Knowledge that Transforms

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To explain why firms with high research and development (R&D) intensity offer their investors higher stock returns, we argue that (1) high R&D capacity relative to firm valuation makes R&D-intensive firms attractive takeover targets, and that (2) the higher takeover probability leads their investors to face higher takeover risk, as proposed by Cremers, Nair, and John (2009), and require higher returns. We find evidence consistent with our hypothesis. Furthermore, we find that takeover probability also relates to large R&D increases, but not to innovation efficiency. Accordingly, we expect and find that takeover risk helps to explain the premium associated with large R&D increases, but not the innovation efficiency premium previously documented.

Recent theory suggests that firms incorporate synergistic interrelationships among executives into optimal incentive design (Edmans, Goldstein, and Zhu 2013). We focus on Pay Performance Sensitivities (PPS) and use dispersion in PPS across top executives as a proxy for the incentive design component shaped by an executive team's synergy profile. We model optimal PPS dispersion and use residuals from this model to measure deviations from optimal. We find that firm performance is increasing (decreasing) in the residual when PPS dispersion is too low (too high). We conjecture that deviations from optimal are sustained by adjustment costs, finding that firms only close around 60 percent of the gap between target and actual PPS dispersion over the subsequent year. Viewing a team's equity grants as a vector, we provide evidence that firms use subsequent equity grants to actively manage PPS dispersion toward optimality. Cross-sectional analysis reveals that the deleterious effect of deviations from optimal is decreasing in the duration of a team's tenure together, and increasing in the importance of effort coordination across team members for firm performance.

This study investigates the impact of dissemination on the efficiency of the price discovery process with respect to management earnings guidance disclosures. I first identify firm and guidance characteristics associated with the likelihood that guidance receives coverage in the Dow Jones Newswires. Using propensity score, within-firm, and returns-based matched control samples of guidance, I find that newswire dissemination is associated with larger initial price reactions and, more importantly, an increase in the speed with which guidance information is incorporated into price. I also find that newswire coverage affects the market's reaction to stand-alone versus bundled guidance and good versus bad news guidance. This study is the first to provide evidence of systematic variation, both across and within firms, in the breadth of guidance dissemination, and it shows that this variation has a substantial effect on how investors respond to guidance.

We document that the effect of Regulation Fair Disclosure (FD) on public management earnings forecasts (MFs) is asymmetric. Our results suggest that FD increased managers' use of MFs as a downward-guidance mechanism to help achieve meeting or beating earnings expectations. This effect is more pronounced when existing analyst forecasts are optimistic and when firms had selective disclosure policies pre-FD. We also find that the increased use of MFs as downward guidance leads to post-FD reductions in MF quality (accuracy and informativeness) for the downward guiding MFs that are most likely meet/beat motivated, while quality improves for upward-guiding MFs. Finally, our evidence suggests that results from prior research about FD-induced changes in information environment variables, such as analyst forecast quality and investor trading activities, depend on whether the firm issues MFs and whether those MFs are downward guiding. Data Availability: All data are available from public databases identified in the paper.

We document the interrelationship of disclosure policy decisions among firms by providing evidence that the cessation of quarterly management forecast guidance by 656 firms (“stoppers”) during 2004–2009 is associated with a pursuant increase in quarterly forecasts by previously non-forecasting firms in the same industries (“free-riders”). Increased forecasting by free-riders is positively associated with the information loss in the industry (proxied by the number of stoppers in the industry, the strength of previously existing information transfer relations between stoppers and free-riders, and whether stoppers and free-riders are peer firms) and the importance of the information loss to the free-riders (proxied by analyst following and the existence of new share issues). Following the cessation event, free-riders' cost of capital decreases as a function of the extent to which free-riders immediately initiate quarterly forecasting. JEL Classifications: M41. Data Availability: Data are available from the sources indicated in the text.