Knowledge that Transforms

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An abstract is not available for this content so a preview has been provided. As you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

An abstract is not available for this content so a preview has been provided. As you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

Abstract Congress and activists recently proposed giving shareholders a say (vote) on executive pay. We find that when the House passed the Say-on-Pay Bill, the market reaction was significantly positive for firms with high abnormal chief executive officer (CEO) compensation, with low pay-for-performance sensitivity, and responsive to shareholder pressure. However, activist-sponsored say-on-pay proposals target large firms, not those with excessive CEO pay, poor governance, or poor performance. The market reacts negatively to labor-sponsored proposal announcements and positively when these proposals are defeated. Our findings suggest that say-on-pay creates value for companies with inefficient compensation but can destroy value for others.

Abstract Using a sample of 2,281 seasoned equity offerings (SEOs) from 1995 to 2004, we show that the marketing of securities is important to issuers. The number of managing underwriters for an SEO is negatively related to the offer price discount, especially when the relative offer size is large and the stock return volatility is high. Larger investor networks of comanaging underwriters also lower offer price discounts. We argue that the evidence is supportive of the marketing hypothesis: The underwriters’ marketing efforts can lower the offer price discount by shifting up and flattening the demand curve of an SEO.

Abstract In this paper, we identify jumps in U.S. Treasury-bond (T-bond) prices and investigate what causes such unexpected large price changes. In particular, we examine the relative importance of macroeconomic news announcements versus variation in market liquidity in explaining the observed jumps in the U.S. Treasury market. We show that while jumps occur mostly at prescheduled macroeconomic announcement times, announcement surprises have limited power in explaining bond price jumps. Our analysis further shows that preannouncement liquidity shocks, such as changes in the bid-ask spread and market depth, have significant predictive power for jumps. The predictive power is significant even after controlling for information shocks. Finally, we present evidence that post-jump order flow is less informative relative to the case where there is no jump at announcement.

Abstract Large shareholders may play an important role for firm performance and policies, but identifying this empirically presents a challenge due to the endogeneity of ownership structures. We develop and test an empirical framework that allows us to separate selection from treatment effects of large shareholders. Individual blockholders tend to hold blocks in public firms located close to where they reside. Using this empirical observation, we develop an instrument (the density of wealthy individuals near a firm’s headquarters) for the presence of large, nonmanagerial individual shareholders in firms. These shareholders have a large impact on firms, controlling for selection effects.

Abstract Using stock returns around recommendation changes to measure the information produced by analysts, I find that analysts produce more firm-specific than industry-level information. Analysts produce more firm-specific information on stocks with higher idiosyncratic return volatilities. The amount of industry information produced by analysts increases with the absolute value of the stock’s industry beta and decreases with the stock’s idiosyncratic volatility. Other stocks in the industry also respond to the recommendation change, and the magnitude of the response increases with the absolute value of the industry beta of the recommended stock and that of other stocks in the industry. I also offer results on how investors may use analyst research more effectively and potentially improve their investment performance.

Abstract This study investigates whether investors see through materially misstated earnings, and whether they anticipate earnings restatements. For firms that restate at least one annual report, we find that investors are misled by mistakes in reported earnings at the time of initial earnings announcements. Investors react positively to the component of the favorable earnings surprise that will subsequently be restated, and they attach the same valuation to it as to the true earnings surprise. We also find that investors anticipate the subsequent downward restatements and start marking stock prices down several months before a restatement announcement, so that the full impact of a restatement is about three times as large as the restatement announcement effect. Indeed, we show that investors punish restating firms because the stock price gains that shareholders enjoy when firms initially announce overstated earnings are more than reversed by the time of the restatement announcement.

Abstract We study earnings management (EM) efforts surrounding seasoned bond offerings using discretionary current accruals. We find that issuers tend to inflate earnings performance prior to an offering. In order for EM efforts to effectively mislead ratings agencies and the bond market, they must lead to inflated bond ratings and decreased offering yields. Regression results indicate the opposite; aggressive EM efforts are associated with lower initial ratings and higher offering yields. We also find a statistically lower proportion of subsequent downgrades for firms with the most aggressive EM efforts, which is inconsistent with these firms’ inflated initial ratings. While some firms may attempt to mislead ratings agencies and market participants by window-dressing earnings, these efforts appear to be counterproductive.