The Rise and Fall of Economic History at MIT

The Rise and Fall of Economic History at MIT

Peter Temin Massachusetts Institute of Technology (MIT) – Department of Economics; National Bureau of Economic Research (NBER)

June 5, 2013
MIT Department of Economics Working Paper No. 13-11

Abstract: 
This paper recalls the unity of economics and economics at MIT before the Second World War, and their divergence thereafter. Economic history at MIT reached its peak in the 1970s with three teachers of the subject to graduates and undergraduates alike. It declined until economic history vanished both from the faculty and the graduate program around 2010. The cost of this decline to current education and scholarship is suggested at the end of the narrative. This paper was written for a conference on the history of the MIT economics department held at Duke University in early 2013.

Expectation Gap and Corporate Fraud: Is Public Opinion Reconcilable with Auditors’ Duties? Expectation gap is unlikely to disappear given that auditor is unable or unwilling to assess the subjective components of fraudulent behavior

Expectation Gap and Corporate Fraud: Is Public Opinion Reconcilable with Auditors’ Duties?

Jeffrey R. Cohen Boston College – Department of Accounting

Yuan Ding China Europe International Business School (CEIBS)

Cédric Lesage HEC School of Management, Paris

Hervé Stolowy HEC Paris – Accounting and Management Control Department

January 15, 2013
CAAA Annual Conference 2013 

Abstract:      
The objective of this paper is to answer the key question of whether auditors’ view of their fraud detection duties is reconcilable with the public’s view. We perform a content analysis of press articles covering 37 U.S. corporate fraud cases discovered during the period 1992-2005. We compare the auditors’ duties (as described by the auditing standards) with the public opinion represented by these press articles. Consistent with Porter (1993), we identify three types of divergence between public expectations and auditing standards: deficient performance (that we label “Type 1”), deficient standards (“Type 2”) and unreasonable expectations (“Type 3”). The Type 1 gap can be reduced by strengthening auditors’ willingness and ability to apply existing auditing standards on fraud detection. The Type 2 gap can be narrowed by improving the existing auditing standards. The Type 3 gap, however, concerns highly subjective criteria beyond the auditors’ usual sphere of control. The results of our analysis confirm that the expectation gap is unlikely to disappear given that the rational auditor is unable or unwilling to assess the subjective components of fraudulent behavior, and that value judgments, as demonstrated in the media, retain their popularity.

What are the Characteristics of Firms that Engage in Earnings Per Share Management Through Share Repurchases?

What are the Characteristics of Firms that Engage in Earnings Per Share Management Through Share Repurchases?

Kathleen A. Farrell University of Nebraska-Lincoln

Jin Yu Saint Cloud State University – G. R. Herberger College of Business

Yi Zhang Prairie View A&M University

July 2013
Corporate Governance: An International Review, Vol. 21, Issue 4, pp. 334-350, 2013

Abstract: 
Manuscript Type. Empirical. Research Question/Issue. This study examines US firms’ share repurchases during 1997–2006 to determine what factors are associated with firms that use share repurchases to manage earnings per share (EPS). Specifically, we analyze firm and governance characteristics associated with firms that engage in share repurchases that increase annual EPS by at least one cent in a given year and that had EPS less than or equal to annual EPS forecast prior to the share repurchase. Research Findings/Insights. We find that growth firms are less likely to use share repurchases to increase EPS for earnings management purposes. We also provide evidence that firms with a more independent board, a separation of the roles of CEO and chairman of the board, or a low entrenchment index (E‐Index) are less likely to engage in earnings management through share repurchases. Finally, we find evidence that high CEO share ownership restrains managers from using share repurchases as a mechanism to manage EPS. Theoretical/Academic Implications. Our empirical results support some of the best practices advocated by various shareholders groups regarding corporate governance. Also, strong shareholder rights can mitigate incentives to manage earnings, highlighting the importance of corporate governance mechanisms/provisions in ensuring the integrity of the financial reporting system. Practitioner/Policy Implications. This research is important to investors in the face of the growing popularity of share repurchases. In particular, our study suggests strong corporate governance, strong shareholder rights, and high percentage CEO stock ownership discourages repurchase‐based earnings management.

Value Relevance of Accounting Information for Intangible-Intensive Industries and the Impact of Scale: The US Evidence

Value Relevance of Accounting Information for Intangible-Intensive Industries and the Impact of Scale: The US Evidence

Mustafa Ciftci State University of New York at Binghamton

Masako N. Darrough City University of New York – Baruch College – Stan Ross Department of Accountancy

Raj Mashruwala University of Calgary – Haskayne School of Business

May 28, 2013
European Accounting Review Forthcoming

Abstract: 
The structural shift in the US from a tangible- to an intangible-intensive economy raises a concern that GAAP-based reporting might have lost its usefulness to investors. Amir and Lev (1996) argue that accounting information is not useful for intangible-intensive firms. In contrast, Collins et al. (1997) find that the value relevance (measured by R-squared) of accounting information has increased over time and that value relevance for intangible-intensive industries is as high as that for tangible-intensive industries. In this article we attempt to resolve the above discrepancy by examining the impact of scale on R-squared (Brown et al., 1999). We find that, after controlling for scale, R-squared is lower for intangible-intensive industries than for non-intangible-intensive industries and has declined over time for intangible-intensive industries but remained stable for non-intangible-intensive industries. Interestingly, the declining trend ended with the demise of the “New Economy” period (NEP) (Core et al., 2003), and value relevance for both industry groups appears to be restored in the post-NEP to the pre-NEP level. We also find that R&D capitalization increases value relevance for intangible-intensive industries, but does not completely eliminate the gap between the two groups.

The Use of Escrow Contracts in Acquisition Agreements

The Use of Escrow Contracts in Acquisition Agreements

Sanjai Bhagat University of Colorado at Boulder – Department of Finance

Sandy Klasa University of Arizona – Department of Finance

Lubomir P. Litov University of Arizona – Department of Finance; University of Pennsylvania – Wharton Financial Institutions Center

May 28, 2013

Abstract: 
Many private firm and subsidiary acquisition deals make use of escrow contracts, whereby a fraction of the total sale proceeds are placed in an escrow account. These contracts give the bidder the opportunity to lay claim on these funds subsequent to the acquisition if the seller fails to meet specific terms of the acquisition agreement or it is found that negative information about the target was hidden from the bidder. We hypothesize that escrow contracts are an efficient contracting mechanism that helps bidders and targets to manage acquisition-related transaction risk and mitigate information asymmetry problems. Supporting our hypothesis, we show using hand-collected data that the likelihood an escrow contract is used in a private firm or subsidiary acquisition is higher when bidder transaction risk or information asymmetry about the value of the target is larger. Further, we document that escrow contracts enable the seller to obtain a higher sale price and that the use of these contracts positively impacts the extent to which a private firm or subsidiary acquisition results in value creation for the bidder.

A growing number of institutional investors are turning away from external asset managers and other intermediaries and are instead looking to one another for assistance. Through collaboration, these investors hope to lever a new set of network economics

Platforms and Vehicles for Institutional Co-Investing

Jagdeep Singh Bachher Alberta Investment Management Corp.

Ashby H. B. Monk Stanford University – Global Projects Center

May 28, 2013
Rotman International Journal of Pension Management, Vol. 6, No. 1, 2013

Abstract: 
A growing number of institutional investors are turning away from external asset managers and other intermediaries and are instead looking to one another for assistance. Through collaboration, these investors hope to lever a new set of network economies. Can they actually co-invest successfully to take advantage of these network effects? Differing return objectives and investment philosophies, as well as the basic challenge of geography, all complicate matters. Through a specific case study of a successful co-investment platform, and drawing on additional information collected from more than 20 on-site case studies of public pension funds and sovereign wealth funds around the world, this article offers insights into how institutional investors can structure platforms and vehicles that will align interests and facilitate co-investment.

Benjamin Graham’s Net Nets: Seventy-Five Years Old and Outperforming

Benjamin Graham’s “Foolproof Method of Systematic Investment”

January 15, 2013 by Tobias Carlisle

Last week I wrote about the performance of one of Benjamin Graham’s simple quantitative strategies over the 37 years he since he described it (Examining Benjamin Graham’s Record: Skill Or Luck?). In the original article Graham proposed two broad approaches, the second of which we examine in Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors. The first approach Graham detailed in the original 1934 edition of Security Analysis (my favorite edition)—“net current asset value”: My first, more limited, technique confines itself to the purchase of common stocks at less than their working-capital value, or net-current asset value, giving no weight to the plant and other fixed assets, and deducting all liabilities in full from the current assets. We used this approach extensively in managing investment funds, and over a 30-odd year period we must have earned an average of some 20 per cent per year from this source. For a while, however, after the mid-1950’s, this brand of buying opportunity became very scarce because of the pervasive bull market. But it has returned in quantity since the 1973–74 decline. In January 1976 we counted over 300 such issues in the Standard & Poor’s Stock Guide—about 10 per cent of the total. I consider it a foolproof method of systematic investment—once again, not on the basis of individual results but in terms of the expectable group outcome. In 2010 I examined the performance of Graham’s net current asset value strategy with Sunil Mohanty and Jeffrey Oxman of the University of St. Thomas. While Graham found this strategy was “almost unfailingly dependable and satisfactory,” it was “severely limited in its application” because the stocks were too small and infrequently available. This is still the case today. There are several other problems with both of Graham’s strategies. In Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors Wes and I discuss in detail industry and academic research into a variety of improved fundamental value investing methods, and simple quantitative value investment strategies. Weindependently backtest each method, and strategy, and combine the best into a sample quantitative value investment model.

Independent Directors in Companies in the Backdrop of Corporate Failures

Independent Directors in Companies in the Backdrop of Corporate Failures

Bindu Samuel Ronald Symbiosis Law School, Pune

May 18, 2013

Abstract:      
The article considers the role of independent directors in the governance of companies. It puts forth the role of independent directors in the good governance of companies and looks at the issues that question the independence of the independent directors.

Equity Vesting and Managerial Myopia

Equity Vesting and Managerial Myopia

Alex Edmans London Business School – Institute of Finance and Accounting; University of Pennsylvania – The Wharton School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Vivian W. Fang University of Minnesota – Twin Cities – Department of Accounting

Katharina Lewellen Dartmouth College – Tuck School of Business

May 25, 2013

Abstract: 
This paper links the imminent vesting of a CEO’s equity to reductions in real investment. Existing studies measure the manager’s short-term concerns using the sensitivity of his equity to the stock price. However, in myopia theories, the driver of short-termism is not the magnitude of incentives but their horizon: equity will not induce myopia if it has a long vesting period. We use recent changes in compensation disclosure to introduce a new empirical measure that is tightly linked to theory – the stock-price sensitivity of shares and options vesting over the upcoming year. This sensitivity is determined by equity grants made several years prior, and thus unlikely to be driven by current investment opportunities. A one standard deviation increase in the sensitivity of imminently vesting equity is associated with a decline of 0.23% in the growth of R&D (scaled by total assets), 75% of the average R&D growth rate of 0.3%. Similar results hold when including advertising and capital expenditure. In addition, CEOs with imminently-vesting equity are significantly more likely to meet or beat analyst earnings forecasts by a narrow margin.

Risk Management Breakdown at AXA Rosenberg: The Curious Case of a Quant Manager Trusted Too Much

Risk Management Breakdown at AXA Rosenberg: The Curious Case of a Quant Manager Trusted Too Much

David F. Larcker Stanford University – Graduate School of Business

Brian Tayan Stanford University – Graduate School of Business

May 30, 2013
Rock Center for Corporate Governance at Stanford University Closer Look Series: Topics, Issues and Controversies in Corporate Governance and Leadership No. CGRP- 33

Abstract: 
All companies face challenges designing a governance system that works best for their particular situation and structure. Even the owners of privately held companies sometimes struggle with issues of separation and control. The challenges can be particularly acute when a company founder has considerable influence over the organization and its culture, and third-party investors have been brought in to share ownership. We examine the interesting case of AXA Rosenberg, a joint venture investment management firm founded and run by legendary finance professor Barr Rosenberg. Although successful for a time, the firm eventually collapsed due to a failure in risk management. We examine the governance structure, unique personalities, and series of events that led to the breakdown of the firm, and the SEC investigation that resulted in Barr Rosenberg’s lifetime ban from the securities industry. We ask: Is it possible for a board to monitor a renowned executive with extremely specialized knowledge? How can the board satisfy itself that risks are appropriately known and monitored? How does an executive’s personality affect a company’s risk management practices?

Do Private Equity Funds Game Returns? We find evidence of managers boosting reported NAVs during times that fundraising activity is likely to occur

Do Private Equity Funds Game Returns?

Gregory W. Brown University of North Carolina (UNC) at Chapel Hill – Finance Area

Oleg Gredil University of North Carolina (UNC) at Chapel Hill – Kenan-Flagler Business School

Steven N. Kaplan University of Chicago – Booth School of Business; National Bureau of Economic Research (NBER)

May 29, 2013

Abstract: 
By their nature, private equity funds hold assets that are hard to value. This uncertainty in asset valuation gives rise to the potential for fund managers to manipulate reported net asset values (NAVs). Managers may have an incentive to game valuations in the short-run if returns on existing funds are used by investors to make decisions about commitments to subsequent funds managed by the same firm. Using a large dataset of buyout and venture funds, we test for the presence of reported NAV manipulation. We find evidence of managers boosting reported NAVs during times that fundraising activity is likely to occur. However, this behavior is mostly limited to firms that are subsequently unsuccessful at raising a next fund which suggests that investors see through the manipulation. In contrast, we find evidence that top-performing funds under-report returns. This conservatism is consistent with these firms insuring against future bad luck that could make them appear as though they are NAV manipulators. Our results are robust to a variety of specifications and alternative explanations.

Politically Connected Firms and Earnings Informativeness in the Controlling Versus Minority Shareholders Context

Politically Connected Firms and Earnings Informativeness in the Controlling Versus Minority Shareholders Context

Carolina Bona Sánchez University of Las Palmas de Gran Canaria

Jerónimo Pérez Alemán Universidad de Las Palmas de Gran Canaria

Domingo J. Santana Martin University of Las Palmas de Gran Canaria

May 25, 2013

Abstract: 
Research Question/Issue: Focusing on an environment where the principal agency conflict steams from the divergence of interests between dominant owners and minority shareholders, and where the legal system provides weak protection to external investors, we analyze the effect of firms’ political ties on earnings informativeness. We also address a question that has not been considered in previous research, namely, the impact of the level of divergence between the dominant owner’s voting and cash flow rights on earnings informativeness for politically connected firms.
Research Findings/Insights: We find that the presence of politicians on the board negatively affects earnings informativeness. We also find a positive impact of the divergence between the dominant owner’s voting and cash flow rights on the informativeness of accounting earnings in politically connected firms.
Theoretical/Academic Implications: We show that the relationship between political ties and earnings informativeness is explained by an information effect, whereby politicians and shareholders are interested in providing as little information to the market as possible. Additionally, we show that the positive relationship between divergence and earnings informativeness in politically connected firms is explained by an alignment effect, whereby the existence of political ties reduces the dominant owner’s incentive to expropriate minority shareholders’ wealth, thus increasing earnings informativeness.
Practitioner/Policy Implications: The results of our study may be useful for regulators interested in increasing transparency in order to promote a more efficient allocation of resources. Similarly, the results may be useful to investors, financial analysts and auditors, as they provide evidence of the importance of considering specific features of the corporate governance system when assessing the credibility of accounting information.

How Do Companies Go Global: Choices and Issues between Entry Strategies

How Do Companies Go Global: Choices and Issues between Entry Strategies

Nancy Hubbard Goucher College – Department of Business Management

April 9, 2013
Conquering Global Markets: Secrets from the World’s Most Successful Multinationals, pp. 40-58, Nancy Hubbard, Palgrave Macmillan, 2013.

Abstract: 
This chapter is from the book “Conquering Global Markets: Secrets from the World’s Most Successful Multinationals” which presents the findings of one of the largest research projects undertaken of its type. Senior executives from fifty multinational companies from sixteen countries were interviewed to understand the issues, risks, challenges and key success factors of how companies have globalized using greenfield investment, joint ventures and alliances as well as mergers and acquisitions. This chapter discusses the historical routes and factors influencing the market entry mode choices made. Historical patterns of internationalization are discussed including the Uppsala Theory, networking theory, “born global”, and early internationalizer theories. A fifth pattern is identified and discussed, the “opportunistic globalizer”. Those interviewed for the research indicated that four factors heavily influenced their choice of entry mode. Those factors were control, speed, local market awareness, and resource allocation all of which are discussed in depth. Further factors that can influence market entry choice are also discussed and include: openness to inward investment, corruption, competition, risk markets, and intellectual property rights are also discussed. Quotes from participants are used throughout the chapter and a case study highlighting the expansion profile of Teva Pharmaceuticals is summarized.

CEO Turnover, Earnings Management, & Family Control

CEO Turnover, Earnings Management, & Family Control

John Manuel Barrios Jr.University of Miami

Daniele Macciocchi LUISS Guido Carli University

May 22, 2013

Abstract: 
The aim of this paper is to study the relation between earnings management and CEO turnover in the context of family firms. Specifically, we investigate whether the probability of the CEO being dismissed increase with the level of earnings management and if this relation is the same in family controlled firms. Using a sample of 221 Italian family and non-family firms between 2006-2010, we find that there is a positive association between earnings management and CEO turnover with non-family firms driving the results. Additionally, we find that in family firms the likelihood of CEO turnover is even lower when a member of the controlling family acts as CEO. Results suggest that family and non-family firms engage in the same level of earnings management, thus supporting the existence of two different corporate governance systems. This study provides empirical support for the understandings of corporate governance mechanisms in retaining and punishing managers’ opportunistic behaviors, and it provides evidence about the different corporate governance systems between family and non-family controlled companies. The issue is relevant because it has never been tackled from an empirical perspective in the family firms’ context, which presents some important peculiarities when compared to other more widely studied corporate governance systems. These results offer insight for policy makers and investors operating in the context of family controlled companies as they point to the diverse effects of corporate governance policies.

The Media and Mispricing: The Role of the Business Press in the Pricing of Accounting Information

The Media and Mispricing: The Role of the Business Press in the Pricing of Accounting Information

Michael S. Drake Brigham Young University – Marriott School

Nicholas M. Guest Massachusetts Institute of Technology (MIT) – Sloan School of Management

Brady J. Twedt Indiana University – Kelley School of Business

May 1, 2013

Abstract: 
This study investigates the role of the business press in the pricing of accounting information. Using a comprehensive dataset of more than 111,000 earnings-related business press articles published from 2000-2010, we find that press coverage of the current period earnings announcement mitigates cash flow mispricing, but has a negligible effect on accrual mispricing. We investigate whether this impact is driven by the press disseminating the information more broadly or by providing content that helps investors understand the implications of accounting information. We find support for the information dissemination role only. Taken together, our results suggest that the business press plays an important role in facilitating the market’s ability to efficiently impound accounting information into stock prices, and we provide insights into the role of the business press as an information intermediary in capital markets.

Identifying Unintentional Error in Restatement Disclosures

Identifying Unintentional Error in Restatement Disclosures

Louise Hayes University of Waterloo – School of Accounting and Finance

May 1, 2013

Abstract: 
Research attention is frequently focused on fraud and earnings management; however, unintentional errors in audited financial statements of public companies occur frequently. Currently, archival study of unintentional error is hampered by the lack of a refined error proxy. The purpose of this study is to develop a proxy for restatements that correct unintentional errors. Using an automated text search, I discover language asserting or implying lack of intent in 751 restatement announcements disclosed after enactment of the Sarbanes-Oxley Act of 2002 (SOX). I validate this proxy for restatements that correct unintentional error by analyzing differences in restatement characteristics and earning quality measures between these 751 restatements and 127 restatements that correct intentional misstatements which I identify by reading SEC Accounting and Auditing Enforcement Releases (AAERs). I find, relative to restatements that correct intentional misstatements, that the proxy for restatements that correct unintentional error is associated with proportionately fewer revenue recognition issues, less positive accruals, less income persistence, and a lower likelihood of meeting and beating analysts’ forecasts by a small amount. Future study of the associations between restatements that correct unintentional error and the expertise and incentives of CFOs, CEOs, audit committee members and auditors may lead to a more nuanced understanding of reporting quality. Thus, this validated proxy has the potential to contribute to future research and improvements in audit, internal control, and governance mechanisms.

The European Corporate Governance Framework: Issues and Perspectives

The European Corporate Governance Framework: Issues and Perspectives

Massimo Belcredi Università Cattolica del Sacro Cuore di Milano

Guido A. Ferrarini University of Genoa – Law School; European Corporate Governance Institute (ECGI)

May 2013
ECGI – Law Working Paper No. 214/2013

Abstract: 
This is the first chapter in a volume on “Boards and Shareholders in European Listed Companies: Facts, Context and Post-Crisis Reforms” (M. Belcredi and G. Ferrarini eds., Cambridge University Press forthcoming 2013). We offer an overview of the volume, placing the same in the context of recent EU reforms and of corporate governance theory, and summarizing the main outcomes of the various chapters. In addition, we offer some policy perspectives based on the theoretical and empirical outcomes of the research project of which this volume is the product. We analyse four main topics in the corporate governance of European listed firms: board structure/composition and its interaction with ownership structure, board remuneration, shareholder activism and corporate governance disclosure based on the “comply-or-explain” approach. For each of them, this volume provides new evidence and derives specific implications, relevant for the policy debate. Basically, proposals aimed at increasing disclosure and accountability at the European level look generally well-grounded: this is true, in particular, for disclosure about managerial compensation and compliance with national governance codes based on the “comply-or-explain” principle. On the opposite, we suggest caution when evaluating proposals targeting specific governance arrangements, which may actually lead to unintended consequences. Even though the Commission has – so far – refrained from adopting an excessively intrusive stance, further analysis may be needed before intervening in the fields of board composition and shareholder activism.

Searching for Blue Oceans: Mental Representation and the Discovery of New Strategies

Searching for Blue Oceans: Mental Representation and the Discovery of New Strategies

Felipe A. Csaszar University of Michigan – Stephen M. Ross School of Business

Daniel Levinthal University of Pennsylvania – Management Department

May 20, 2013

Abstract: 
Managers’ mental representations affect the perceived payoffs and alternatives that managers consider. Thus, mental representation must affect how managers search for profitable strategies and the quality of the strategies that they discover. Yet, the strategy literature has been mostly silent about how mental representation and search interact. The main objective of this paper is to understand under what conditions it is better to emphasize searching for the right policies rather than searching for the right mental representation, and vice versa. We show that the balance between these two types of search processes is contingent on the cognitive capacity of managers and on environmental factors (i.e., technological complexity, relative relevance of product attributes, and time horizon). To capture managers’ mental representation we develop a simulation of a popular management technique, Blue Ocean Strategy (BOS). We illustrate the usefulness of our enriched view of search by examining BOS in novel ways. In particular, we ask under what conditions BOS is more likely to be successful and how much risk firms incur by using BOS.

Investment consultants and institutional corruption

Investment consultants: the heart of systemic failure?

Posted By STAFF WRITER On 29/05/2013 @ 1:18 pm In RESEARCH

In this engaging Edmond J Safra Research Lab Working Paper, Investment consultants and institutional corruption, lawyer Jay Youngdahl looks candidly at investment consultants in the United States. Describing them as gatekeepers between institutional investors and the peddlers of financial products, the author identifies ethically dodgy and widespread practices, and suggests they are at the heart of failure in the financial system. While he points to “a reimagined investment consulting industry”, Youngdahl declines to sell readers a solution, sticking instead to a highly personable litany of consultants’ avarice and the widely held warped perceptions that allow it to continue.

Investment consultants and institutional corruption

Abstract

Analyses of the financial crisis of 2007-2009 and the continuing effects of a difficult investing environment have largely focused on factors such as the roles of failed and complex financial products, inadequate credit rating agencies, and ineffective government regulators. Nearly unexamined, however, is a key group of actors in the financial landscape, investment consultants. Investment consultants stand as gatekeepers between large investors, such as private and public retirement funds, and those from “Wall Street” who design and sell financial products. Investment consultants hired by these asset owners practically control many investment decisions. Yet, as a whole the profession failed to protect asset owners in the recent financial crisis and has yet to engage in serious self-examination. Much of the reason for the failure can be traced to institutional corruption, which takes the form of conflicts of interest, dependencies, and pay-toplay activity. In addition, a claimed ability to accurately predict the financial future, an ambiguous legal landscape, and a tainted financial environment provide a fertile soil for institutional corruption. This institutional corruption erodes the confidence and effectiveness of the retirement and investment systems today. While not proposing a comprehensive system of reform, this article illuminates a way forward for those in the industry who have the desire to address and implement necessary corrective activity.

Disclosure and Firm Separation: A Text-Based Examination

Disclosure and Firm Separation: A Text-Based Examination

Christopher Ball Meta Heuristica, LLC

Gerard Hoberg University of Maryland – Department of Finance

Vojislav Maksimovic University of Maryland – Robert H. Smith School of Business

May 1, 2013

Abstract: 
We examine the hypothesis that high value firms use the Management’s Discussion and Analysis in the 10-K to separate from low value firms. We further hypothesize that high quality firms disclose a highly granular set of managerial policies that low quality firms cannot emulate due to high emulation, reputational and punishment costs in a regulated environment. We implement a standard computational linguistics approach to score MD&A disclosures in a high dimensional space, and find strong support for these central separation and granularity hypotheses. We also find that verbal content is most informative about more distant future outcomes, separation is stronger within industry groups, and content relating to high-growth entrepreneurial policies is especially relevant to separate firms. The value relevance of MD&A also increased following a 2003 SEC guidance release which likely increased the emulation costs faced by low value firms.

Did Analysts Contribute to the Disappearance of the Accrual Anomaly? Our results conflict with the widely-held notion that analysts are sophisticated information intermediaries who improve market efficiency

Did Analysts Contribute to the Disappearance of the Accrual Anomaly?

Sami Keskek University of Arkansas – Sam M. Walton College of Business

Senyo Y. Tse Texas A&M University – Lowry Mays College & Graduate School of Business

May 20, 2013

Abstract: 
We use the recent disappearance of the accrual anomaly to investigate analysts’ contribution to improved information processing by investors. Prior research finds that investors and analysts made similar accrual-related pricing and forecast errors, respectively, in the anomaly period. As sophisticated information intermediaries, analysts could have initiated the disappearance of the anomaly by issuing forecasts that are free of accrual-related bias. We find, however, that both expert (e.g., all-star) and non-expert analysts continue to issue forecasts with predictable accrual-related bias after the disappearance of the accrual anomaly. Furthermore, the accrual anomaly is similar for firms followed by analysts and for non-followed firms, and disappears at the same time for both. Thus, investors began to correctly incorporate accruals information in security prices even though analysts continued issuing earnings forecasts that have predictable accrual-related bias. Our results conflict with the widely-held notion that analysts are sophisticated information intermediaries who improve market efficiency.

Investing in Connections: Corporate Jets and Firm Value

Investing in Connections: Corporate Jets and Firm Value

Lian Fen Lee Boston College – Carroll School of Management

Michelle Lowry Pennsylvania State University – Mary Jean and Frank P. Smeal College of Business Administration

Susan Shu Boston College – Carroll School of Management

May 1, 2013

Abstract: 
Executives’ connections have been shown to benefit firms, yet we know little about firms’ efforts to foster connections. Using corporate jet flight data, we examine firms’ efforts to foster connections via face-to-face interactions. Such interactions can increase firm value by enhancing information flow. However, they can decrease firm value if individuals devote firm resources to pursue connections that further their own agendas. We find jet flights increase firm value if the information role prevails, such as when jets fly to subsidiaries. In contrast, flights to external locations decrease firm value, but they appear to yield personal benefits for the executives.

Merger Rumor Has It: Sensationalism in Financial Media

Rumor Has It: Sensationalism in Financial Media

Kenneth R. Ahern University of Southern California – Marshall School of Business

Denis Sosyura University of Michigan – The Stephen M. Ross School of Business

May 5, 2013

Abstract: 
Financial media have an incentive to publish sensational news. We study how these incentives affect asset prices through one form of media sensationalism – merger rumors. Using a novel dataset, we find that newspapers are more likely to publish merger rumors about firms that interest their readers: local firms with recognizable brands that are owned by retail investors. Yet, rumors about these types of firms are less likely to come true. Instead, a rumor’s accuracy is predicted by journalists’ experience, training, and reputation, but stock returns do not reflect this information. Overall, we find that investors do not completely account for the distortions created by sensationalist reporting standards.

The Unintended Consequences of High Expectations and Pressure on New CEOs

The Unintended Consequences of High Expectations and Pressure on New CEOs

Kevin Krieger University of West Florida

James S. Ang Florida State University

April/May 2013
Journal of Business Finance & Accounting, Vol. 40, Issue 3-4, pp. 501-526, 2013

Abstract: 
We provide empirical tests of a general version of targeting theory that greater scrutiny could lead to executive abuses. Our results show that new CEOs under higher expectations or pressure are more likely to report meeting analyst forecasts; however, this apparent superior performance dissipates after excluding firms having characteristics synonymous with earnings manipulation. We find evidence that new CEOs under greater pressure are considerably more likely to engage in manipulation while the link between expectations and manipulation is much weaker. The results are strongest for new CEOs whose firms report meeting forecasts and do not “walk down” earnings estimates.

Stanford U: The Evolution of Partnerships in China: From the Perspective of Asset Partitioning

The Evolution of Partnerships in China: From the Perspective of Asset Partitioning

Lin Lin  National University of Singapore; Stanford Law School; Stanford University – Arthur & Toni Rembe Rock Center for Corporate Governance

2013
Stanford Journal of Law, Business and Finance, Vol. 18, No. 2, pp. 212-246, 2013

Abstract: 
Two of the world’s leading corporate law scholars, Henry Hansmann and Reinier Kraakman, recently shook the foundation of organizational law theory by suggesting that the genius behind modern business organizations was a concept that they have coined “asset partitioning”. Specifically, they argue that a critically important characteristic of almost all business organizations is the creation of rules which partitions separate pools of assets between creditors of the firm and creditors of the firm’s investors. Building on this theory, in a recent Harvard Law Review article, “Law and the Rise of the Firm”, Hansmann, Kraakman and Richard Squire further posit that historical and at present “entity shielding” (i.e., the rules that protect or partition the firm’s assets from the creditors of the firm’s investors) must be created by a countries organizational law for large business organizations to develop. In fact, they suggest that entity shielding has been even more important than limited liability in the development of modern business organizational forms.

While their research presents a comprehensive “western story” of the evolution of business entities, it does not mention China and other Asian jurisdictions. This Article attempts to fill this gap in the literature by examining Hansmann and Kraakman’s influential theory in the context of China. It accomplishes this by examining whether entity shielding existed in ancient China, which was one of the most advanced societies and economies in the ancient world. If this examination reveals that entity shielding did exist in ancient China then it will reinforce Hansmann and Kraakman’s prominent theory by demonstrating that it can make sense of the development of business organizations both in the East and the West. This finding would also reinforce their suggestion that entity shielding generally is a universal prerequisite for large business organizations to effectively function. On the contrary, if there was an absence of entity shielding in ancient China, it would force us to rethink this theory further and it would bring new insight to the divergence between the East and West on the matter of entity shielding.

This Article brings unique insights from the complex evolution of Chinese partnerships to the recent debate on asset partitioning. By illustrating how Chinese partnerships have evolved and how Chinese perception has influenced this process, this Article shows that ancient Chinese partnerships did not exhibit a feature comparable to entity shielding vis-à-vis their European counterparts, especially the partnerships during Ancient Rome and Italian Middle Ages.

It demonstrates that beneath the surface of great divergence in the institutionalization of business practices between China and the West is the great differences between both societies. These differences include different social and legal traditions, different social attitudes towards merchants and commerce and differing levels of development of commodity markets. In particular, Confucian distaste of profits and merchants, the emperors’ concern on maintaining centralized control over the state, the governments’ custom of utilizing merchants created huge obstacles to the development of partnerships as well as partnership law in ancient China. Also, there were alternative means for ordering behavior and protection of creditors, such as kinship obligations, lineage trust, local customs and social norms. All these factors shaped Chinese business practice and led to the lack of rule of entity shielding.

What the economists call a market failure, the entrepreneurs call a market opportunity; How Platforms are Shaping Markets Through Market Failures

Firm/Market Equivalency: How Platforms are Shaping Markets Through Market Failures

Denis Lescop TELECOM Ecole de Management

Elena Lescop TELECOM Ecole de Management

May 13, 2013

Abstract: 
What the economists call a market failure, the entrepreneurs call a market opportunity. Firms today are the intricate interlacing of interactions, which arise in response to market failures. Market opportunities that emerge as a result are addressed by the firms through market support strategy, i.e. platform creation. Not only do the firms facilitate market activity by providing participants with basic resources, firms also take up a leading role in the regulation of all of its creation’s activities. The purpose of this paper is to explore the phenomenon of concurrent double function of firm: market creation and market support through the concept of firm/market equivalency.

Duke’s Campbell Harvey et al: Most claimed research findings are false; a newly discovered factor needs to clear a much higher hurdle, with a t-ratio greater than 3.0

…and the Cross-Section of Expected Returns

Campbell R. Harvey Duke University – Fuqua School of Business; National Bureau of Economic Research (NBER)

Yan Liu Duke University

Heqing Zhu Duke University – Fuqua School of Business

May 4, 2013

Abstract: 
Hundreds of papers and hundreds of factors attempt to explain the cross-section of expected returns. Given this extensive data mining, it does not make any economic or statistical sense to use the usual significance criteria for a newly discovered factor, e.g., a t-ratio greater than 2.0. However, what hurdle should be used for current research? Our paper introduces a multiple testing framework and provides a time series of historical significance cutoffs from the first empirical tests in 1967 to today. We also project forward 20 years assuming the rate of factor production remains similar to the experience of the last few years. We argue that today a newly discovered factor needs to clear a much higher hurdle, with a t-ratio greater than 3.0. Echoing a recent disturbing conclusion in the medical literature, we argue that most claimed research findings are false. Our key results are summarized:

The Constant: Companies that Matter

The Constant: Companies that Matter

Paul Kedrosky University of California, San Diego (UCSD); Ewing Marion Kauffman Foundation

May 2013

Abstract: 
There are few constants in entrepreneurship — perhaps none. That is why when something appears to be even semi-stable across meaningful periods, it is usually worth further investigation.

This short paper investigates just such an apparent constant. Specifically, it is often claimed that there only are fifteen to twenty information technology companies created per year in the United States that turn out to “matter,” where matter is defined as the company (relatively) promptly going from founding to $100 million in revenues. Further, and of real consequence to cities and regional economies, is that most such companies founded in any given year are thought to be in California. This paper tries to find out if the preceding is true.

The Corporate Immune System: Governance from the Inside Out

The Corporate Immune System: Governance from the Inside Out

Omari Scott Simmons Wake Forest University School of Law

April 29, 2013
University of Illinois Law Review, Forthcoming
Wake Forest Univ. Legal Studies Paper

Abstract: 
The “Corporate Immune System” (CIS) is an outgrowth of an evolutionary trend reflecting firms’ adaptation to challenges including growing corporate complexity, threats to corporate value, and political compromise. Similar to biological immune systems, corporations have adopted a range of internal mechanisms to ward off threats. The CIS performs an internal regulatory function that lowers monitoring costs for government regulators through internal mechanisms such as a monitoring board, compliance and risk management systems, compensation, and an enhanced chief legal officer (CLO) role. It complements external corporate governance strategies: shareholder empowerment, markets, litigation, gatekeepers, and top-­down public regulation. Today’s corporate boards are much more informed, organized, skilled, and accountable than their historical antecedents. Although far from perfect, they continue to evolve and improve. The CIS, recognizing the potential of collaborative inside‐out reforms in the corporate arena is, on balance, a promising development. But this trend also raises concerns that merit further discussion.

Corporate Governance Reforms Around the World and Cross-Border Acquisitions

Corporate Governance Reforms Around the World and Cross-Border Acquisitions

E. Han Kim University of Michigan – Stephen M. Ross School of Business

Yao Lu Tsinghua University – School of Economics & Management

May 15, 2013

Abstract: 
This paper provides comprehensive, detailed documentation of major corporate governance reforms (CGRs) undertaken by 26 advanced and emerging economies. Have these reforms impacted corporate investment decisions by altering investor protection (IP)? To answer this question, we estimate the CGRs’ impacts on foreign acquirers’ tendency to pick better performing firms in emerging markets. We argue the cherry picking is partly due to emerging countries’ weaker IP than acquirer countries’, predicting a positive relation between the degree of cherry picking and the gap in the strength of IP. If the CGRs strengthen IP, the gap will decrease (increase) following a CGR in a target’s (acquirer’s) country, moderating (intensifying) the cherry picking tendency. This is what we find when we estimate difference-in-differences in cherry picking before and after a CGR. These results not only demonstrate the CGRs’ impacts, but also imply the IP gap between capital exporting and importing countries distorts firm-level allocation of foreign capital inflows and reduces the benefits of globalization.