Earnings Variability and Disclosure of R&D: Evidence from Press Releases

This study explores press releases in the pharmaceutical industry to expand our understanding of how investments in R&D outlays influence uncertainty of future earnings. The findings make two contributions to the literature. First, they provide evidence that equal investments in different R&D ventures are associated with differential variability of future earnings. This result suggests that non‐financial information contained in press releases captures attributes of firm‐specific R&D investments that are not revealed through R&D expenditures reported in financial statements. Second, prior studies have indicated that investments in pharmaceutical R&D are associated with the highest variability of future earnings among all industries. The results, however, suggest that for a large class of low‐risk pharmaceutical R&D investments, the relative variability of future earnings is low and similar to that generated by capital expenditures. The findings hold when we control for endogeneity in voluntary disclosure of press releases.     

Sociocultural Integration in Mergers and Acquisitions: Unresolved Paradoxes and Directions for Future Research

Despite decades of research, the key factors for success in mergers and acquisitions (M&As) and the reasons why M&As often fail remain poorly understood. While attempts to explain M&A success and failure have traditionally focused on strategic and financial factors, an emergent field of inquiry has been directed at the sociocultural and human resources issues involved in the integration of acquired or merging firms. This research has sought to explain M&A performance and underperformance in terms of the impact that variables such as cultural fit, management style similarity, the pattern of dominance between merging firms, the acquirer's degree of cultural tolerance, and the social climate surrounding a takeover have on the postmerger integration process. In this article, we attempt to take stock of, and synthesize, the findings from research on sociocultural and human resources integration in M&A, to identify conflicting perspectives and unresolved questions as well as several underresearched areas, and then use our analyses to propose an agenda for the next stage of research in this field. © 2013 Wiley Periodicals, Inc.     

The Value Relevance of Financial Institutions' Fair Value Disclosures: A Study in the Difficulty of Linking Unrealized Gains and Losses to Equity Values

This article provides a residual-income valuation framework for assessing whether fair value disclosures required by SFAS 119, Disclosures About Derivative Financial Instruments and Fair Values of Financial Instruments , are value-relevant. The primary theoretical and empirical result is that when using a residual-income valuation model, the estimated relation between variables measuring fair value-book value differences for financial instruments and security prices may be contrary to what one would have expected. Specifically, the greater the firm's return on invested capital and growth rate relative to its cost of capital, the more negative the estimated relation between fair value-book value differences for financial instruments and security prices. A generalization of this result is that tests linking equity values to various types of unrecognized gains and losses are, in many cases, unlikely to generate the hypothesized positive relation between equity values and the unrecognized gains and losses.     

THE MEAN‐GINI EFFICIENT PORTFOLIO FRONTIER

A main advantage of the mean‐variance (MV) portfolio frontier is its simplicity and ease of derivation. A major shortcoming, however, lies in its familiar restrictions, such as the quadraticity of preferences or the normality of distributions. As a workable alternative to MV, we present the mean‐Gini (MG) efficient portfolio frontier. Using an optimization algorithm, we compute MG and mean‐extended Gini (MEG) efficient frontiers and compare the results with the MV frontier. MEG allows for the explicit introduction of risk aversion in building the efficient frontier. For U.S. classes of assets, MG and MEG efficient portfolios constructed using Ibbotson (2000) monthly returns appear to be more diversified than MV portfolios. When short sales are allowed, distinct investor risk aversions lead to different patterns of portfolio diversification, a result that is less obvious when short sales are foreclosed. Furthermore, we derive analytically the MG efficient portfolio frontier by restricting asset distributions. The MG frontier derivation is identical in structure to that of the MV efficient frontier derivation. The penalty paid for simplifying the search for the MG efficient frontier is the loss of some information about the distribution of assets.     

Capital market equilibrium with heterogeneous investors

As a two-parameter model that satisfies stochastic dominance, the mean-extended Gini model is used to build efficient portfolios. The model quantifies risk aversion heterogeneity in capital markets. In a simple Edgeworth box framework, we show how capital market equilibrium is achieved for risky assets. This approach provides a richer basis for analysing the pricing of risky assets under heterogeneous preferences. Our main results are: (1) identical investors, who use the same statistic to represent risk, hold identical portfolios of risky assets equal to the market portfolio; and (2) heterogeneous investors as expressed by the variance or the extended Gini hold different risky assets in portfolios, and therefore no one holds the market portfolio.     

THE LIQUIDITY ROUTE TO A LOWER COST OF CAPITAL

The managements of many public companies do not pay much attention to the liquidity of their securities. Many if not most CEOs and CFOs feel powerless to affect what goes on in financial markets, and a common attitude among top executives is that maintaining liquidity is the concern of the securities exchanges and the Securities and Exchange Commission. This approach may work for those companies whose stocks are already highly liquid—a group made up mainly of large‐cap companies, as well as a number of smaller high‐flying, high‐tech firms. But, for the vast majority of public companies—especially smaller and mid‐sized firms—this is likely to be the wrong policy. As the authors of this article demonstrated in their pioneering study (published in the Journal of Financial Economics in 1986), liquidity appears to be a major determinant of a company's cost of capital. As their theory suggests and their empirical tests confirmed, the more liquid a company's securities, the lower its cost of capital and the higher its stock price. And, as discussed in this article, academic research since then has produced a large and impressive body of evidence linking greater liquidity to higher stock prices. Although recent technological innovations such as Internet‐based trading have increased liquidity generally, not all companies appear to have benefited equally. The authors offer a number of suggestions for companies intent on increasing the liquidity of their stock. Specifically, they propose that managers do the following: (1) consider measures, such as stock splits, designed to increase their investor base by attracting small investors; (2) seek trading venues for their securities that promise to increase liquidity; and (3) take advantage of the new Internet technology to provide more and better information to investors. Moreover, for smaller companies with little or no analyst coverage, the authors offer the radical suggestion that such companies actually pay analysts to cover their stock, much as companies pay Moody's or Standard & Poors to rate their bonds. This, in the authors' view, would be a more efficient alternative to the current practice of using stock splits to encourage intermediaries to make markets in the firm's shares.