.     

Earnings management as a predictor of future profitability of Finnish firms

This study investigates whether the level of current earnings management can be used to predict future profitability of Finnish firms. Earnings management is assumed to predict future profitability, because firms use discretional accruals to manage this year's earnings upwards/downwards, if they believe that the next year's earnings will be high/low. Finnish data are used because the extent of the earnings management can be directly measured from the published Finnish financial statements. The results indicate that the lagged earnings management is significantly related to the future profitability of a firm. The lagged earnings management also contains incremental information relative to past profitability or stock prices when predicting future profitability.     

我国房地产并购动机及其经济后果——以恒大地产并购深圳建设为例

严厉的宏观调控以及复杂的社会环境,促使我国房地产企业通过并购寻求生存,实现扩张,提高整体业绩,增强行业竞争力,以求更好发展。本文以恒大地产并购深圳建设为例研究我国房地产企业并购动机及其经济后果,并分别从市场反应和财务绩效研究并购的经济后果。研究发现,从并购公告的市场反应来看,恒大地产并购深圳建设利用事件研究法来分析,其累积超常收益率都跑赢了市场;从财务指标变动趋势来看,恒大地产偿债能力比较强,盈利能力稳健,成长能力逐年增强,风险水平比较低,能够创造价值。     

Assessment and selection of management consultants: A comparative cognitive study between small- and large-scale companies

This paper explores alternative ways of evaluating and ultimately hiring a generalist consultancy for short- and medium-term projects, and how this is shaped by the size of the clients’ company. What buying factors do managers of small and large firms have in mind when hiring consultants for their projects?Instead of employing surveys incorporating predefined buying factors based on what the researchers think would be important, a cognitive mapping methodology - the repertory grid technique - is applied to investigate the underlying phenomena. Using the repertory grid technique to draw mental models is a novel research technique within the supply management field. Recent behavioral supply chain management research found the behavior of managers to be critically influenced by mental models: the lenses through which managers perceive, simplify and interpret the world.Results show differences between the buying factors used in small- and large-scale companies: managers of large companies are more ‘reputation and outcome-oriented’ and managers of small businesses are more concerned with ‘how the services are rendered’. However, both constituents stressed the importance of expertise, quality and the relationship between the client and the management consultancy, although the character of such a relationship differed between small- and large-scale firms. Results also point out criteria that managers of small and large companies employ to discriminate between good and poor performing consultancies and to judge service delivery. The practical implications for both companies hiring consultancies and the consultancy companies are discussed. For consultancies, our findings can help tailoring their efforts to a differing clientele when marketing and selling their services. For companies hiring consultancies, fixating too much on particular buying factors may lead to biased decisions.     

Empirical evidence on the effects of delisting from the National Market System

This study analyzes empirical evidence related to changes in market value and liquidity characteristics of stocks, which are delisted from the National Market System (NMS) due to an elevation of NMS listing standards. Our results are thus relatively independent of the financial conditions of the firms prior to delisting. We document significant increase in bid-ask spreads and decrease in trading volume after delisting. A significant negative stock price reaction around the delisting announcement period is also observed. Both sets of findings suggest that delisting from NMS increases a firm’s cost of capital by adversely affecting the liquidity of its stock. (JEL: G14)     

The reaction of security prices to tracking stock announcements

This paper provides some empirical evidence on a relatively new and increasingly prevalent form of equity restructuring called tracking stock. We identify the effects associated with tracking stock announcements by excluding from our sample those announcement events that include other significant news announcements on the event date, such as announcements of acquisitions and earnings. For the 35 announcement events that fit this criteria, we find a mean abnormal return of over 3 percent in the two-day period surrounding the announced proposal to issue a tracking stock, with 30 of the 35 firms in the sample earning positive abnormal returns. The views expressed in this paper are that of the author(s) and do not reflect the views or opinions of Deutsche Bank Securities Inc. or any of its affiliates.     

Enforcement Actions and Auditor Changes

In this paper, we examine whether the uncovering of erroneous financial statements by German enforcement agencies is related to subsequent auditor changes. We argue that enforcement actions are likely to reveal information about the client or its auditor, which might affect auditor choice by initiating an update of mutual expectations. Our empirical findings indicate that firms with erroneous financial statements indeed have an increased probability of subsequent auditor changes. Firms also tend to change from a non-Big4 auditor to a Big4 auditor in this situation, suggesting that clients increasingly seek the reputation and services of Big4 auditors. Big4 auditors in turn do not appear to refrain from taking over error-firms as new clients in the German setting, which is characterized by limited auditor liability. Additionally, auditor changes are more likely to occur before the public announcement of an error, indicating that firms take action as soon as the uncovering of an accounting error becomes sufficiently certain.     

CEO compensation and the seasoned equity offering decision

Empirical research on seasoned equity offerings indicates that the decision to make an SEO typically engenders a decline in firm value, as investors interpret this decision as a signal of poor financial health or that the stock is overpriced. Here, we add to the literature by analyzing the short‐term market reaction to SEO announcements and the chief executive officer's link to firm performance (i.e. the proportion of CEO equity‐based compensation). Results support the hypothesis that investors are more likely to view the announcement of an SEO as a last resort source of capital when the proportion of CEO equity‐based compensation is high. In such cases of high equity‐based compensation, our findings indicate that the SEO announcement provides an incremental signal of financial distress above that provided by financial statements. We also find this relationship (last resort signal) to be stronger when large information asymmetries exist between management and investors. Thus, managers should consider the ramifications of executive compensation structure when considering whether to make an SEO. Copyright © 2006 John Wiley & Sons, Ltd.