Equity Financial Assets: A Tool for Earnings Management—A Case Study of a Chinese Corporation

With China’s adoption of principles-based international accounting standards and its convergence with International Accounting Standard 39 (IAS 39), Chinese companies have discretion under the original Accounting Standards for Enterprises 22 (CAS 22) as to how they account for the initial measurement, sale, and subsequent reclassification of financial assets. We use a Chinese company (‘Company A’) as a case study to illustrate how earnings are managed to exploit this discretion. We document that the company re-classifies its available for sale equity investments as long-term equity investments to decrease the volatility of the company’s apparent profits. We also make some predictions regarding how the company will handle its financial assets under the new standard, which is the same as IFRS 9. Our research contributes to the continuous improvement of China’s accounting standards and has implications for regulators of the capital market.     

Relational venture capital financing of serial founders

I study how often and why a serial founder receives financing for his new company from a venture capital (VC) firm that also invested in his previous company. One in 10 VC investments leads to a repeated relationship and one in three serial founders enters into a repeated relationship with any previous VC firm. A repeated relationship is more likely when the relational VC firm has acquired more private information about the founder, but less likely if the founder’s new venture has a bad fit with the VC firm’s geographic or industry focus. My findings add to the literature on relational financing by showing that the preservation of information is an important motivation for relational financing when screening and monitoring costs are high. Yet, repeated relationships are discontinued because investors also respond to information problems by specializing in certain types of firms. Finally, I find evidence of non-relational investments being passed onto trusted VC syndication partners.     

Building Relationships Early: Banks in Venture Capital

This paper examines bank behavior in venture capital. It considersthe relation between a bank's venture capital investments andits subsequent lending, which can be thought of as intertemporalcross-selling. Theory suggests that unlike independent venturecapital firms, banks may be strategic investors who seek complementaritiesbetween venture capital and lending activities. We find evidencethat banks use venture capital investments to build lendingrelationships. Having a prior relationship with a company inthe venture capital market increases a bank's chance of subsequentlygranting a loan to that company. Companies can benefit fromthese relationships through more favorable loan pricing.     

The effect of sovereign wealth funds on the credit risk of their portfolio companies

We study how sovereign wealth fund (SWF) investments affect the credit risk of target companies as measured by the change in their credit default swap (CDS) spreads around the investment announcement. We find that the CDS spread of target companies decreases, on average, following an SWF investment. The reduction in the CDS spread is higher when the SWF is established by a politically stable non-democratic country that has a neutral political relationship with the host country of the target company. Our results suggest that creditors expect SWFs to protect target companies from bankruptcy when it is in the interest of their home country to build political goodwill in the host country of the company.     

地区制度环境与跨境风险资本进入：社会嵌入机制研究

以1990—2020年风险资本投资事件为样本,考察跨境风险资本进入制度不完善地区的社会嵌入机制。结果发现：在制度不完善地区,跨境风险资本倾向通过与本土风险资本联合投资来嵌入本土社会网络。跨境风险资本借此获取联合伙伴的本土信息和资源,提高从本次投资成功退出的概率,并与网络中其他本土风险资本建立间接联系,未来可以从有直接或间接联系的本土风险资本那里得到交易机会。     

Early indicators of fundraising success by venture capital firms

We show how a venture capital firm's fundraising is affected by its investment choices. We investigate three leading indicators that are calculated from the types of investments the venture capital firms make: style drift investments, follow-on investments, and investments in which the venture capital firm is not the lead investor in the portfolio company. We find that these investment characteristics are associated with lower fundraising. Characteristics and the reaction of fundraising to characteristics are both moderately stable through time. We also find some evidence that information about investment characteristics is more important for fundraising during bad states of the world and that ex-ante characteristics are related to eventual exit outcomes and financial performance.     

Do Individual Investors Have Asymmetric Information Based on Work Experience?

Using a novel data set covering all individual investors' stock market transactions in Norway over 10 years, we analyze whether individual investors have a preference for professionally close stocks, and whether they make excess returns on such investments. After excluding own‐company stock holdings, investors hold 11% of their portfolio in stocks within their two‐digit industry of employment. Given the poor hedging properties of such investments, one would expect abnormally high returns. In contrast, all estimates of abnormal returns are negative, in many cases statistically significant. Overconfidence seems the most likely explanation for the excessive trading in professionally close stocks.     

The fine art of friendly acquisition

It's no secret that the track record of corporate acquirers has been dismal. But there is a group that's had consistent success. A recent study on M&A reveals that between 1984 and 1994, fund investors at some 80% of LBO firms enjoyed returns equal to or greater than their cost of capital on their M&A investments. And this was true even though in many cases the prices paid for the companies were pushed up by competing bidders. Why are financial acquirers so much more successful than their corporate counterparts? It's because they approach the negotiation process differently. Most corporate managers treat acquisitions as a direct-march-up-the-hill kind of exercise: "I want to buy this company. Let's find out what it's worth, offer less, and see if we get it." The actual deal management is delegated to outside experts--investment bankers and lawyers. But fund investors treat deal management as a core part of their business conducted by a permanent group of experienced executives, and they have well-established processes that they stick to. The authors examine how the best acquirers approach all five stages of deal negotiations--screening potential deals, reaching initial agreement, conducting due diligence, setting final terms, and reaching closure--comparing good practice with bad, to reveal the secrets of their success.     

Last resort gambles, risky debt and liquidation policy

This paper develops a real option model in which the interaction between debt, liquidation policy and risky investments is studied. We consider a manager who owns the firm and faces the opportunity to invest in risky projects which may boost current profits at the cost of bankruptcy if they turn out to be unsuccessful. These investments are “last resort gambles” in the sense that, if successful, they save the company from insolvency, while, if unsuccessful, they make liquidation unavoidable. It is shown that last resort gambles delay liquidation. We study how the liquidation trigger and the last resort investment decisions are affected by the firm's capital structure.     

Extending the Basel II approach to estimate capital requirements for equity investments

Under the Basel II banking regulatory capital regime the capital requirements for credit exposures are calculated using the Asymptotic Single Risk Factor (ASRF) approach. The capital requirement is taken to be the contribution of an exposure to the unexpected loss on the bank’s diversified portfolio. Here we extend this approach to calculate capital requirements for equity investments. We show that in the case when asset values have a normal distribution an analytical formula for the unexpected loss contribution may be developed. We show that the capital requirements for equity investments are quite different to those of credit exposures, since equity investments can suffer substantial loss of value even when the underlying company has not defaulted.     

中国城际高铁与商业信用供给——基于准自然实验的研究

本文利用中国城际高铁开通对公司产品质量保证动机产生的外生变化来考察其如何影响公司的商业信用供给决策。高铁开通通过降低运输成本,提高了公司与客户之间的交易量,不仅可以降低公司与客户之间的信息不对称,还可以促使公司提高产品质量,削弱了公司为了保证产品质量而提供商业信用的动机。借助高铁开通在时间和空间上错列发生的特征,构建准自然实验情境,本文使用双重差分方法的检验,结果表明高铁开通使公司商业信用供给减少约3.51%。研究发现,交易量提高是高铁开通减少公司商业信用供给的重要渠道。进一步分析发现,对于事前信息不对称程度较大、关系专用性投资水平较高和产品质量保证需求较低的公司,高铁开通导致公司商业信用供给减少更多。本文研究为商业信用供给的产品质量保证理论提供了进一步的补充和发展,研究结论对于理解交通基础设施的经济效应以及公司商业信用供给决策的影响因素具有一定的启示意义。     

Legally‐Recognised Group Structures: An Exploratory Analysis

Corporate groups are the dominant vehicle for organising business activity in Australia. For accounting purposes, a corporate group is treated as a single economic entity, and for this reason empirical research largely ignores the underlying legal structures. While the basic position at law is that each company within the corporate group is a separate legal entity, we demonstrate how the regulatory interventions of tax consolidation and the deed of cross‐guarantee may interfere with this fundamental notion. Using hand‐collected observations for the S&P/ASX200, we provide unique insights into individual group composition and identify corporate groups that have achieved optimal reporting efficiencies, as envisaged by the regulator, by adopting these legally‐recognised group structures. We also identify cases that appear to exploit these regimes for more strategic reasons, which may result in legal complications when untangling the complexities of group liability. It is clear from our analysis that there is very little homogeneity in group organisation among the large Australian public companies that we study.     

Making sense of corporate venture capital

Large companies have long sensed the potential value of investing in external start-ups, but more often than not, they fail to get it right. Remember the dash to invest in new ventures in the late 1990s and the hasty retreat when the economy turned? This article presents a framework that will help a company decide whether it should invest in a particular start-up by first understanding what kind of benefit might be realized from the investment. The framework--illustrated with examples from Intel, Lucent, and others--explains why certain types of corporate VC investments proliferate only when financial returns are high, why other types persist in good times and in bad, and why still others make little sense in any phase of the business cycle. The framework describes four types of corporate VC investments, each defined by its primary goal--strategic and financial--and by the degree of operational linkage between the start-up and the investing company. Driving investments are characterized by a strong strategic rationale and tight operational links. Enabling investments are also made primarily for strategic reasons, but the operational links are loose. Emergent investments, which are characterized by tight operational links, have little current--but significant potential--strategic value. Passive investments, offering few potential strategic benefits and only loose operational links, are made primarily for financial reasons. Passive corporate VC investments dry up in a down economy, but enabling and driving investments usually have more staying power. That's because their potential returns are primarily strategic, not financial. In other words, they can foster business growth. Emergent investments may make sense even in a weak market because of their potential strategic value--that is, their ability to help companies identify and spark the growth of future businesses.     

Toward a model of effective monitoring of IT application development and maintenance suppliers in multisourced environments

Many international corporations are now adopting multisourcing approaches to information technology (IT). Multisourcing is described as the disciplined provision and blending of services from multiple suppliers both outside the company and within the company. This approach to meeting business goals is primarily concerned with the relationship between the client organization and the multiple suppliers. To date, aspects relating to performance measurement and governance have scarcely been covered in the literature, and established IT frameworks such as control objectives for information and related technology (COBIT) provide imprecise approaches for monitoring suppliers. In this study, we intend to sharpen the existing understanding of how corporations manage and monitor suppliers in a multisourced environment and of why specific key performance indicators (KPIs) are utilized. We provide insights using a real-life example of the monitoring of IT application development and maintenance (IT ADM) suppliers and suggest monitoring dimensions based on a cross-case analysis. Based on inter-rater reliability, we further derive a minimum set of corresponding IT ADM KPIs. This study is expected to help corporations facing similar challenges by providing a set of essential KPIs to monitor IT ADM suppliers.     

Advertising investments,information asymmetry,and insider gains

Extant research has documented various sources of informational advantages enjoyed by company insiders including firm size, analyst following, dividend payout policy, book-to-market ratio, and the presence or absence of R&D investments. Surprisingly, despite this large body of work, virtually no research has investigated the contribution of advertising investments to information asymmetry. This omission is particularly glaring since: (a) advertising investments constitute a significant fraction of many firms' ongoing expenditures, and (b) the received literature provides strong theoretical arguments relating advertising investments and information asymmetry. Accordingly, the primary objective in this study is to empirically address this gap. Using advertising and insider transaction data at over 12,000 firms from 1986 to 2011, we find that insider gains are significantly greater at firms characterized by advertising investments. Specifically, a zero cost portfolio that is long on firms with net insider purchases and advertising investments, and short on firms with net insider purchases and devoid of advertising investments, garners annual abnormal returns of 5.5%. In addition, we find that investors' reaction to news of insider purchasing is significantly more pronounced at firms characterized by advertising investments — investors rationally recognize the greater information content associated with insider purchases at these firms.     

AGENCY CONFLICTS IN DELEGATED PORTFOLIO MANAGEMENT: EVIDENCE FROM NAMESAKE MUTUAL FUNDS

Namesake funds provide a unique sample for studying the two agency conflicts that exist within a mutual fund. The first is between the fund management company and fund shareholders, and the second is between the fund management company and the fund manager. A typical namesake fund manager sits on his or her fund's board, frequently as the chairman, is the majority owner of the fund management company, and has significant investments in the fund he or she manages. Our results indicate that namesake funds charge higher fees, suggesting that the boards of namesake funds are less effective. We find that namesake funds are more tax efficient, consistent with the idea that managerial ownership helps align the interests of managers with those of shareholders. Because of fewer career concerns, namesake fund managers herd less while assuming greater unsystematic risk. We find weak evidence that namesake fund managers outperform their benchmarks and peers. Finally, we observe that namesake funds attract higher levels of investor cash flow.     

一损俱损:违规事件在企业集团内的传染效应研究

本文以企业集团为对象,研究违规事件的传染效应。利用2003-2015年我国上市公司违规样本,本文发现:(1)当公司发生违规行为而被证监会等监管机构进行处罚公告后,违规公司股价显著下跌的同时,同一集团内其他公司的股价也显著下跌,即违规事件在集团内存在传染效应,而这一传染效应主要存在于与信息披露相关的财务违规事件中;(2)进一步的路径检验发现“被传染公司”较低的盈余质量和集团内财务公司的存在能够解释传染效应的发生;(3)分组检验结果表明:集团内的传染效应在地区市场化程度较低、分析师跟踪人数较少、股权集中度较高的公司和国有企业中更为明显。借助违规事件的传染效应研究视角,本文的研究结果有助于进一步认识新兴市场中的企业集团。     

Online social networks and corporate investment similarity

This paper analyzes the relationship between online social networks and inter-firm investment similarity. Using mutual friendships of senior officers on Sina Weibo as proxies for online social connections, we find that companies, whose senior officers share online connections, exhibit more similar levels of capital investments. In addition, the baseline result is robust in subsamples of senior officers' first like on Weibo, and continue to hold for a battery of robustness and endogeneity tests. One possible underlying mechanism through which social networks influence corporate investment similarity is that senior officers learn privileged information from their social connections, which is supported by examining the interaction effect of analyst coverage and online social connections. We further show that this investment similarity is more pronounced in the condition that company pairs are connected by more reputable senior officers, or in the case of under-investing.     

Corporate Leverage and Specialized Investments by Customers and Suppliers

A company's performance in the product market depends in part on the willingness of its suppliers and customers to invest in the relationship—to make specialized investments of human as well as financial capital that may have no value outside that relationship. Consistent with Stewart Myers's concept of debt overhang and underinvestment, the authors hypothesize that companies can encourage their suppliers and other key stakeholders to make such specialized investments by limiting their use of debt financing, thereby addressing their stakeholders' concerns about their long‐term performance and staying power. In this article, the authors report the findings of a recently published study of a sample of U.S. industrial companies during the period 1984‐2003. Using the benchmark input‐output accounts for the U.S. economy, the authors identified supplier and customer industries for each company in their sample while also collecting data on the firm's actual suppliers and customers from Compustat's segment files. Using empirical proxies for the intensity of specialized investments, they find that companies that operate in environments requiring specialized investments by suppliers and customers tend to operate with lower levels of debt. At the same time, the authors report evidence suggesting that the suppliers and customers of highly leveraged companies make lower levels of specialized investment than the suppliers and customers of less leveraged firms.     

企业绿色投资提升了企业环境绩效吗——基于效率视角的经验证据

本文从效率视角将企业的绿色投资与环境绩效联系起来,应用SBM-DEA方法和我国重污染行业上市公司污染物排放量的详细手工数据,对微观企业级的绿色投资效率进行了量化与分析。研究发现,企业绿色投资效率总体偏低,且主要是由投入冗余问题造成的,说明管理层只是粗放地对环境维度进行投资,忽视了资源的有效分配和价值创造使用。进一步发现,地方政府环境规制执行力度对企业绿色投资效率具有倒"U"型影响,并且这种影响在非国有企业与小规模企业中尤为显著。此外,地方政府环境规制执行与企业绿色投资冗余之间存在"U"型关系,而这种关系也仅在非国有企业与小规模企业中显著。本文结论表明地方政府应通过差异化执行环境规制来优化企业绿色投资效率。