ARE FIRM‐ AND COUNTRY‐SPECIFIC GOVERNANCE SUBSTITUTES? EVIDENCE FROM FINANCIAL CONTRACTS IN EMERGING MARKETS

We investigate how borrowers’ corporate governance influences bank loan contracting terms in emerging markets and how this relation varies across countries with different country‐level governance. We find that borrowers with stronger corporate governance obtain favorable contracting terms with respect to loan amount, maturity, collateral requirements, and spread. Firm‐level and country‐level corporate governance are substitutes in writing and enforcing financial contracts. We also find that the distinctiveness of borrowers’ characteristics affect the relation between firm‐level corporate governance and loan contracting terms. Our findings are robust, irrespective of types of regression methods and specifications.     

DO INSTITUTIONS PREFER HIGH‐VALUE ACQUIRERS? AN ANALYSIS OF TRADING IN STOCK‐FINANCED ACQUISITIONS

If owners of target shares in a stock‐for‐stock merger perceive the acquirer as overvalued, they should sell their holdings more aggressively to profit before such overvaluation dissipates. We study institutional owners of targets and find that slightly more than half liquidate their shares in stock mergers, consistent with high institutional‐share turnover rates found in the prior literature. However, share retention is higher when valuation measures suggest greater acquirer overvaluation, regardless of whether institutional owners generally prefer growth or value stock. Institutions that prefer large‐cap, growth stock are most enthusiastic about bids from large, high‐valuation acquirers, and substantially increase their stakes in such deals.     

DO INSTITUTIONAL INVESTORS IN THE UK ADOPT A DUAL STRATEGY FOR MANAGING FOREIGN EXCHANGE RISK?

In recent years, the gradual increase in international portfolio diversification within the UK institutional investment community has led to a growing need to manage foreign exchange (FX) risk. This paper reports on the findings of a postal questionnaire survey relating to FX risk management practices in UK institutional investment organisations. The findings demonstrate an increasing awareness of the FX risk management problem and indicate that UK investment institutions actively manage FX risk within their investment portfolios. The paper also focuses on the interesting question of whether UK institutional investors manage their own portfolio's FX risk, simultaneously concerning themselves with their investee companies’ FX risk management practices. Overall, the findings indicate that institutional investors adopt adual strategyfor managing FX risk; not only managing their own FX risk, but also requiring that their investee companies manage FX risk. There is also evidence to suggest that the institutional investors require their investee companies to disclose information relating to their FX risk management policies.     

DO FIRMS SEEK A TARGET BOARD STRUCTURE? EVIDENCE FROM THE POST‐SOX PERIOD

We investigate whether firms restructure board composition to align with changes in their contracting environment. Board size and independence increase with firm complexity, consistent with theoretical predictions. However, the hypothesized negative relation between board independence and information costs is evident only for firms completing acquisitions. Furthermore, board independence increases to offset increases in CEO power in a sample of firms making acquisitions, but decreases when CEO power increases in a large cross‐section of firms. We conclude that after the Sarbanes–Oxley Act of 2002, firms face constraints adjusting to target board structure, but these constraints can be mitigated by a shock to the contracting environment via acquisition.     

WHAT DO AUDITORS DO? OBVIOUSLY THEY DO NOT SCRUTINISE THE ACCOUNTING AND REPORTING

Auditors and auditing firms are important actors in the process of institutionalising accounting standards. However, the formal and institutional requirements to de facto ensure professionalism and independence in the Swedish municipal sector have been strongly questioned. The aim of this paper is to investigate and explain how deviations from accounting standards are treated and reported by auditors. The results indicate deficiency in both competence and independence among the auditors. The institutional arrangements in Sweden do not seem to ensure that auditors facilitate and support the implementation of accounting standards.     

Marking‐to‐Market: Panacea or Pandora's Box?

Financial institutions have been at the forefront of the debate on the controversial shift in international standards from historical cost accounting to mark‐to‐market accounting. We show that the trade‐offs at stake in this debate are far from one‐sided. While the historical cost regime leads to some inefficiencies, marking‐to‐market may lead to other types of inefficiencies by injecting artificial risk that degrades the information value of prices, and induces suboptimal real decisions. We construct a framework that can weigh the pros and cons. We find that the damage done by marking‐to‐market is greatest when claims are (1) long–lived, (2) illiquid, and (3) senior. These are precisely the attributes of the key balance sheet items of banks and insurance companies. Our results therefore shed light on why banks and insurance companies have been the most vocal opponents of the shift to marking‐to‐market.     

When Is a Treasury Security On‐the‐Run?

The literature contains two conflicting definitions of the on‐the‐run period for Treasury securities. We address the conflict by empirically examining the implications of the two definitions. We conclude that it is important that researchers clearly understand the implications of each definition. Our results suggest that on‐the‐run activity spans different auction calendar time in T‐notes and T‐bills.     

Does Say‐on‐Pay Matter? Evidence from Say‐on‐Pay Proposals in the United States

We investigate the effect of say‐on‐pay (SOP) proposals on changes in executive and director compensation. Relative to non‐SOP firms, SOP firms’ total compensation to CEOs does not significantly change after the proposal. However, the mix of compensation does change—companies move away from using cash compensation toward more incentive compensation, offsetting the reduction in bonus. Further, the mix of compensation of non‐CEO executives changes similarly to that of CEOs. Compensation to directors of SOP firms increases less than non‐SOP firms. Firms whose CEOs are well compensated, especially with cash‐based compensation, are most likely to receive a proposal.     

Do Not‐For‐Profits Need Their Own Conceptual Framework?

This paper raises the issue of whether not‐for‐profit (NFP) oganisations require a conceptual framework that acknowledges their mission imperative and enables them to discharge their broader accountability. Relying on publicly available documentation and literature, it suggests the current Conceptual Frameworks for the for‐profit and public sectors are inadequate in meeting the accountability needs of NFPs. A NFP‐specific conceptual framework would allow the demonstration of broader NFP‐specific accountability and the formulation of NFP‐appropriate reporting practice, including the provision of financial and non‐financial reporting. The paper thus theoretically challenges existing financial reporting arrangements and invites debate on their future direction.     

How Do Quasi‐Random Option Grants Affect CEO Risk‐Taking?

We examine how an increase in stock option grants affects CEO risk‐taking. The overall net effect of option grants is theoretically ambiguous for risk‐averse CEOs. To overcome the endogeneity of option grants, we exploit institutional features of multiyear compensation plans, which generate two distinct types of variation in the timing of when large increases in new at‐the‐money options are granted. We find that, given average grant levels during our sample period, a 10% increase in new options granted leads to a 2.8% to 4.2% increase in equity volatility. This increase in risk is driven largely by increased leverage.     

Are Stock‐for‐Stock Acquirers of Unlisted Targets Really Less Overvalued?

Extant studies assume that targets’ private ownership mitigates acquirers’ incentives and opportunities to finance acquisitions with inflated stocks. This view stems from the observation that, although the average stock‐for‐stock acquirer's merger announcement return is negative when the target is listed, it is positive when the target is unlisted. Accordingly, extant studies often suggest that announcements of stock‐for‐stock acquisitions of unlisted targets convey favorable private information about the acquirers. However, an analysis of stock‐for‐stock acquirers’ stock performance, abnormal accruals, net operating assets, and insider trading suggests the opposite. Acquirers of unlisted targets are generally more overvalued than acquirers of listed targets.     

What Drives Sell‐Side Analyst Compensation at High‐Status Investment Banks?

We use proprietary data from a major investment bank to investigate factors associated with analysts’ annual compensation. We find compensation to be positively related to “All‐Star” recognition, investment‐banking contributions, the size of analysts’ portfolios, and whether an analyst is identified as a top stock picker by the Wall Street Journal. We find no evidence that compensation is related to earnings forecast accuracy. But consistent with prior studies, we find analyst turnover to be related to forecast accuracy, suggesting that analyst forecasting incentives are primarily termination based. Additional analyses indicate that “All‐Star” recognition proxies for buy‐side client votes on analyst research quality used to allocate commissions across banks and analysts. Taken as a whole, our evidence is consistent with analyst compensation being designed to reward actions that increase brokerage and investment‐banking revenues. To assess the generality of our findings, we test the same relations using compensation data from a second high‐status bank and obtain similar results.     

DO DIVIDEND FLOWS AFFECT STOCK RETURNS?

We examine price impacts from dividend flows. Event‐study estimates show that stocks experience abnormal returns on the dividend distribution day. Results also show a spillover effect to non‐dividend‐paying stocks that are likely to be part of the same benchmark portfolio as the dividend‐paying stocks. Regression results indicate that the effect is dependent on the ownership share by professional investors. The temporary nature of the effect on returns is in line with the literature's demand‐driven price pressure hypothesis.     

WHAT DETERMINES SEO OFFER‐DAY RETURNS?

We examine seasoned equity offering (SEO) initial‐day returns after controlling for the dilution effect from the SEO discount and new shares offered. Contrary to the existing literature that ignores the effect of dilution, we find that initial‐day returns are not consistently positive. Modeling adjusted initial‐day returns, we show that dilution‐adjusted initial‐day returns respond to partial price adjustments reflecting both private and public information. Additional determinants of SEO offer‐day returns include lockup length, discount reversal, prior operating performance, and underwriter reputation. Long‐run tests reveal that adjusted initial‐day returns are not predictive of postissuance long‐term performance.     

Risk‐Sharing or Risk‐Taking? Counterparty Risk,Incentives, and Margins

Derivatives activity, motivated by risk‐sharing, can breed risk‐taking. Bad news about the risk of an asset underlying a derivative increases protection sellers' expected liability and undermines their risk‐prevention incentives. This limits risk‐sharing, creates endogenous counterparty risk, and can lead to contagion from news about the hedged risk to the balance sheet of protection sellers. Margin calls after bad news can improve protection sellers' incentives and in turn enhance risk‐sharing. Central clearing can provide insurance against counterparty risk but must be designed to preserve risk‐prevention incentives.     

Click or Call? Auction versus Search in the Over‐the‐Counter Market

Over‐the‐counter (OTC) markets dominate trading in many asset classes. Will electronic trading displace traditional OTC “voice” trading? Can electronic and voice systems coexist? What types of securities and trades are best suited for electronic trading? We study these questions by focusing on an innovation in electronic trading technology that enables investors to simultaneously search many bond dealers. We show that periodic one‐sided electronic auctions are a viable and important source of liquidity even in inactively traded instruments. These mechanisms are a natural compromise between bilateral search in OTC markets and continuous double auctions in electronic limit order books.     

Overreaction to Intra‐industry Information Transfers?

Prior research has documented that earnings announcements provide information not only about the announcing firm but also about other firms in the same industry. We document a stock market anomaly associated with this phenomenon of intra-industry information transfers by showing that the stock price movements of late announcers in response to earnings reported by early announcers are negatively related to subsequent price responses of late announcers to their own earnings reports. Apparently, the stock market overestimates the intra-industry implications of early announcers' earnings for late announcers' earnings, and that overestimation is corrected when late announcers disclose their earnings.