Does accounting conservatism improve the corporate information environment?

This study investigates whether and how accounting conservatism improves the corporate information environment. We argue that conservatism facilitates the flow of firm-specific information from corporate insiders to outsiders and leads to a high-quality information environment. Using the Basu (1997) model to capture the extent of accounting conservatism and firm-specific return variation to proxy for the quality of information environment, we find that conservatism is positively associated with the improvement of the corporate information environment in our sample of 43 countries. We also find that the information role of conservatism is more pronounced in countries with weaker protection of private property rights, suggesting that conservatism substitutes for legal institutions in ensuring the quality of information environment.     

Does external uncertainty matter in corporate sustainability performance?

Motivated by the prevalence of corporate sustainability and the rise of uncertainty at the national level, we investigate the impact of three sources of uncertainty; namely, economic policy, climate change, and political instability, on firms' sustainability performance. Using a sample of 6804 firms from 72 countries spanning 15 years, our study revealed that uncertainty due to climate change, economic policy, and political instability negatively affects firms' sustainability performance. This finding is in line with the real options theory that uncertainty in an external environment discourages firms' long-term investment (e.g. investment in corporate sustainability). In addition, the results show that the option for delay in sustainability investment moderated the relation between uncertainty at the national level and firms' sustainability performance. Firms with better sustainability performance had higher firm value when facing uncertainty. Interestingly, firms with higher profitability performed better in sustainability when facing uncertainty at the national level.     

Does corporate international diversification destroy value? Evidence from cross-border mergers and acquisitions

This paper investigates the valuation effects of corporate international diversification by examining cross-border mergers and acquisitions of US acquirers over the period 1990–2000. We find that, on average, acquisitions of “fairly valued” foreign business units do not lead to value discounts. In contrast, unrelated cross-border acquisitions result in a significant diversification discount of about 24% after accounting for the valuation of foreign targets. Furthermore, significant wealth gains accrue to foreign target shareholders regardless of the type of acquisition. Overall, our results suggest that international diversification does not destroy value while industrial diversification leads to discounts even after controlling for the pre-acquisition value of the target.     

Abnormal operating performance in IPOs: Does public float matter?

Using a unique dataset of privately held firms and companies that went public on the European and Asian stock exchanges between 2007 and 2011, we find that on average, newly listed firms experience negative abnormal operating performance in the years after the IPO. Furthermore, we document a nonlinear relation (inverted Ushaped) between public float and post-IPO abnormal operating performance. We interpret this quadratic relation as evidence that for each level of public float, factors that facilitate the convergence of interest between insiders and outsiders (namely, monitoring effects) and entrenchment factors (namely, agency problems) are both at work. Specifically, we suggest that at low levels of public float, increasing the float intensifies agency problems less than it increases monitoring effects. However, at a high level of public float, the situation is inverted, and increasing public float intensifies agency problems much more than it facilitates the convergence of interest between insiders and outsiders.     

Does broadband infrastructure affect corporate mergers and acquisitions? Quasi-natural experimental evidence from China

This study investigates the relationship between broadband infrastructure and corporate M&A. Using the shock of “Broadband China” policy, we conduct difference-in-differences estimations and find that broadband infrastructure significantly increases corporate M&A, which remains robust after a series of robustness checks. Further analysis shows that the underlying mechanism is alleviating information asymmetry and increasing market competition. Finally, the heterogeneity analysis shows that our results are significant mainly in the group with high regional market segmentation, manufacturing industries, and non-state enterprises. Overall, this study enriches the research on the driving factors of M&A at the firm level and provides a micro-level evaluation of economic consequences of broadband infrastructure.     

Does corporate social responsibility affect mutual fund performance and flows?

We use an asset-weighted composite corporate social responsibility (CSR) fund score to study the effects of CSR on fund performance and flows. Compared to low-CSR funds, high-CSR funds display poorer performance, stronger performance persistence, a weaker performance-flow relationship, and comparable persistence in flows. These findings are consistent with investors in high-CSR funds deriving utility from non-performance attributes.     

Does board structure in banks really affect their performance?

We study whether board structure (board size, independence and gender diversity) in banks relates to performance. Using a broad panel of large US bank holding companies over the period 1997–2011, we find that both board size and independent directors decrease bank performance. Although gender diversity improves bank performance in the pre-Sarbanes-Oxley Act (SOX) period (1997–2002), the positive effect of gender diminishes in both the post-SOX (2003–2006) and the crisis periods (2007–2011). Finally, we show that board structure is particularly relevant for banks with low market power, if they are immune to the threat of external takeover and/or they are small. Our two-step system generalised method of moments estimation accounts for endogeneity concerns (simultaneity, reverse causality and unobserved heterogeneity). The findings are robust to a wide range of other sensitivity checks including alternative proxies for bank performance.     

Does incorporating non-linearity into discretionary accrual models improve their performance?

Using a large sample of firms that restated earnings, this study investigates whether incorporating non-linearity (conditional conservatism) into discretionary accrual models improves their performance in detecting earnings management. The findings of this study are important because discretionary accrual models play a prominent role in several streams of accounting research and the models' ability to isolate the discretionary (managed) component from the non-discretionary (unmanaged) component of total accruals is critical. If the conventional linear discretionary accrual models are mis-specified, it is likely to result in misleading inferences about earnings management behavior. The findings indicate that the non-linear specification improves the performance of most linear models. The findings also indicate that a more sophisticated linear model that incorporates a performance measure and a future growth measure outperforms other simple models.     

Do corporate governance recommendations improve the performance and accountability of small listed companies?

This study examines whether the implementation of the 2003 Australian Securities Exchange Limited governance recommendations influenced the governance choices of small companies and whether compliance improves their accounting and market performance and earnings quality. Our analysis examines small and large companies because we are interested in the different effects of the governance recommendations on the two groups. The analysis shows a significant shift by small and large companies to comply with the recommendations around the time of their introduction. We find that formation of an audit committee surrounding the reform period is significantly associated with improved earnings quality for small and large companies. However, compliance with other governance recommendations is not systematically associated with improved performance or earnings quality.     

Do institutional shareholder services (ISS) corporate governance ratings reflect a company's operating performance?

Little is known about the relation between the actual governance rating received by a firm and the firm's performance. In this study, we examine the relation between the actual corporate governance rating received by a firm and the firm's performance during the years 2002–2004. We use the institutional shareholder services (ISS) corporate governance quotient (CGQ) rating of a firm's corporate governance structure and analyze this rating in relation to the firm's operating performance. We compare the institutional shareholder services’ CGQ rating to two measures of the firm's operating performance, return on assets (ROA) and return on equity (ROE). Based upon our results, we do not find statistical evidence suggesting that the firms’ operating performance is related to the firms’ ISS corporate governance rating.     

Does monitoring by the media improve the performance of government banks?

By examining cross-country data for the period from 2000 to 2010, this study investigates whether monitoring by the media affects the performance of government-owned banks (GOBs). The results indicate that GOBs under strong monitoring do not underperform privately owned banks (POBs), whereas those under weak monitoring do underperform POBs. Further, we find that the strength of the media's monitoring has an important effect on corruption behavior and banks’ performance. This result provides an important policy implication that the government should minimize its ownership, and therefore its influence, in the media sector if it intends to improve the performance of its GOBs.     

Does liquidity risk explain low firm performance following seasoned equity offerings?

A seasoned equity offering (SEO) can improve a firm’s stock liquidity and lower its cost of capital. This paper examines whether SEO firms achieve a liquidity gain and the sources of this gain. It explores the role of liquidity risk in explaining SEO long-run performance. The evidence shows that SEO firms experience significant post-issue improvements in liquidity and reductions in liquidity risk. Size and book-to-market matching fails to control for these liquidity effects, generating the low long-term post-SEO performance documented in the literature. After adjusting for liquidity risk, SEO firms show normal long-term performance.     

Do REITs use cash reserves efficiently? Evidence from corporate acquisitions

We examine the combined impact of corporate governance and excess cash holdings on the propensity of firms to become bidders and engage in value destroying acquisitions. We focus on the REIT market, due to its unique characteristics caused by regulation and the nature of the industry. The lack of active real estate takeover market should lead to entrenchment and exacerbate agency costs. However, given the mandatory high cash payout for REITs, the absence of takeover market should not cause concerns to shareholders. Our analyses reveal that unlike conventional firms, cash-rich REITs are not more likely to become acquirers and acquisitions by cash-rich REITs are not value decreasing. However, similarly to industrial firms, REITs with higher excess cash and lower insider ownership are more likely to become bidders. We interpret our results to be consistent with the hypothesis that agency problems are less severe in real estate and investors are not averse to use of excess cash by REIT managers on intra-industry acquisitions.     

The long-run performance of acquiring firms in mergers and acquisitions: Does managerial ability matter?

This paper examines the association between the managerial ability of acquiring firms and their long-term performance after mergers and acquisitions (M&As). Based on M&A data for U.S. firms from 2000 to 2012, we find that acquiring firms with higher managerial ability achieve better long-term operating performance and stock returns. We also find that the positive effect of managerial ability on long-term performance is more pronounced when acquirers and target firms belong to the same industry. The result suggests that managers who have higher ability to manage their firms, i.e., to generate higher revenues for given resources, are more capable of achieving higher synergy benefits and better post-acquisition performance in same-industry acquisitions than in cross-industry acquisitions.     

Does confucianism influence corporate earnings management?

This paper investigates the effect of Confucianism on corporate earnings management. Using a sample of Chinese listed firms from 2007 to 2017, we find that corporate earnings management is negatively associated with the popularity of Confucianism. Our findings also reveal that the effect of Confucianism is particularly strong among firms characterized with weaker internal control and external supervision or located in areas with lower level of marketization. Our findings shed important light on how culture improves the quality of financial reporting in emerging markets.     

Does executive compensation reflect corporate productivity?

Recent literature has given attention to the effect of CEO-specific productivity on the structure of CEO compensation. Our paper instead focuses on the effect of a different productivity factor—which we call “corporate productivity”—on CEO compensation. In particular, we show that corporate productivity affects the trade-off between incentive and risk in a non-monotonic fashion, which the literature has not yet recognized. Using various empirical proxies for corporate productivity, we show that our results are consistent with the non-monotonic relation and thus contribute to the debates in the incentive-risk trade-off literature. Second, our findings also contribute to the internal capital market literature by exploring the relation between the structure of CEO compensation and excess value.     

Does venture capital syndication affect mergers and acquisitions?

We find that venture capital (VC) syndicate-backed targets receive higher acquisition premiums and spend more time negotiating transaction terms. The acquirers of syndicate-backed targets receive lower cumulative abnormal returns surrounding the acquisition announcement, but they outperform the individual-backed targets in the long-term. We show that VC syndication creates value for entrepreneurial firms by leading to larger and more independent boards of directors prior to acquisition. It also leads to better incentive alignment between the CEO and the shareholders of the acquiring firm. In addition, syndicate-backed targets prefer stock as the method of payment in mergers and acquisitions. Collectively, we show that VC syndication creates value for both entrepreneurial firms and their acquirers in the long-term.     

What drives acquisitions?: Market valuations and bidder performance

Given the recent theoretical development that documents stock market misvaluations’ driven acquisition, this paper examines the relation between market valuations and bidder performance. We focus on hot stock markets and find that bidder reactions to mergers, in both the short- and long-run period, are consistent with the predictions of investors’ sentiment (optimism) after controlling for target type and method of payment. Managers that undertake mergers during bullish periods are rewarded by the generalized upward trend of the market in the short-run. However, this is followed by long-term reversals as the market learns only gradually that many of the mergers undertaken during hot periods were not carefully evaluated and were made under the pressure of ‘urge to merge’ to take advantage of the overall market status of a particular period.     

Does investor sentiment really matter?

We examine the role sentiment plays and its manifestation in the trading behavior of investors in the U.S. stock market. Our findings support the notion that sentiment-induced buying and selling is an important determinant of stock price variation. While ‘classical’ asset pricing categorizes investors who trade in ways not consistent with mean-variance optimization as ‘irrational,’ we show that this traditional view should not hastily be evoked to characterize sentiment-driven investing. We instead show that sentiment-driven investors can trade against the herd and sell when prices are overinflated as a result of over-bullishness and vice versa. The asset pricing implications of this paper are that sentiment is linked to shifts in risk tolerance and this triggers contrarian-type behavior. In sum, we uncover the following regarding the behavior of sentiment-driven investors; firstly, they are more apt to trade on survey-based indicators rather than market-based indicators. Secondly, they trade on the basis of information extracted from individual, rather than institutional, investor surveys. Thirdly, they respond asymmetrically to shifts in sentiment and trade more aggressively during periods of declining sentiment. Finally, there is asymmetry in the role of sentiment with respect to business conditions whereby such buying and selling is more pronounced during bear markets.     

Do early and voluntary filers of financial information in XBRL format signal superior corporate governance and operating performance?

On March 16, 2005, the SEC issued Final Rule 33-8529 encouraging registrants to voluntarily file tagged financial statement information on the EDGAR reporting System using XBRL format. In this paper, we examine whether early and voluntary filers of financial information in XBRL format demonstrate superior corporate governance and operating performance relative to their non-adopting peers. We investigate performance, market, and structure-related firm variables. Our results suggest that corporate governance is significantly and positively associated with a firm's decision to be an early and voluntary filer of financial information in XBRL format. At the same time, firm performance factors including liquidity and firm size are also associated with the early and voluntary XBRL filing decision. Our findings should be particularly interesting for the SEC, as it considers the corporate governance and firm-performance related associations between certain registrants' early and voluntary response and its call for XBRL-based filings.