Equity‐based incentive contracts and behavior: Experimental evidence

Equity ‐ based incentive contracts provide managers with dual incentives, motivating both effort and fraud. We report the results from an experiment in which manager subjects make effort and fraud decisions that affect a firm's value. The main treatment variable is the incentive contract, which can be of either the simple equity or stock option type. We find that both effort and fraud are increasing in a manager's share of equity and decreasing in the strike price of an option. Interestingly, the stock option contract induces relatively more fraud than the simple equity contract, even though the two induce the same effort.     

Motives and consequences of IPOs in cold periods

We analyze the motives and long-term stock price performance of firms that pursue IPOs in cold IPO periods. We find that firms are more likely to engage in an IPO during a cold period when their earnings are relatively high and are expected to decline in the future. We also find that IPO firms during a cold period are more likely to have managed their earnings prior to the IPO. Furthermore, we find that cold IPO firms experience significantly weaker stock price performance than hot IPO firms, and results are robust to different criteria for defining hot and cold IPO periods, different measures of stock price performance, and different investment holding periods. We find that investment opportunities, the backing of a venture capitalist, and an increase in earnings in the year of the IPO lead to significantly higher long term stock price performance of IPO firms. Our multivariate models confirm the adverse cold IPO period effect on stock price performance even after controlling for the IPO motives and the firm's earnings performance. Our results also hold within the post-Sarbanes-Oxley (SOX) era.     

The revision frequency of earnings forecasts and firm characteristics

This study investigates how the revision frequency of earnings forecasts affects firm characteristics. Previous studies generally focus on the number of analysts following a firm to measure a firm's information environment. The frequency with which news is updated is often defined as an analyst's effort. Analysts provide more information to investors if they update news more frequently. This study examines whether the frequency of information updating for a particular firm affects the firm's performance. We apply three proxies for firm performance: stock liquidity, the cost of equity capital, and firm value. Our findings indicate that the analysts’ effort as measured by the frequency of news updating is effective in providing additional power beyond the number of analysts to represent the information environment of a firm. Therefore, this study suggests that combining both the number of analysts following a firm and the frequency of news updating can be a better proxy for assessing a firm's information environment.     

When do high‐level managers believe they can influence the stock price? Antecedents of stock price expectancy cognitions

Stock based rewards are often used to motivate high‐level managers to take actions to increase the stock price of the firm. However, numerous constraints may weaken the perceived link between individual effort and stock price appreciation for many recipients. This study introduces a new construct, stock price expectancy, which we define as individuals' perceptions of influence over their firm's stock price. We examined its antecedents in a sample of 349 high‐level U.S. managers and found that employment at corporate headquarters, firm size, hierarchical level, and contact with investment analysts predicted stock price expectancy perceptions. © 2010 Wiley Periodicals, Inc.     

Private Debt and Timely Loss Recognition

Abstract

In this study, we investigate whether private debt contracting provides incentives for borrowers to recognize economic losses earlier in accounting earnings. Focusing on the window around firms' issuances of private loans, we document that timely loss recognition significantly increases following an issuance. This effect is significantly stronger for debt contracts that include performance covenants acting as trip-wires when firm performance deteriorates. We also find that timely loss recognition is particularly used when writing debt contracts is hampered by uncertainty about a firm's future development. These findings are consistent with timely loss recognition being used to increase contract efficiency by facilitating state-contingent control allocation based on a borrower's performance over the loan term.     

Analyst following,financial constraint,and audit opinion shopping: From the perspective of earning management

This study examines the relationships among analyst following, financial constraint, and audit opinion shopping from the perspective of earnings management, taking a sample of Chinese A-share firms from 2008 to 2018. We find that analyst following alleviates firm's accrued earnings management activities which restrain opinion shopping behaviors; on the other hand, it prompts real earnings management activities that encourage firm's effort to audit opinion shopping. Earnings management has a mediation effect on the positive association between analyst following and audit opinion shopping. Corporate financial constraint amplifies the positive effect of analyst following on opinion shopping.     

Analyzing the underlying dimensions of firm profitability

In this paper we decompose a traditional measure for firm's performance, return on sales, into four components that capture the impact of productivity, price recovery, product mix and capacity utilization, respectively, on a firm's profitability. The new measures are used as an illustration to explain changes in the performance of firms in the US telecommunications industry following deregulation. Changes in the overall profitability margin of these firms are explained by substantial but offsetting changes in their productivity, price recovery ability, product-mix maximization and capacity utilization, that have occurred as a consequence of deregulation. The new measures enable us not only to illustrate relative differences between firms in a given cross-section but also to shed light on how changes take place over time in the different components that underlie firms' profitability.     

Why More Forward-Looking Accounting Standards Can Reduce Financial Reporting Quality

A premise of standard setters and of much empirical research is that improving the quality of accounting standards and their implementation increases information in capital markets. This paper challenges this premise and shows that there are situations in which ‘better’, that is, more forward-looking, accounting standards reduce the information content of financial reports. The reason is that a forward-looking accounting standard affects the smoothness of reported earnings, which can conflict with the manager's smoothing incentive and her willingness to incorporate private information in the financial report. Although the manager could eliminate the effect by earnings management, it is too costly to do so. As a consequence, the capital market's ability to infer the financial and nonfinancial information in reported earnings declines. This finding should increase the awareness that an ‘improvement’ in accounting standards, without considering incentives and other information residing in firms, can adversely affect the quality of financial reporting.     

Multinational Firm Knowledge,Use of Expatriates,and Foreign Subsidiary Performance

The impact of knowledge transfer on foreign subsidiary performance has been a major focus of research on knowledge management in multinational enterprises (MNEs). By integrating the knowledge‐based view and the expatriation literature, this study examines the relationship between a multinational firm's knowledge (i.e. marketing and technological knowledge), its use of expatriates, and the performance of its foreign subsidiaries. We conceptualize that expatriates play a contingent role in facilitating the transfer and redeployment of a parent firm's knowledge to its subsidiary, depending on the location specificity of the organizational knowledge being transferred and the time of transfer. Our analysis of 1660 foreign subsidiaries of Japanese firms over a 15‐year period indicates that the number of expatriates relative to the total number of subsidiary employees (1) strengthened the effect of a parent firm's technological knowledge (with low location specificity) on subsidiary performance in the short term, but (2) weakened the impact of the parent firm's marketing knowledge (with high location specificity) on subsidiary performance in the long term. We also found that the expatriates' influence on knowledge transfer eventually disappeared. The implications for knowledge transfer research and the expatriate management literature are discussed.     

The economic causes and consequences of corporate divestiture

This study investigates economic causes and consequences of large corporate divestitures between 1983 and 1987. Prior empirical evidence suggests that firms hold on to poorly performing operating units for many years before divestiture. An agency-cost explanation for ‘holding on to losers’ has been proposed in the literature, as managers may be unwilling to admit they invested in inappropriate asset choices in the first place. However, a puzzle still remains: why should such a manager ever sell off such a unit? We provide both a possible explanation and empirical evidence that suggests managers hold on to losers as long as they can ‘blur’ their poor performance under the cover of the remaining operating units of the firm. We find that firms do not sell off poorly performing business units until the firm's other units experience significant underperformance relative to their industry peers. Finally, although there is evidence that the stock market reacts favorably to divestitures, we find that beyond the initial improvement, the firm's performance reverts back to its mean pre-divestiture level.© 1997 John Wiley & Sons, Ltd.     

Does it pay to be green? A disaggregated analysis of U.S. firms with green patents

The objective of this paper is to investigate the relationship between environmental performance and financial performance on a sample of 361 U.S. firms over the 2007–2016 period. We contribute to the literature by considering firms active in sustainable innovations by obtaining green patents. We also contribute to the literature by using disaggregated measures of environmental performance collected from the Bloomberg ESG database, including environmental disclosure score, greenhouse gas emissions, waste emissions and water use. Panel data regressions' results show that environmental transparency positively influences current accounting and stock market performance, but negatively influences the return on capital employed. Furthermore, lower pollution emissions tend to improve the current return on assets, while being harmful for the efficiency of long‐term capital employment at the same time. The empirical results also indicate that the Global Financial Crisis (2007–2010) increased the environmental transparency of firms with green patents but negatively impacted their price to earnings ratio. At the same time, lower waste disposal diminishes stock valuation while the opposite is true with water use. Taken together, our results suggest that environmental transparency and greenhouse gas emissions generally appear to be the most important environmental variables influencing financial performance, with increasing importance attributed to them by the market after the global crisis period.     

Top management successions: the choice between internal and external sources

There is no conclusive evidence on the firm's preference in appointments of top management. In this study four theoretical hypotheses on the likely source of appointment (internal vs. external) are examined using multivariate logistic regressions on a sample of 260 top management appointments in US firms. Two factors were found to have a significant effect: 1) Firm size – larger firms tend to appoint more from their internal sources, probably due to their informal commitment to their reservoir of internal talent; 2) power – the more power the firm is willing to delegate to its next manager, the more likely are external successions. Two other factors, the disposition of the former top manager (left/stayed with the firm) and firm's past performance, were found insignificant.     

An empirical investigation of owner–manager labor-supply behavior

This paper uses data from the University of Michigan's Panel Study of Income Dynamics to examine an owner–manager's labor-supply decision. Graphical analysis is used to motivate the central hypothesis tested, which is that the hourly wage paid to comparable hired managers is the marginal price of leisure to the owner–manager and will help determine his hours worked. The results suggest that this is an appropriate interpretation, with the average elasticity of hours-worked with respect to cost of comparable hired managerial services equal to + 0.23.     

When should a firm set its selling price to cope with gray market trade?

This study investigates the problem of timing for firms that must cope with gray market in setting its prices by applying an observable delay game. We consider a case in which a multinational firm sells a product in two countries, and a parallel importer buys the product in one country and resells it in the other country. We show that the multinational firm never sets its price at the same time when the parallel importer sets in equilibrium, and that the multinational firm's optimal timing depends on the degree of variation in consumer preferences for product quality.     

Tender-offer premia as a management signal

In this paper we test whether tender-offer premia for share repurchases can be viewed as an outgrowth of optimizing behavior by managers in a signalling environment. This is in contrast to previous work on the signalling hypothesis which focuses on the stock market's reaction to the announcement of tender offers. Our empirical results indicate that premia are systematically related to the price of the firm's stock and the level of the stock market but are not related to either management compensation, inside holdings of stock or the ratio of shares sought to total shares.     

The Effects of Conservative Reporting on Investor Disagreement

We examine whether the level of a firm's conditional conservatism affects investor disagreement around earnings announcement dates. Investor disagreement is relevant for its repercussions on stock market efficiency. However, the literature related to the effect of firms’ reporting policies on disagreement is scant. Prior research suggests that conservatism, by requiring higher verifiability of profits, constrains earnings overstatements and encourages more complete revelations of losses, thus improving the information environment. In this paper, we further hypothesize that these effects of conservatism enhance news credibility and decrease information asymmetry, particularly for bad news announcements. This results in a lower disagreement and improved interpretation of earnings news. We consistently find that conservatism measures are negatively associated with proxies of announcement-time investor disagreement and that this effect is stronger when the firm is reporting bad news. Additional analyses indicate that the impact of conservatism is stronger when market surprise to the announcement is greater, while it is weaker in the presence of frequent and precise voluntary disclosure that preempts the earnings announcement. Finally, we show that a higher percentage of institutional investors’ ownership and a higher level of commitment to conservatism reinforce the impact of the latter.     

中国城市土地市场存在“赢者诅咒”吗？

借鉴相关研究成果,构建一个综合性的时间窗口分析模型,利用我国境内房地产上市公司在20个城市购置的205宗土地作为样本,设置前向与后向共八个事件窗口,定量考察土地市场价格信号对股票市场的影响。实证结果表明：土地市场与股票市场是两个高度关联的市场,两个市场之间存在信号传递作用,短期内具有正向冲击效应,地价信号在土地出让后能够在短期内影响股票收益率,形成对股票价格的短期冲击效应;土地出让价格信号对股票市场的影响具有时间上的不对称性,地价信号对于股票收益率的影响主要发生在土地成交之后,股票市场对于土地竞拍以前的信息没有明显响应;土地市场所发现的价格信号是关联市场价格波动的信号源,改变竞价人的预期是市场稳定的关键。     

自媒体帮助控股股东在定向增发中获利了吗？

考察了上市公司控股股东如何利用自媒体信息披露在定向增发融资中调节股价的变化,从而获取额外收益的过程。研究发现：控股股东为使定向增发融资顺利进行,倾向于在定向增发准备期频繁发布自媒体信息,以抬高股价吸引外部投资者关注,并且当发行对象不包括控股股东时,通过发布自媒体信息来抬高股价的行为会更加显著;而在定增新股定价期间,定向增发对象包括控股股东的上市公司却会显著减少自媒体信息发文数量,以压低股票价格,帮助控股股东以较低对价购入定增股票。进一步分析发现：上市公司中机构投资者持股对控股股东定价期间压低股价的行为具有显著抑制作用。从自媒体信息披露这一崭新视角切入,证实了我国上市公司控股股东在定向增发过程中既有通过自媒体信息披露使定向增发吸引关注、满足融资需求的动机,又有利用自媒体信息披露降低控股股东参与定向增发的成本、对自身进行利益输送的动机;而机构投资者能够有效监督这一过程中大股东的利己行为。研究结论为加强对上市公司在定向增发中信息披露的监管,保护中小投资者利益提供了有益的启示。     

What Factors Affect the Persistence of an Innovation Advantage?

Factors that affect a firm's ability to achieve an advantage may differ from those that affect its ability to sustain that advantage. Moreover, if advantage is a relative concept then studies that relate resource stocks to ‘absolute’ outcomes say little about how resources contribute to enduring differences among firms. We explore these issues in the global semiconductor industry by analyzing how a firm's resource stocks contribute to the persistence of an innovation advantage (a relative outcome). The findings demonstrate that a firm's own production experience and the experience held by its partners contribute to temporary innovation advantages. The results also show that a firm's own production experience yields a more durable innovation advantage as compared to the experience held by a firm's partners and that the experience held by a firm's partners provides a more enduring advantage than a firm's patent stock.     

Dominant stockownership and profitability

Dominant stockholders can acquire variable amounts of control over a firm's performance. The amount of control depends largely on both the incentive and power to dominate the firm's decision-making process. Ceteris paribus, a dominant stockholder has more incentive and power to influence firm behavior when he owns larger amounts of the firm's stock. To capture properly the effects of the separation of ownership and control this study considers a continuous relation between stockownership and control. This formulation allows for variable degrees of stockholder control, and suggests a critical minimum percentage of stockownership necessary for constraining managerial behavior.