CEO Overconfidence and Repurchases

CEO Overconfidence and Repurchases

Suman Banerjee Nanyang Business School

Mark Humphery-Jenner University of New South Wales – Australian School of Business; Financial Research Network (FIRN)

Vikram K. Nanda Georgia Institute of Technology – College of Management

June 8, 2013 FIRN Research Paper

Abstract: 
This paper analyzes how CEO overconfidence influences repurchase-decisions, dividend-repurchase substitution, and the market’s reaction to repurchases. Overconfident CEOs tend to over-estimate the value of investments and under-estimate their risk. We show that overconfident CEOs prefer repurchases to dividends as they represent less of a drain on future cash flows, reflecting overconfident CEOs’ positive beliefs about future projects and the need for cash to support them. This manifests in a substitution from dividends to repurchases. Further, consistent with the idea that an overconfident CEO believes their company to be under-valued, overconfident CEOs are even more likely to substitute CAPEX for repurchases. Overconfident CEOs are also more sensitive to a stock market decline than are other CEOs and are less sensitive to the company’s cash/cash-flow decision when making repurchases. Overconfident CEOs who are more insulated from internal or external discipline are more likley to act on these behavioral biases. We also find that overconfident CEOs’ excessive optimism results in repurchases conveying a weaker signal about the firm’s quality, leading the market to react less strongly to overconfident CEOs’ repurchases.

Are Institutional Investors Truly Skilled or Merely Opportunistic?

Are Institutional Investors Truly Skilled or Merely Opportunistic?

Gennaro Bernile Singapore Management University – School of Business; University of Miami – School of Business Administration

Alok Kumar University of Miami – School of Business Administration

Johan Sulaeman Southern Methodist University (SMU) – Edwin L. Cox School of Business

Qin Wang University of Michigan – Dearborn

July 25, 2013

Abstract: 
Using a large dataset of institutional trades, we examine whether superior intraquarter trading performance of institutional investors reflects superior trading skill or opportunistic access to information. Our conjecture is that true investment skill would not depend upon geographical proximity between investors and firms, while opportunistic access to information is likely to be location-dependent. Thus, if institutions are truly skilled, they would earn high average return and exhibit performance persistence in both their local and nonlocal trades. Our evidence indicates that institutions on average are not skilled and their superior intraquarter performance is more likely to reflect opportunistic access to short-term local information. They have high average local performance but this performance is not persistent. Further, we observe increased local trading activity and profitability prior to earnings announcements, particularly before negative news. In contrast, the average net non-local intraquarter trading profits are not significantly different from zero. There is persistence in non-local performance, however, which suggests that some investors in the cross-section may be skilled. Specifically, investors with superior non-local performance exhibit superior future performance in both non-local and local trades. This evidence indicates that superior performance in non-local trades is a better indicator of innate trading skill.

Swept Away by the Crowd? Crowdfunding, Venture Capital, and the Selection of Entrepreneurs

Swept Away by the Crowd? Crowdfunding, Venture Capital, and the Selection of Entrepreneurs

Ethan R. Mollick University of Pennsylvania – Wharton School

March 25, 2013

Abstract: 
Venture Capitalists (VCs) are experts in assessing the quality of entrepreneurial ventures. A long tradition of research has examined the signals of quality that VCs look for in new ventures, and the biases that result from the VC selection process. Recently, an alternative form of new venture funding has arisen in the form of crowdfunding, which relies on the judgement of millions of amateurs about which entrepreneurial projects are worth funding. Little is known about the degree to which amateurs respond to the same signals of quality as VCs, and whether they are subject to the same biases. To address this gap, I examine 2,101 crowdfunded projects that match characteristics of more traditional VC-backed seed ventures. Despite the radical differences in selection environments, I find that entrepreneurial quality is assessed in similar ways by both VCs and crowdfunders, but that crowdfunding alleviates some of geographic and gender biases associated with the way that VCs look for signals of quality.

Informed Trading Before Unscheduled Corporate Events: Theory and Evidence

Informed Trading Before Unscheduled Corporate Events: Theory and Evidence

Shmuel Baruch University of Utah – Department of Finance

Marios A. Panayides University of Pittsburgh – Finance Group; University of Utah

Kumar Venkataraman Southern Methodist University (SMU) – Edwin L. Cox School of Business

May 2013

Abstract: 
Despite widespread evidence that informed agents are active before corporate events, there is little work describing how informed agents accumulate positions and what explains their trading strategies. We use the prisoners’ dilemma to model the execution risk that informed traders impose on each other and explain why they forgo the price benefit of limit orders and use instead market orders. However the efficient limit-orders outcome is obtained if there is sufficient uncertainty about the presence of informed traders. We link the level of uncertainty to costly short selling and test theoretical predictions using order level data from Euronext Paris. We find empirical support for the prediction that informed traders use limit orders when the news is negative, especially when (a) the investor base is not broad, (b) security borrowing costs are high, and (c) the magnitude of the event is small so potential profits cannot justify the cost of borrowing. When the news is positive, we show that informed buyers face more competition and use market orders. These results help explain the buy-sell asymmetry in price impact of trades and provide a framework for surveillance systems that are designed to detect insider trading.

Geography and CEO Luck: Where Do CEOs Tend to be Lucky?

Geography and CEO Luck: Where Do CEOs Tend to be Lucky?

Pandej Chintrakarn Mahidol University International College (MUIC)

Napatsorn Jiraporn State University of New York at New Paltz

Pornsit Jiraporn Pennsylvania State University – SGPS; National Institute of Development Administration (NIDA), Mahidol University, College of Management (CMMU), Bangkok, Thailand

July 10, 2013

Abstract: 
CEOs are “lucky” when they receive stock option grants on days when the stock price is the lowest in the month of the grant, implying opportunistic timing (Bebchuk, Grinstein, and Peyer, 2010). We extend Bebchuk et al. (2010) by investigating the geographic peer effects of CEO luck. Our evidence shows that a CEO is significantly more likely to be lucky when other CEOs in the surrounding area are not lucky. It appears that a CEO tends to practice opportunistic timing of option grants when such a practice is less prevalent and thus less noticeable in the nearby area, probably in order to avoid detection. We estimate that the marginal geographic effect on a given CEO’s luck is 18.36%, which is both statistically and economically significant. Our results suggest that regulators should look for corporate opportunistic behavior where it is not expected.

Founding Family Ownership and Firm Performance in Consumer Goods Industry: Evidence from Indonesia

Founding Family Ownership and Firm Performance in Consumer Goods Industry: Evidence from Indonesia

Margaretha Bambang Bina Nusantara University (Binus) – Binus Business School

Marko Hermawan Victoria University of Wellington

July 11, 2013

Abstract:      
This research investigates the significant influence of family ownership on the firm performance in order to provide information to decision maker and other interested parties. The analysis includes comparison between family and non-family firm performance in Indonesia. The samples are taken from 31 consumer goods companies, listed in Indonesian Stock Exchange, ranging from 2005 to 2009. The result describes that non-family firms perform better than family firms and no significant influence between family ownership and firm’s profitability. On the other hand, family ownership has negative contribution to firm market valuation. The study suggests that family firms have less financial performance than that of non-family. Family member within the top position and have major control rights contribute negative influence to firm performance. The evidence raises concerns about possible profit manipulation and weak governance law in Indonesia, and as a result there is an expropriation of wealth to the majority and family related shareholders.

The Role of Institutional Investors in Public-to-Private Transactions

The Role of Institutional Investors in Public-to-Private Transactions

Emanuele Bajo University of Bologna – Department of Management

Massimiliano Barbi University of Bologna – Department of Management

Marco Bigelli University of Bologna – Department of Management

David Hillier University of Strathclyde, Glasgow – Department of Accounting and Finance

July 5, 2013
Journal of Banking and Finance, Forthcoming

Abstract: 
In Italy, as in many other European countries, listed firms will normally go dark through controlling owner-initiated tender offers. We find that institutional investors play a central role in the bid process and can protect minority shareholders from being frozen out in the bid. Specifically, tender offers are less likely to succeed when a firm has institutional investors in its ownership structure. When public-to-private offers are accepted, bid premiums are significantly greater if a financial institution (particularly when it is foreign, independent or activist) has a stake in the firm. We explore the effect of a number of hitherto unexplored factors on the takeover premium and find that shareholder agreements facilitate public-to-private acquisitions. Other factors, such as a threat to merge the target if the bid fails, or external validation of the offer price, have no impact on either the likelihood of delisting or the premium paid by the bidder.

The Low Volatility Anomaly in the U.S. and in India – An Evaluation in Light of Different Holding Periods and Regimes

The Low Volatility Anomaly in the U.S. and in India – An Evaluation in Light of Different Holding Periods and Regimes

Raahat Achtani Independent

June 1, 2013

Abstract: 
This study evaluates the existence and extent of the low volatility anomaly in a developed market, the U.S and in an emerging market, India from 2004-2012 for holding periods of 1, 3 and 4.5 years and for two sub-periods 2004-2007 and 2008-2012, by creating equally weighted decile portfolios. The results show that the low volatility anomaly exists in India but does not exist in the U.S, which is inconsistent with the hypothesis that it exists in both markets. The results obtained are statistically significant at the 5% significance level. The volatility effect is stronger during the volatile period of 2008-2012 in both markets, and when comparing low volatility Decile 1 and high volatility Decile 10 portfolios, the effect gets stronger when holding period is increased from 1 year to 3 years. The implications are that in India, low volatility stocks give higher returns, whereas in the U.S, the use of low volatility stocks to give higher returns may not be useful even during a period in which the market is characterized by uncertainty.

Great Expectations from Pension Fund Activism: Insights from an Emerging Market

Great Expectations from Pension Fund Activism: Insights from an Emerging Market

Agnieszka Slomka-Golebiowska Warsaw School of Economics

April 9, 2013

Abstract: 
This study examines private pension funds’ preferences for shareholder activism in Poland in closely-held firms that dominate stock exchanges in emerging markets. The results show that the major institutional investors engage in a limited spectrum of shareholder activities. Most often they seek to contact the company’s management board members as well as supervisory board members if they are dissatisfied with a portfolio company. None of the funds even considers public criticism or litigation. The form of shareholder activism selected by different funds and the sequence do not vary substantially. The reasons lie in the internal benchmark. However, the largest pension funds tend to be more active than the rest. They choose low-cost and low-risk forms of activism, but they hardly participate in any corporate governance organizations. They avoid highly visible and confrontational activities.

Can Investors in the Stock Market Generate Profit from the Analysts? – An Empirical Analysis of Analysts’ Signals Disseminated from the Bloomberg Terminal

Can Investors in the Stock Market Generate Profit from the Analysts? – An Empirical Analysis of Analysts’ Signals Disseminated from the Bloomberg Terminal

Katsuhiko Okada Kwansei Gakuin University Business School

Takahiro Azuma Independent

June 7, 2013

Abstract:      
Using a large database of Japanese analysts’ rating information over the period 2000-2010, we examine short term market reactions to the announcement. We find a significant market reaction to the information contained in the analysts’ rating. Particularly, the market reacts sensitively to the rating changes rather than the rating itself. We also examine whether investors are able to achieve a positive net return by taking advantage of the abnormal market reaction to the analysts’ signal by constructing a dynamic calendar time equity long-short portfolio. Results indicate that investors are able to capture some abnormal profit trading on such signals, however, large size investment based on the same strategy becomes implausible due to the transaction costs.

Short-Term Shareholders, Bubbles, and CEO Myopia

Short-Term Shareholders, Bubbles, and CEO Myopia

John E. Thanassoulis University of Oxford – Department of Economics

July 1, 2013

Abstract: 
This paper analyses the real economy effects of firms having some shareholders with a short investment horizon on their shareholder register. Short-term shareholders cause management to be concerned with the path of the share price as well as its ultimate value. Such shareholders in an economy lead to bubbles in the prices of key inputs, to the misallocation of firms to risky business models, and to increased costs of capital. For individual firms short-term shareholders induce the Board to reduce deferred incentives in CEO pay prompting CEO myopia and reduced investments in the long-run capabilities of the firm.

Do General Managerial Skills Spur Innovation?

Do General Managerial Skills Spur Innovation?

Claudia Custodio Arizona State University – W. P. Carey School of Business

Miguel A. Ferreira Nova School of Business and Economics; European Corporate Governance Institute (ECGI)

Pedro P. Matos University of Virginia – Darden School of Business; European Corporate Governance Institute (ECGI)

July 4, 2013

Abstract: 
We show that firms with chief executive officers (CEOs) that gather general managerial skills during their lifetime work experience produce more innovation. Firms with generalist CEOs invest more in R&D and produce more patents than those with specialist CEOs. Generalist CEOs also create more diverse and original patent portfolios. We address the potential endogenous CEO-firm matching bias using firm fixed effects and the variation on the enforceability of non-competing agreements across states and time as an instrument for general managerial skills. Our findings suggest that generalist CEOs spur innovation because they have skills that can be applied elsewhere should risky innovation projects fail. We conclude that an efficient labor market for executives can promote corporate innovation by acting as mechanism of tolerance for failure.

Persistence Pays: Evidence from Investment Style Dynamics in the Venture Capital Industry

Persistence Pays: Evidence from Investment Style Dynamics in the Venture Capital Industry

Amit Bubna Indian School of Business

Sanjiv Ranjan Das Santa Clara University – Leavey School of Business

Paul Hanouna Villanova University – School of Business

June 20, 2013

Abstract: 
We examine style drift in venture capital investing using 344,491 VC firm-financing rounds between 1980 and 2010. We locate each VC financing round in one of twenty styles, and develop a measure of a change in a VC’s styles (“style drift”) that is time consistent and independent of firm size. VC firms that exhibit style persistence outperform those that drift. VCs in the early years of their lifecycle exhibit greater style drift. Style drift hurts performance for seasoned VCs and for VCs that drift in a correlated (herd) fashion with other VC firms. We find evidence for economies of style persistence.

Why Economics Cannot Explain the Modern World

Why Economics Cannot Explain the Modern World

Deirdre Nansen McCloskey University of Illinois at Chicago – Department of Economics

June 2013
Economic Record, Vol. 89, pp. 8-22, 2013

Abstract: 
Why indeed? Because the Great Fact, 1800 to the present, incomes rising by a factor of a factor of 30, and higher if quality is acknowledged, cannot be explained by piling brick on brick, or BA on BA, in the absence of new ideas. As Keynes said, the marginal product of capital would be driven quickly down to zero. If the key were accumulation, which economists love, the Great Fact of modern growth would have happened earlier, or in China. Only ideas, in an environment of liberty and dignity for ordinary people, historically unique to northwestern Europe, work.

Embracing Co-Creation Thinking in Economics

Embracing Co-Creation Thinking in Economics

Avik Chakrabarti University of Michigan – Stephen M. Ross School of Business

Venkatram Ramaswamy Stephen M. Ross School of Business at the University of Michigan

June 2013
Ross School of Business Paper No. 1188

Abstract: 
Economics without the lens of co-creation, in the new evolving economy, blurs visibility. We provide a framework that can reshape economic thinking with co-creation at the core. In particular, an individual’s experience from co-creation is at the foundation of our economic apparatus. This is consistent with the mounting evidence on the new evolving economy where the conventional firm-centric view is of little relevance. We compare and contrast key elements of our co-creation thinking with conventional economic thinking. We show how fundamental economic concepts, such as surplus and efficiency, must be modified in order to incorporate co-creation experiences. We also posit a principle of co-creative advantage to guide efficient co-creation.

The Network Origins of Large Economic Downturns

The Network Origins of Large Economic Downturns

Daron Acemoglu Massachusetts Institute of Technology (MIT) – Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Asuman E. Ozdaglar Massachusetts Institute of Technology (MIT) – Department of Electrical Engineering and Computer Science

Alireza Tahbaz-Salehi Columbia Business School – Decision Risk and Operations

June 13, 2013
Columbia Business School Research Paper

Abstract: 
This paper shows that large economic downturns may result from the propagation of microeconomic shocks over the input-output linkages across different firms or sectors within the economy. Building on the framework of Acemoglu et al. (2012), we argue that the economy’s input-output structure can fundamentally reshape the distribution of aggregate output, increasing the likelihood of large downturns from infinitesimal to substantial. More specifically, we show that an economy with non-trivial intersectoral input-output linkages that is subject to thin-tailed productivity shocks may exhibit deep recessions as frequently as economies that are subject to heavy-tailed shocks. Moreover, we show that in the presence of input-output linkages, aggregate volatility is not necessarily a sufficient statistic for the likelihood of large downturns. Rather, depending on the shape of the distribution of the idiosyncratic shocks, different features of the economy’s input-output network may be of first-order importance. Finally, our results establish that the effects of the economy’s input-output structure and the nature of the idiosyncratic firm-level shocks on aggregate output are not separable, in the sense that the likelihood of large economic downturns is determined by the interplay between the two.

Governance Through Threat: Does Short Selling Improve Internal Governance?

Governance Through Threat: Does Short Selling Improve Internal Governance?

Massimo Massa INSEAD – Finance

Bohui Zhang The University of New South Wales – School of Banking and Finance; Financial Research Network (FIRN)

Hong Zhang INSEAD – Finance

July 9, 2013
INSEAD Working Paper No. 2013/83/FIN

Abstract: 
We explore the relationship between internal governance and the disciplining mechanisms created by the threat of short selling (i.e. “short-selling potential”). We argue that the presence of short selling increases the cost of agency problems for shareholders and incentivizes them to improve internal governance. Our stock-level tests across 23 developed countries during 2003-2009 confirm that the threat of short selling significantly enhances the quality of internal governance. This effect is stronger for financially constrained firms and more pronounced in countries with weak institutional environments. The governance impact of short selling leads to an improvement in firms’ operating performance.

Investor Awareness and PSY-chology Surrounding ‘Gangnam Style’

Investor Awareness and PSY-chology Surrounding ‘Gangnam Style’

Y. Han (Andy) Kim Nanyang Technological University (NTU)

Ho Sung Jung Bank of Korea

July 11, 2013

Abstract: 
The historically unprecedented success of “Gangnam Style,” the 18th K-pop single by the South Korean rapper musician PSY that went global in 2012, was an exogenous shock to investor awareness and enthusiasm about DI Corp., the company founded by the Korean rapper’s father. Equipped with Korean microstructure data that identifies non-resident foreign individual investors by their country of origin, we study the impact of investor awareness and enthusiasm about DI Corp.’s stock and related individual investor behavior. We find that the number of unique countries where non-resident foreign institutional investors place orders for the DI Corp. stock (excluding offshore Koreans) more than doubled after “Gangnam Style” was released, which supports Merton (1987). In addition, using the count of parody videos and flash mobs uploaded on YouTube from each country as a proxy for the enthusiasm of individual investors about DI Corp., we find that non-resident (resident) foreign individual investors become net buyers (sellers) when the count of the uploads increases in their country. In contrast, we find that non-resident foreign institutional investors short sell the stock after the release of the song, except for a period of excessive cost of arbitrage.

The Twilight Zone: OTC Regulatory Regimes and Market Quality

The Twilight Zone: OTC Regulatory Regimes and Market Quality

Ulf Brüggemann Humboldt University of Berlin – School of Business and Economics

Aditya Kaul University of Alberta – Department of Finance and Statistical Analysis

Christian Leuz University of Chicago – Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Center for Financial Studies (CFS); University of Pennsylvania – Wharton Financial Institutions Center; CESifo Research Network

Ingrid M. Werner The Ohio State University – Fisher College of Business

July 9, 2013
Fisher College of Business Working Paper No. 2013-03-09
Charles A. Dice Center Working Paper No. 2013-09

Abstract: 
We analyze a comprehensive sample of more than 10,000 U.S. stocks in the OTC market. As little is known about this market, we first characterize OTC firms by trading venue and provide evidence on survival, success, frequency of venue changes, reporting status, and trading activity. A large number of new firms appear on the OTC market each year. With few exceptions, these new firms exhibit poor performance and rarely rise to trade on traditional exchanges. We analyze how market liquidity, price efficiency and crash risk, all of which capture aspects of market quality, differ across OTC venues and firms subject to different regulatory regimes, including federal securities and state blue sky laws. We show that OTC firms that are subject to stricter regulatory regimes have higher market liquidity and price efficiency, and lower return skewness. We also analyze OTC market features that are potential substitutes for SEC registration, such as publication in a securities manual or state merit reviews, and provide evidence on their capital-market effects. This evidence is relevant in light of the JOBS Act and the ensuing relaxation of SEC registration requirements. Overall, our results suggest that investors consider information and regulatory differences when trading OTC stocks.

Enforcement of Accounting Standards in Germany: The Pre- and Post-Misstatement Development of Censured Firms

Enforcement of Accounting Standards in Germany: The Pre- and Post-Misstatement Development of Censured Firms

Manuel Strohmenger University of Wuerzburg

June 20, 2013

Abstract: 
This paper focuses on implementation of a two-tiered external financial reporting enforcement mechanism in Germany 2004. The first objective of the study is the systematically evaluation of the information contained in 151 disclosed error announcements. I find that error announcement on average contain 3.64 single errors and 77% affect the reported profit. Small, high levered and relatively unprofitable firms are overrepresented by the sample of misstatement firms. In a second step, I investigate the development of censured firms over time; I track the pre- and post-misstatement development of the firms in terms of balance sheet data, financial ratios and (real) earnings management. The analysis detects increasing leverage ratios and a decline in profitability overtime. In the year of misstatement firms report large total and discretionary accruals, indicating earnings management. Compared to matched control firms, significant differences in profitability, market valuation, earnings management and real activities manipulations are observable. A major contribution of this study is the examination of trends in financial data and (real) earnings management over a number of years round misstatement as well as the elaboration of the distinction to non-misstating firms. My results show the meaning of the enforcement of IFRS for the quality of financial reporting to standard setters, policy makers, and investors in Germany.

Executive Compensation and Corporate Fraud in China

Executive Compensation and Corporate Fraud in China

Martin J. Conyon University of Pennsylvania – The Wharton School; European Corporate Governance Institute (ECGI)

Lerong He SUNY College at Brockport; University of Pennsylvania – The Wharton School

July 11, 2013

Abstract: 
This study investigates the relation between CEO compensation and corporate fraud in China. We document a significantly negative correlation between CEO compensation and corporate fraud using data on publicly traded firms between 2005 and 2010. Our findings are consistent with the hypothesis that the firm’s owners and the board of directors penalize CEOs for fraud by awarding lower pay. We also find that executive compensation is lower in firms that commit more severe frauds. Panel data fixed effects and propensity score methods are used to demonstrate these effects. We also show that CEOs of privately controlled firms, firms that split the posts of CEO and chairman, and CEOs of firms located in developed regions, suffer larger compensation penalties for committing financial fraud. Finally, we show that CEOs at firms that commit fraud are more likely to be replaced (lose their jobs) compared to non-fraud firms.

Discretionary Disclosure of Customer Information and Average Stock Returns

Discretionary Disclosure of Customer Information and Average Stock Returns

Li-Wen Chen National Chung Cheng University

Hsin-Yi Yu National University of Kaohsiung

Chia-Tien Kelly Hsieh Durham Business School

July 1, 2013

Abstract: 
Firms with lower levels of disclosure hold more private information and thereby generate undiversified risk. This paper investigates the effect of discretionary disclosure of customer identities on average stock returns. Using a data set of firms’ principal customers, we find a negative relationship between the disclosure level of customer information and the cross-section of returns, after controlling for size, book-to-market ratio, momentum, and other return determinants. We also observe that individual investors are inclined to buy stocks that report more customer information. Overall, poor information on customer identity has higher costs of capital than do firms with good information quality.

When Sell-Side Analysts Meet High-Volatility Stocks: An Alternative Explanation for the Low-Volatility Puzzle

When Sell-Side Analysts Meet High-Volatility Stocks: An Alternative Explanation for the Low-Volatility Puzzle

Jason C. Hsu Research Affiliates, LLC; University of California, Los Angeles – Anderson School of Business

Hideaki Kudoh Nomura Asset Management Co., Ltd. (NAM)

Toru Yamada Nomura Holdings, Inc. (NHI) – Nomura Asset Management Co., Ltd. (NAM)

June 14, 2013
Journal Of Investment Management (JOIM), Second Quarter 2013

Abstract: 
Using a global equity dataset that includes emerging markets, we confirm that high-volatility stocks tend to deliver low average returns; this effect is robust to adjustments for for country and style factors. We also show that sell-side analysts earnings growth forecasts for high-volatility stocks are more biased. It is well-known that sell-side analysts are predictably optimistic; however, the relationship between the degree of optimism and a stocks volatility has not been documented before. We hypothesize that analysts inflate earnings forecasts more aggressively for volatile stocks, in part because the inflation would be more difficult for investors to detect. Because investors are known to overreact to analyst forecasts (under-adjust to analyst bias), this contributes to systematic overvaluation and low returns for high-volatility stocks. Additionally, we find sell-side analysts research informative despite the biases; stocks that have high forward E/P ratios based on analyst earnings forecasts tend to outperform and produce significantly positive FamaFrench alphas. This evidence rejects the cynical view of some in our industry that sell-side analysts are unskilled. More interestingly, we find high forward E/P stocks also exhibit high analyst bias, which supports an interpretation that analysts are more willing to inflate earnings forecasts for stocks that they believe are likely to deliver high returns or for which their inflated forecasts are likely to do no harm.

Unethical Culture, Suspect CEOS, and Corporate Misbehavior

Unethical Culture, Suspect CEOS, and Corporate Misbehavior

Lee Biggerstaff University of Tennessee, Knoxville – Department of Finance

David C. Cicero University of Alabama – Culverhouse College of Commerce & Business Administration

Andy Puckett University of Tennessee, Knoxville

June 2013

Abstract: 
We show that firms with CEOs who personally benefited from options backdating were more likely to engage in other forms of corporate misbehavior, suggestive of an unethical corporate culture. These firms were more likely to overstate firm profitability and to engage in less profitable acquisition strategies. The increased level of corporate misbehavior is concentrated in firms with suspect CEOs who were outside hires, consistent with adverse selection in the market for chief executives. Difference-in-differences tests confirm that the propensity to engage in these activities is significantly increased following the arrival of an outside-hire ‘suspect’ CEO, suggesting that causation flows from the top executives to the firm. Finally, while these suspect CEOs appear to have avoided market discipline when the market was optimistic, they were more likely to lose their jobs, and their firms were more likely to experience dramatic declines in value during the ensuing market correction.

Fraud, Market Reaction, and Role of Institutional Investors in Chinese Listed Firms

Fraud, Market Reaction, and Role of Institutional Investors in Chinese Listed Firms

Reena Aggarwal Georgetown University – Robert Emmett McDonough School of Business

May Hu Curtin University of Technology

Jingjing Yang Jiangxi Normal University

July 3, 2013

Abstract: 
We examine the extent of fraud and the type of financial fraud committed by listed firms in China, stock market reaction to the detection and announcement of fraud, the characteristics of firms committing fraud, and the association between institutional ownership and financial fraud. One of our objectives is to study the monitoring role of different types of institutional investors, such as mutual funds, pension funds and insurance companies. Using fraud data from the Chinese Securities Regulatory Commission between 2001 and 2011, we find wide occurrence of fraud, and a strong negative market reaction on the announcement date, particularly in cases of serious fraud. Fraud is more likely to take place at firms that have a smaller proportion of independent directors, and at poorly performing firms. We find firms with higher mutual fund ownership subsequently have fewer incidences of fraud. We do not find any association between ownership by grey financial institutions, such as insurance companies and pension funds that are likely to have business ties with firms, and future corporate fraud. Our results show that ownership by independent institutions, such as mutual funds, enhances corporate governance in Chinese capital markets, and serves as an effective monitoring mechanism.

Grandstanding and Spinning in VC Backed IPOs on AIM UK

Grandstanding and Spinning in VC Backed IPOs on AIM UK

Alberto Dell’Acqua SDA Bocconi

Antonio Guardasole Bocconi University

Stefano Bonini Bocconi University – Department of Finance; NYU Stern

May 14, 2013

Abstract: 
We study a hand-collected dataset that includes 507 IPOs on the UK Alternative Investment Market (AIM) from FY2004 to FY2010. IPOs backed by venture capitalists registered an average underpricing of 25.8 percent; almost double that of non-venture-backed IPOs (14.6%). We provide new empirical evidence that grandstanding and spinning increase IPO underpricing. Conversely venture capitalists provide a certification role when they avoid moral hazard behaviors. Firms may strategically exploit these phenomena to accelerate growth while market regulators have to evaluate this evidence in light of stricter or more prone to laissez faire policies.

Are CEOs and CFOs Rewarded for Disclosure Quality?

Are CEOs and CFOs Rewarded for Disclosure Quality?

Kai Wai Hui Hong Kong University of Science & Technology – Department of Accounting

Steven R. Matsunaga University of Oregon

June 1, 2013

Abstract: 
In this study, we provide insight into the economic determinants and consequences of disclosure quality by examining the extent to which boards consider disclosure quality to be an important responsibility of the CEO and CFO. Specifically, we examine whether CEO and CFO pay is related to the firm’s disclosure quality, as measured using the index from Anderson, Duru and Reeb (2009) and management forecast accuracy. We find changes in cash compensation for both the CEO and CFO to be positively associated with changes in each measure of disclosure quality. We also investigate factors that influence the extent to which boards reward the managers for disclosure quality. We find that the relation is stronger for high growth firms and firms that have stronger governance structures. Overall, our findings provide empirical evidence that boards’ view disclosure quality to be an important determinant of firm value and provide managers financial incentives to provide high quality disclosures.

In Search of Concepts: The Effects of Speculative Demand on Returns and Volume

In Search of Concepts: The Effects of Speculative Demand on Returns and Volume

Owain Ap Gwilym Bangor Business School

Qingwei Wang Bangor Business School; Centre for European Economic Research (ZEW)

Iftekhar Hasan Fordham University; Bank of Finland

Ru Xie Bangor Business School

May 28, 2013
Bank of Finland Research Discussion Paper No. 10/2013

Abstract: 
Using a novel proxy of investors’ speculative demand constructed from online search interest in “concept stocks”, we examine how speculative demand affects the returns and trading volume of Chinese stock indices. We find that returns and trading volume increase with the contemporaneous speculative demand. In addition, the high speculative demand causes lower near future returns, while recent high past returns cause the high speculative demand. Moreover, the speculative demand explains more variation in returns and trading volume of A shares (more populated by retail investors) than B shares (less populated by retail investors). Our findings support the attention theory of Barber and Odean (2008).