Zombie Board: Board Tenure and Firm Performance

We show that board tenure exhibits an inverted U‐shaped relation with firm value and accounting performance. The quality of corporate decisions, such as M&A, financial reporting quality, and CEO compensation, also has a quadratic relation with board tenure. Our results are consistent with the interpretation that directors’ on‐the‐job learning improves firm value up to a threshold, at which point entrenchment dominates and firm performance suffers. To address endogeneity concerns, we use a sample of firms in which an outside director suffered a sudden death, and find that sudden deaths that move board tenure away from (toward) the empirically observed optimum level in the cross‐section are associated with negative (positive) announcement returns. The quality of corporate decisions also follows an inverted U‐shaped pattern in a sample of firms affected by the death of a director.     

Analyst Forecast Consistency

We show empirically that analysts who display more consistent forecast errors have greater ability to affect prices, and that this effect is larger than that of stated accuracy. These results lead to three implications. First, consistent analysts are less likely to be demoted and are more likely to be nominated All Star analysts. Second, analysts strategically deliver downward‐biased forecasts to increase their consistency (if at the expense of stated accuracy). Finally, the benefits of consistency and of “lowballing” (accuracy) are increasing (decreasing) in institutional investors’ presence.     

FIRMS’ CHARACTERISTIC AND EQUILIBRIUM WITH TRADEABLE PERMITS MARKET*

We study, in a simple model, the partial equilibrium of an industry with n firms endowed by different Cobb‐Douglas technologies which have different pollution effects. The price of input (labour) and the demand curve to the industry are given. Pollution is restricted by a tradeable market of permits in the industry. Each firm is characterised by a parameter combining production efficiency and pollution effect, its e‐characteristic. The equilibrium depends mainly on these e‐characteristics which are linked to the performance of the technologies. In the long run performances are defined per unit of capital. Last, we analyse the consequences of permits’ allocations on the profitability of the firms.     

Is Reinstatement a Remedy Suitable to At- Will Employees?

Reinstatement is central to many proposals of statuto y reform providing protection against wrongful dismissal for at-will employees. This paper discusses the results of an empirical study of the post-reinstatement experience of such rehired employees in Quebec. The Canadian experience demonstrates both the signijicant drawbacks to and the unique merits of reinstatement as a form of protection for nonunion employees.     

Skin in the Game and Moral Hazard

What determines securitization levels, and should they be regulated? To address these questions we develop a model where originators can exert unobservable effort to increase expected asset quality, subsequently having private information regarding quality when selling ABS to rational investors. Absent regulation, originators may signal positive information via junior retentions or commonly adopt low retentions if funding value and price informativeness are high. Effort incentives are below first‐best absent regulation. Optimal regulation promoting originator effort entails a menu of junior retentions or one junior retention with size decreasing in price informativeness. Zero retentions and opacity are optimal among regulations inducing zero effort.     

Analyst Coverage and Financing Decisions

We provide evidence that analyst coverage affects security issuance. First, firms covered by fewer analysts are less likely to issue equity as opposed to debt. They issue equity less frequently, but when they do so, it is in larger amounts. Moreover, these firms depend more on favorable market conditions for their equity issuance decisions. Finally, debt ratios of less covered firms are more affected by Baker and Wurgler's (2002) “external finance‐weighted” average market‐to‐book ratio. These results are consistent with market timing behavior associated with information asymmetry, as well as behavior implied by dynamic adverse selection models of equity issuance.     

Management Forecast Consistency

We posit that management forecasts, which are predictable transformations of realized earnings without random errors, are more informative than unbiased forecasts, which manifest small but unpredictable errors, even if biased forecasts are less accurate. Consistent with this intuition, we find that managers who make consistent forecasting errors have a greater ability to influence investor reactions and analyst revisions, even after controlling for the effect of accuracy. This effect is more economically significant and statistically robust than that of forecast accuracy. More sophisticated investors and experienced analysts are found to have a better understanding of the benefits of consistent management forecasts.