Price‐Match Announcements in a Consumer Search Duopoly

Using a model of sequential search, we show that announcements to price‐match raise prices by altering consumer search behavior. First, price‐matching diminishes firms’ incentives to lower prices to attract consumers who have no search costs. Second, for consumers with positive search costs, price‐matching lowers the marginal benefit of search, inducing them to accept higher prices. Finally, price‐matching can lead to asymmetric equilibria where one firm runs fewer sales and both firms tend to offer smaller discounts than in a symmetric equilibrium. Price increases grow in the proportion of consumers who invoke price‐matching guarantees and in the level of equilibrium asymmetry.     

The Informativeness of Relative Performance Information and Its Effect on Effort Allocation in a Multitask Environment

Prior research documents that providing relative performance information (RPI) motivates employees to increase effort; however, a potential downside of RPI is that it also motivates employees to distort their effort allocations between tasks such that it can be detrimental to overall firm performance. This study investigates via an experiment how the informativeness of RPI affects employees' effort allocations and performance in a multitask environment. We investigate the informativeness of two RPI design choices that are observed in practice: detail level and temporal aggregation. Regarding detail level, firms may provide each employee's performance ranking on tasks, which is less informative than providing the actual performance score of each employee. Regarding temporal aggregation, firms may provide RPI that is reset each period, which is less informative than RPI that is based on cumulative performance. We find RPI detail level and temporal aggregation interact to influence effort distortion. Specifically, we find that, compared to reset RPI, cumulative RPI leads to greater distortion of effort away from firm‐preferred allocations and that this effect is magnified when RPI provides actual performance scores rather than performance rankings. Finally, high levels of effort distortion hurt overall performance, thereby demonstrating the potentially detrimental effect of effort distortion on performance. Results of our study enhance our understanding of how firms can use their control over the design of RPI to enhance its usefulness in directing employees' effort in multitask environments by highlighting the role that informativeness of information can have on employee behavior.     

ASYMMETRIC PRICE TRANSMISSION AND MARKET CONCENTRATION: AN INVESTIGATION INTO FOUR SOUTH AFRICAN AGRO-FOOD INDUSTRIES

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Earnings Forecasts and Price Efficiency after Earnings Realizations: Reduction in Information Asymmetry through Learning from Price*

When information asymmetry is a major market friction, earnings forecasts can lead to higher price efficiency even after the information in forecasts completely dissipates upon earnings realizations. We show this in an experimental market that features information asymmetry (i.e., some traders possess differential private information). Earnings forecasts reduce information asymmetry and lead to prices that reflect a greater amount of private information. Traders can learn more about others' information from prices. This information learned from past prices continues to reduce information asymmetry and improve price efficiency even after earnings realizations. We contribute to the disclosure literature by showing the evidence that the learning‐from‐price effect amplifies the impact of public disclosure on price efficiency.     

The Use of Trade Association Disclosures by Investors and Analysts: Evidence from the Semiconductor Industry*

This paper investigates the relation between industry-wide information disclosures by the trade association for the semiconductor industry and both share prices and analyst forecasts. Such disclosures may have little impact on investors and analysts, since prior theoretical research suggests that trade associations may be unable to secure reliable data from firms in an industry. At the same time, such disclosures may be important, since prior empirical research suggests that share prices and analyst forecasts reflect industry-wide earnings effects earlier than firm-specific effects. We document significant stock price movements on release dates of industry Flash Reports by the Semiconductor Industry Association (SIA) each month that contain aggregate industry data on new orders and shipments. The magnitude of the price revisions on Flash Report disclosure dates is positively associated with changes in the numbers disclosed and varies across sample firms in a manner associated with identifiable characteristics of the firms. Further tests indicate that the Flash Report provides mainly forward-looking information on new orders that is linked to firm-specific sales changes and has explanatory power for quarterly stock prices beyond firm-specific earnings. This information is used by security analysts mainly in assessing the persistence of firm-specific quarterly sales changes. Our findings support the hypothesis that the SIA is able to obtain data from firms, compile it into reliable aggregate statistics, and then distribute these statistics in a timely fashion.     

Analysts' Interpretation and Investors' Valuation of Tax Carryforwards*

We examine how financial analysts and equity investors incorporate information on deferred taxes from carryforwards into earnings forecasts and share prices. We focus on carryforwards because, in providing this information each period, management must use their private information about the firm's profitability prospects. Thus, accounting measurement of tax carryforwards is another way of providing a management earnings forecast. In analyzing the role of carryforwards in valuation, we distinguish between two conflicting effects. First, deferred taxes from carryforwards represent future tax savings; hence, they should be valued positively as assets. In contrast, the existence of tax carryforwards may signal a higher likelihood of future losses, which would have a negative effect on expected earnings and share prices. We find that analysts consider earnings of firms with carryforwards to be less persistent because of the increased likelihood of future losses. We also find that analysts tend to be less precise and more optimistic (biased) in forecasting earnings of firms with carryforwards. This higher optimism and lower precision are more pronounced just after firms adopt Statement of Financial Accounting Standards (SPAS) 109 and are almost entirely corrected over time. An analysis of investors' valuation indicates a strong positive relation between deferred taxes from carryforwards and share prices, suggesting that these carryforwards are valued as assets. Also, earnings and book values of equity are valued less in firms that have carryforwards than in firms without carryforwards. Finally, the valuation allowance required under SFAS 109 assists equity investors in valuing a firm's earnings and net assets. The combined findings on analysts' interpretation and investors' valuation suggest that analysts fail to fully capture the implication of carryforwards on future earnings within their forecasting horizon.     

Voluntary Disclosure and Equity Offerings: Reducing Information Asymmetry or Hyping the Stock?*

We examine corporate disclosure activity around seasoned equity offerings and its relationship to stock prices. Beginning six months before the offering, our sample issuing firms dramatically increase their disclosure activity, particularly for the categories of disclosure over which firms have the most discretion. The increase is significant after controlling for the firm's current and future earnings performance and tends to be largest for firms with selling shareholders participating in the offering. However, there is no change in the frequency of forward‐looking statements prior to the equity offering, something that is expressly discouraged by the securities law. Firms that maintain a consistent level of disclosure experience price increases prior to the offering, and only minor price declines at the offering announcement relative to the control firms, suggesting that disclosure may have reduced the information asymmetry inherent in the offering. Firms that substantially increase their disclosure activity in the six months before the offering also experience price increases prior to the offering relative to the control firms, but suffer much larger price declines at the announcement of their intent to issue equity, suggesting that the disclosure increase may have been used to “hype the stock” and the market may have partially corrected for the earlier price increase. Firms that maintain a consistent disclosure level have no unusual return behavior relative to the control firms subsequent to the announcement, while the firms that “hyped” their stock continue to suffer negative returns, providing further evidence that the increased disclosure activity may have been hype, and suggesting that the hype may have been successful in lowering the firms' cost of equity capital.     

Market liquidity,private information,and the cost of capital: Market microstructure studies on family firms in Japan

We investigate cost of capital, information asymmetry, and market liquidity of listed family firms vs. non-family firms in Japan. First, we find that the cost of debt is lower and the cost of equity is higher for family firms than non-family firms, but the differences are not significant. The WACC of family firms becomes higher than that for non-family firms and the difference is significant probably because family firms in Japan use less leverage. Next, we find that the stocks of family firms are traded with higher information asymmetry than non-family firms. As for information asymmetry and illiquidity measures, we utilize the variables Adjusted PIN and Probability of Symmetric Order Flow Shocks (PSOS). Concomitantly we also estimate alternate conventional measures of market liquidity as a robustness check. Overall, the evidence on liquidity is somewhat mixed, while we find family firms show higher information asymmetry, which may affect cost of equity. As a final policy implication, we recommend family firms in Japan conduct more voluntary and timely disclosure, in particular, for the benefit of general stock investors, and may want to increase leverage to reduce the WACC.     

Pricing and Mispricing of Accounting Fundamentals in the Time‐Series and in the Cross Section

This study examines the extent to which parsimonious and general cross‐sectional valuation models, restricted to include only publicly available historical accounting information, explain share prices in the cross section, identify periods when market mispricing may be more pervasive, and also identify which shares within those cross sections are more likely to be mispriced. Our model simply includes historical book value, earnings, dividends, and growth, but it explains on average over 60 percent of the cross‐sectional variation in share prices in annual estimations across 1975–2011. We also examine the extent to which the residuals indicate mispricing. The quintile of stocks picked by our model as most likely underpriced outperform the quintile of stocks picked as most likely overpriced by an average of 9.9 percent over the following 12 months, after controlling for size. We also predict and find that value residuals are better predictors of future abnormal returns: (i) among firms that are not covered by analysts; (ii) among firms that face fewer accounting measurement challenges; and (iii) when we estimate value model parameters by industry/year. We also predict and find our approach works better in periods when the mapping of fundamentals into prices is weaker. This study contributes a novel and straightforward approach to map accounting fundamentals into share prices in order to identify mispricing in time‐series and in the cross section.     

The Valuation Effect of Accounting Standard 158 on Firms with High and Low Financial Risk

SFAS 158 mandated balance sheet disclosure of the funded status of firms’ Defined Benefit Pension Plan using the Projected Benefit Obligation (PBO) to estimate the pension liability. SFAS 158 caused a market phenomenon because the use of the PBO engendered dramatically higher estimates of pension liability and hence the perception of risk. Our work focuses on two aspects of this change in pension accounting: first, how will industry firms change their accounting strategy in light of the new rules, and second, how will firms’ stock prices be affected by the new allegedly better estimate of pension liability? Our research suggests that firms’ accounting strategies changed in that they use higher discount rates to estimate pension liability which offset the dramatic impact of using the PBO. In addition, we find that high financial risk firms’ tendencies to use higher discount rates increase with the firms’ leverage and decrease with liquidity. To test the market reaction we utilize standard event study methodology to investigate the effects of SFAS 158 on stock returns. Our findings suggest that firms with high (low) financial risk earn negative (positive) abnormal returns on and around relevant event dates preceding the implementation of SFAS 158.     

Financial Statement Comparability and the Efficiency of Acquisition Decisions

This study examines whether acquirers make better acquisition decisions when target firms’ financial statements exhibit greater comparability with industry peer firms. We predict and find that acquirers make more profitable acquisition decisions when target firms’ financial statements are more comparable—as evidenced by higher merger announcement returns, higher acquisition synergies, and better future operating performance. We also find that post‐acquisition goodwill impairments and post‐acquisition divestitures are less likely when target firms’ financial statements are more comparable. Finally, we find that acquirers benefit most from comparability when acquirers’ ex ante information asymmetry is higher, acquirers operate in volatile operating environments, and management knows relatively less about the target. In total, our evidence suggests targets’ financial statement comparability helps acquirers make better acquisition‐investment decisions and fosters more efficient capital allocation.     

Access to Bottleneck Inputs under Oligopoly: A Prisoners' Dilemma?

We analyze the incentives of vertically integrated oligopolists to concede access to their bottleneck inputs to an entrant in the downstream market. First, two vertically integrated incumbents make access price offers to an entrant that chooses which one to accept, if any. Second, firms compete on Salop's circle. The firms may be asymmetrically located on the circle, to reflect differences in consumer shares. For some levels of asymmetry, the incumbents face a prisoners' dilemma with respect to conceding access to their bottleneck inputs. Entry by a downstream firm may lead to lower retail prices. However, entry may also lead to higher retail prices for the access provider and for the entrant. We also consider the cases where there are several incumbents and where the entrant makes the access price offers.     

Intraday information efficiency on the Chinese equity market

Bid-ask spread is a direct measure of information asymmetry. As such, it can be used to evaluate information efficiency. In this paper, we show that both the quoted and effective spreads on the Shanghai Stock Exchange are extremely high at the open, decrease over the trading day, and experience a small rebound at the close. The spread decreases with share volume, daily trades, and market capitalization, but increases with average trade size. We further examine the beta using the unbiasedness regression from Biais et al. [Biais, B., Hillion, P., Spatt, C. (1999). Price discovery and learning during the pre-opening period in the Paris Bourse. Journal of Political Economy, 107, 1218–1248] and find that intraday prices are efficient and unbiased for more liquid stocks. This suggests that liquidity prompts information-motivated trading, which, in turn, improves information dissemination. Moreover, our findings indicate that small and medium trades are more likely to facilitate the formation of efficient prices at the open and close of the market, while large trades play a more important role during the other trading periods.     

WATER BILL ESTIMATION WHEN PRICE IS CRYPTIC: EXPERIENCE FROM WINDHOEK,NAMIBIA

For water policy to be effective, policy makers must know how water users perceive and respond to changes in water prices. However, it is not uncommon for water prices faced by consumers to be unclear. In Windhoek, Namibia, the marginal and average water price is difficult to calculate from the information provided in users' utility bills. This paper applies a hedonic pricing approach to investigate price perceptions of water users in a setting with cryptic price information. Using self‐reported water charges as the dependent variable, the pricing model utilises reported utility characteristics and other factors that may affect perceived price. Low‐income standpipe water users report a weighted average monthly charges of N$24.68, whereas users in high income segments report N$521.34. This reflects differences in service levels, possible subsidies to low‐income users and potential errors in respondents' understanding of their water price. Average price per litre (N$11.78 for the low‐use segment; N$1.89 for the highest segment of Tier 1 water use) tends to be perceived as higher by those with lower water use even though average prices in the relevant range should generally be identical.     

Capital structure and short-term decisions

Share price pressure can lead to managerial myopia as managersface incentives to make short-run decisions. We show how long-rundebt can negate myopic behavior by serving as an incentive tohave high future earnings in order to avoid the risk of bankruptcy.We show how increases in leverage could have been a signal inresponse to growing share price pressure in the 1980s. We obtaina theory of capital structure whose predictions are in linewith recent empirically observed patterns. We demonstrate thebenefits of high bankruptcy penalties in inducing efficientdecision making, and show how debt may, ex post, lead to inefficientdecisions being taken in an effort to pay it off. This ex postconsequence of debt can potentially undermine its ex ante incentivebenefits.     

Information Use and Transference among Legally Separated Share Markets—An Experimental Approach

Several countries have adopted legally separated share markets (LSSM), where local firms market separate claims to the same dividend flow to domestic and foreign investors who cannot arbitrage across LSSM. We designed a laboratory experiment to test whether the inside information in one LSSM is reflected in the prices of both markets. We find that insider information does transfer across markets. The extent of this transfer depends upon whether the location of insiders is publicly known, how close prices in the informed market get to the full information equilibrium, and how much the price variance is in this market. We also observe insiders' behavior and performance under different market conditions. Efforts by insiders to manipulate the market increase when their location is unknown to the public. On average such efforts pay off to the whole group of insiders but not to the initiator of these manipulative transactions.     

Managerial Discretion and Task Interdependence in Teams

This study investigates whether task interdependence in teams alters the effectiveness of managerial discretion in motivating team performance. Teams are particularly useful when employees' tasks are interdependent—that is, when the degree to which the increase in team performance resulting from a team member's effort depends on the effort and skills of the other team members. The reason is that the more interdependent tasks are, the more employees need to coordinate their actions and help one another to achieve their objectives. Prior research analyzing settings where task interdependence is absent suggests that providing managers with discretion over team bonus allocation can improve team performance relative to equal team bonus allocations because it strengthens the link between contributions to team output and rewards. Economic theory suggests that managerial discretion will also improve team performance when task interdependence is present and information is efficiently used. However, we use behavioral theory to predict that managerial discretion is less effective in the presence of task interdependence, because managers do not fully incorporate all relevant information into bonus decisions and because managerial discretion hurts coordination and helping, which is particularly problematic under task interdependence. We find that while discretion over compensation has a positive effect on team performance relative to equal bonus allocation when task interdependence is absent, it has a negative effect when task interdependence is present. Additional analyses provide support for our underlying theory. Results of our study contribute to both theory and practice by suggesting that, ironically, managerial discretion may be most useful when the potential benefits of employing teams are lowest and least useful when the potential benefits are highest. Our results help explain why firms often grant managers only partial or no discretion over team members' compensation.     

Investor Overreaction to Earnings Surprises and Post‐Earnings‐Announcement Reversals

Prior literature suggests that the market underreacts to the positive correlation in a typical firm's seasonal earnings changes, which leads to a post‐earnings‐announcement drift (PEAD) in prices. We examine the market reaction for a distinct set of firms whose seasonal earnings changes are uncorrelated and show that the market incorrectly assumes that the earnings changes of these firms are positively correlated. We also document that positive (negative) seasonal earnings changes in the current quarter are associated with negative (positive) abnormal returns in the next quarter. Thus, we observe a reversal of abnormal returns, consistent with a systematic overreaction to earnings, rather than the previously documented PEAD. Additional analysis indicates that financial analysts similarly overestimate the autocorrelation of these firms, although to a lesser extent. We also find that the magnitude of overestimation and the subsequent price reversal are inversely related to the richness of the information environment. Our results challenge the notion that investors recognize but consistently underestimate earnings correlation and provide a new perspective on the inability of prices to fully reflect the implications of current earnings for future earnings. That is, we show that investors predictably overestimate correlation when it is lacking, but underestimate it when it is present.     

An empirical evaluation of the 1986 Semiconductor Trade Arrangement

In the paper, we aim to empirically evaluate the extent to which the 1986 Semiconductor Trade Arrangement (STA) affected the Japanese producers’ behavior in the market for the 1 M Dynamic Random Access Memory (DRAM) chips. Based on the Euler equation of non-Japanese firms’ learning-curve optimization, we estimate the marginal cost function and then calculate Japanese price-cost margins by using nonparametric estimation. Our estimation results show that the price-cost margins of Japanese firms were set far above the learning-curve optimization margins but still lower than the marginal costs on average. Hence we can infer that the STA could not push the price above the average Japanese marginal cost but facilitate the Japanese firms to collude to set the price-cost margins by taking account of learning-by-doing effects. This empirical finding and no significant spillover effect are combined with other observations to imply that the STA might have enabled later-entering non-Japanese firms to rapidly expand their market shares and get a foot in the door of the R&D competition for new generational DRAM.     

An Analysis of Historical and Future-Oriented Information in Accounting-Based Security Valuation Models*

The Ohlson (1995) and Feltham and Ohlson (1995) valuation model provides a rigorous framework for summarizing the information in expected future earnings and book values. However, the model provides little guidance on selecting an empirical proxy for expected future earnings. We examine whether and under what circumstances historical earnings and analyst earnings forecasts offer comparable explanation of security prices. This issue is of particular interest because analyst forecasts are less readily available than historical data. Under appropriate circumstances, historical data may allow wider use of the Feltham-Ohlson valuation model by researchers and investors. A related issue is the incremental explanatory power of historical earnings and realized future earnings (perfect-foresight forecasts) for security prices beyond analyst forecasts. If historical earnings are incrementally informative, that would suggest that analyst forecasts do not fully reflect price-relevant information in past earnings. If future earnings are incrementally informative, that would suggest that security prices reflect investors' implicit earnings forecasts beyond analyst forecasts. We examine these issues using a historical model (based on past earnings), a perfect-foresight model (based on realized future earnings), and a forecast model (based on Value Line earnings forecasts). All three models provide significant explanatory power for security prices, and each set of earnings data provides incremental explanatory power for prices when used with the other sets of earnings data. We estimate the models separately for firms with moderate and extreme earnings-to-price (E/P) ratios, a proxy for earnings permanence. For moderate-E/P firms, the historical model's explanatory power exceeds that of the perfect foresight model, and is indistinguishable from that of the analyst forecast model. In contrast, for extreme-E/P firms, the perfect-foresight model offers greater explanatory power than the historical model, but lower explanatory power than analyst forecasts. Our results suggest that financial analysts' forecasting efforts are best focused on firms whose earnings contain large temporary components (extreme E/P firms). However, in general, both historical data and analyst forecasts are complementary information sources for security valuation.