Meeting or Missing Earnings Benchmarks: The Role of CEO Integrity

Meeting or Missing Earnings Benchmarks: The Role of CEO Integrity

Yuping Jia Frankfurt School of Finance and Management

April/May 2013
Journal of Business Finance & Accounting, Vol. 40, Issue 3-4, pp. 373-398, 2013

Abstract: 
This paper examines the role of CEO integrity in determining whether a company’s earnings benchmarks will be met, beaten or missed. Prior literature provides evidence that managers have incentives for meeting or beating earnings benchmarks and are rewarded by the market for doing so (Lopez and Rees, 2002; and Skinner and Sloan, 2002). Managers also have incentives to miss their earnings targets for the benefit of a lower strike price on subsequent option grants (McAnally et al., 2008). A CEO’s involvement in backdating is taken here as a measure of his or her integrity. This paper shows that CEO integrity significantly influences whether benchmarks are met or beaten. In other words, backdating CEOs are more likely to meet or narrowly beat all three earnings benchmarks examined in the paper: positive earnings, last year’s earnings and analysts’ forecasts. At the same time, they are also less likely to narrowly miss a zero‐earnings benchmark. The results presented in this paper further validate the use of benchmark meeting/beating as a measure of earnings manipulation.

Social Media and Firm Equity Value

Social Media and Firm Equity Value

Xueming Luo University of Texas at Arlington

Jie Zhang University of Texas at Arlington; University of Rochester – Simon School of Business

Wenjing Duan George Washington University – School of Business

May 3, 2013
Luo, Xueming, J. Zhang, and W. Duan (2013), “Social Media and Firm Equity Value,” Information Systems Research, Forthcoming

Abstract:
Companies have increasingly advocated social media technologies to transform businesses and improve organizational performance. This study scrutinizes the predictive relationships between social media and firm equity value, the relative effects of social media metrics compared with conventional online behavioral metrics, and the dynamics of these relationships. The results derived from vector autoregressive models suggest that social media-based metrics (web blogs and consumer ratings) are significant leading indicators of firm equity value. Interestingly, conventional online behavioral metrics (Google searches and web traffic) are found to have a significant yet substantially weaker predictive relationship with firm equity value than social media metrics. We also find that social media has a faster predictive value, i.e., shorter “wear-in” time, than conventional online media. These findings are robust to a consistent set of volume-based measures (total blog posts, rating volume, total page views, and search intensity). Collectively, this study proffers new insights for senior executives with respect to firm equity valuations and the transformative power of social media.

Expert Networks and Insider Trading: An Introduction and Recommendation

Expert Networks and Insider Trading: An Introduction and Recommendation

Daniel H. Jeng Boston University School of Law

May 7, 2013
Review of Banking and Financial Law, Forthcoming

Abstract: 
An expert network enabled the largest insider trading scheme ever discovered and charged by the Securities and Exchange Commission (“SEC”). As complex information webs circulating money for information, expert networks are significant and relevant to the financial system, generating over $400 million in revenue annually. In the past decade, regulatory revisions to disclosure requirements and reformations to investment banking research practices have fueled the rise of expert networks. Despite recent notoriety in connection with Raj Rajaratnam’s insider trading case and various insider trading convictions of expert network consultants, use of expert networks is legally permissible, as specifically acknowledged by the SEC. Nevertheless, expert network firms, expert consultants, and clients must guard against insider trading by ensuring that no information transferred is material, nonpublic, or acquired through a breach of duty. This article argues that strong compliance programs and well-written contracts protect expert networks against insider trading and regulatory investigations.

Shaping Liquidity: On the Causal Effects of Voluntary Disclosure

Shaping Liquidity: On the Causal Effects of Voluntary Disclosure

Karthik Balakrishnan University of Pennsylvania – Accounting Department; University of Pennsylvania – The Wharton School

Mary Brooke Billings New York University; New York University (NYU) – Department of Accounting, Taxation & Business Law

Bryan T. Kelly University of Chicago – Booth School of Business; National Bureau of Economic Research (NBER)

Alexander Ljungqvist New York University (NYU) – Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Research Institute of Industrial Economics (IFN)

April 2013
NBER Working Paper No. w18984

Abstract: 
Can managers influence the liquidity of their firms’ shares? We use plausibly exogenous variation in the supply of public information to show that firms seek to actively shape their information environments by voluntarily disclosing more information than is mandated by market regulations and that such efforts have a sizeable and beneficial effect on liquidity. Firms respond to an exogenous loss of public information by providing more timely and informative earnings guidance. Responses appear motivated by a desire to reduce information asymmetries between retail and institutional investors. Liquidity improves as a result of voluntary disclosure and in turn increases firm value. This suggests that managers can causally influence their cost of capital via voluntary disclosure.

CEO Succession Practices: 2012 Edition

CEO Succession Practices: 2012 Edition

Jason D. Schloetzer Georgetown University – McDonough School of Business

Matteo Tonello  The Conference Board, Inc.

Melissa Aguilar The Conference Board, Inc.

April 13, 2013

The Conference Board Research Report R-1492-12-RR

Abstract: 
CEO Succession Practices: 2012 Edition documents and analyzes succession events of chief executive officers (CEOs) of S&P 500 companies. In addition to updates on historical trends, the study features discussions of the most notable cases of CEO succession that took place in 2011 (based on press announcements and other publicly available information) as well as the results of a survey of corporate secretaries and general counsel on the succession oversight practices of their boards (administered annually by The Conference Board). The study includes the following: Part I-CEO Succession Trends (2000–2011): Year-by-year succession rates; Part II-CEO Succession Practices (2011): Includes two sections, “Board Practices in CEO Succession Planning” and “Communication Practices in CEO Succession”; Part III-Notable Cases of CEO Succession (2011): Summaries of 10 episodes of CEO succession that made headlines in 2011 (Advanced Micro Devices; The AES Corporation; Apple; First Solar; Gannett Co.; Hewlett-Packard; H&R Block; Newell Rubbermaid; PG&E; and Yahoo); Part IV-Shareholder Activism on CEO Succession Planning (2011): Discusses a critical policy reversal by the U.S. Securities and Exchange Commission on the excludability of shareholder proposals in CEO succession policies (Hewlett-Packard; Kohl’s; News Corp; Red Robin Gourmet Burgers; United Natural Foods). Concluding the report is an appendix of The Conference Board Roadmap to CEO Succession Planning, which outlines a series of steps intended to help directors organize succession planning, integrate it with existing board responsibilities, make it transparent to all stakeholders, and ultimately define it as an ongoing element of business strategy.

Burton Malkiel: Asset Management Fees and the Growth of Finance

Asset Management Fees and the Growth of Finance

Burton G. Malkiel

Journal of Economic Perspectives—Volume 27, Number 2—Spring 2013—Pages 97–108

From 1980 to 2006, the financial services sector of the United States economy grew from 4.9 percent to 8.3 percent of GDP. A substantial share of that increase was comprised of increases in the fees paid for asset management. This paper examines the significant increase in asset management fees charged to both individual and institutional investors. Despite the economies of scale that should be realizable in the asset management business, the asset-weighted expense ratios charged to both individual and institutional investors have actually risen over time. If we exclude index funds (an innovation that has made market returns available even to small investors at close to zero expense), fees have risen substantially as a percentage of assets managed. One could argue that the increase in fees charged by actively managed funds could prove to be socially useful, if it reflected increasing returns for investors from active management or if it was necessary to improve the efficiency of the market for investors who availed themselves of low-cost passive (index) funds. But neither of these arguments can be supported by the data. Actively managed funds of publicly traded securities have consistently underperformed index funds, and the amount of the underperformance is well approximated by the difference in the fees charged by the two types of funds. Moreover, it appears that there was no change in the efficiency of the market from 1980 to 2011. Arbitrage opportunities to obtain excess risk-adjusted returns do not appear to have been available at any time during the early part of the period. Passive portfolios that bought and held all the stocks in a broad-based market index substantially outperformed the average active manager throughout the entire period. Thus, the increase in fees is likely to represent a deadweight loss for investors. Indeed, perhaps the greatest inefficiency in the stock market is in “the market” for investment advice.

Multiproduct Multinationals and the Quality of Innovation

Multiproduct Multinationals and the Quality of Innovation

Sasan Bakhtiari University of New South Wales

Antonio Minniti Catholic University of Louvain (UCL) – Center for Operations Research and Econometrics (CORE)

Alireza Naghavi University of Bologna – Department of Economics

May 10, 2013
Quaderni DSE Working Paper N° 879

Abstract: 
This research sheds light on the role of product scope on the innovation activity of multinational multi-product firms. We use patent citation data to break down innovation into two types by measuring the degree to which innovation performed by firms is fundamental and the extent to which the output of the R&D can be spread across different product lines. We focus on two features in multinational production: (i) fundamental innovation is geographically more difficult to transfer abroad to foreign production sites, (ii) learning spillovers can occur from international operations. The results reveal that the second effect is more likely to dominate when a firm is active in more product lines. We argue that a more diversified portfolio of products increases a firm’s scope of learning from international operations, thereby enhancing its ability to engage in more fundamental research. In contrast, firms with less product lines that geographically separate production from innovation shift the innovation activities towards more specialized types of innovation.

Governance Through Trading: Does Institutional Trading Discipline Empire Building and Earnings Management?

Governance Through Trading: Does Institutional Trading Discipline Empire Building and Earnings Management?

Eric C. Chang University of Hong Kong – School of Business

Tse-Chun Lin University of Hong Kong – Faculty of Business and Economics

Xiaorong Ma University of Hong Kong – School of Business

May 12, 2013

Abstract: 
This paper empirically identifies an important external corporate governance mechanism through which the institutional trading improves firm values and disciplines managers from conducting value-destroying behaviors. We propose a reward-punishment intensity (RPI) measure based on institutional investors’ absolute position changes, and find it is positively associated with firm’s future risk-adjusted returns and Tobin’s Q. Importantly, we find that firms with higher RPI exhibit less subsequent empire building and earnings management. Our results suggest that the improved firm values can be attributed to the discipline effect of institutional trading on managers, which is in line with the argument of “Governance Through Trading”. Furthermore, we find that the exogenous liquidity shock of decimalization augments the governance effect of institutional trading. We also find that the discipline effect is more pronounced for firms with lower institutional ownership concentration, higher stock liquidity, and higher managers’ wealth-performance sensitivity, which further supports the governance role of the RPI.

The Emergence of Openness: How Firms Learn Selective Revealing in Open Innovation

The Emergence of Openness: How Firms Learn Selective Revealing in Open Innovation

Joachim Henkel TUM School of Management – Technische Universität München (TUM) ; Centre for Economic Policy Research (CEPR)

Simone Schöberl McKinsey & Company Inc.

Oliver Alexy Technische Universität München (TUM), TUM School of Management

March 28, 2013

Abstract: 
Open innovation is often facilitated by strong intellectual property rights (IPRs), but it may also function, and even be boosted, when firms deliberately waive some of their IPRs. Yet, extant literature falls short of explaining how firms learn to practice this behavior. To address this question, we conduct an empirical study in a segment of the computer component industry which traditionally has taken a rather proprietary stance. With the advent of the open source operating system Linux, firms increasingly waived their IPRs on software drivers. We trace and analyze this process using both qualitative and quantitative methods. We find that component makers had to go through a learning process to realize that and how selectively waiving IPRs may be beneficial for their business. We uncover customer demand as a trigger, organizational inertia as an obstacle, and positive experiences as subsequent driver of this learning process. We also identify differences between uni-directional and bi-directional openness, and find that firms’ motives relate to how they implement openness. Of particular interest are the important role of an external trigger to rethink an engrained industry practice of strong IP protection, and the development of openness into a new dimension of competition.

Behavioral Outcomes of Next Generation Family Members’ Commitment to Their Firm

Behavioral Outcomes of Next Generation Family Members’ Commitment to Their Firm

Alexandra Dawson Concordia University, Quebec – John Molson School of Business

P. Gregory Irving Independent

Pramodita Sharma Wilfrid Laurier University

Francesco Chirico Jonkoping University – Jonkoping International Business School (JIBS)

Joel Markus Wilfried University

April 23, 2013 European Journal of Work and Organizational Psychology (Forthcoming)

Abstract: 
Are there variations in behaviors and leadership styles of next generation family members or descendants who join their family business due to different forms of commitment? Evidence from a dual respondent study of 109 Canadian and Swiss family firms suggests that descendants with affective commitment to their family firms are more likely to engage in discretionary activities going beyond the job description, thereby contributing to organizational performance. Next generation members with normative commitment are more likely to engage in transformational leadership behaviors. Both affectively and normatively motivated next generation members use contingent reward forms of leadership. A surprising finding of this study is the binding force of normative commitment on positive leadership behaviors of next generation members. This study empirically tests the generalizability of the three-component model of commitment to family businesses, a context in which different forms of commitment may play a unique role.

How Much Does an Illegal Insider Trade?

How Much Does an Illegal Insider Trade?

Alex Frino University of Sydney – Discipline of Finance; Financial Research Network (FIRN)

Stephen E. Satchell University of Cambridge – Faculty of Economics and Politics

Brad Wong University of Sydney

Hui Zheng Discipline of Finance, The University of Sydney; Financial Research Network (FIRN)

June 2013 International Review of Finance, Vol. 13, Issue 2, pp. 241-263, 2013

Abstract: 
This paper examines the choice of trade size by an illegal insider. Previous literature (i.e. Meulbroek 1992) tends to focus on the price impact of such a trader. Using a unique data set hand‐collected from the litigation reports of the Securities and Exchange Commission and court cases, we provide evidence, which suggests that the size of an illegal insider’s trade is a function of the value of his private information, the probability of detection and the expected penalty if detected. Our results have important implication for security market regulators.

Linguistic Diversity and Stock Trading Volume

Linguistic Diversity and Stock Trading Volume

Yen-Cheng Chang Shanghai Advanced Institute of Finance; China Academy of Financial Research (CAFR)

Harrison G. Hong Princeton University – Department of Economics; National Bureau of Economic Research (NBER)

Larissa Tiedens Stanford Graduate School of Business

Bin Zhao Shanghai Advanced Institute of Finance; China Academy of Financial Research (CAFR)

March 14, 2013
Rock Center for Corporate Governance at Stanford University Working Paper No. 134

Abstract: 
We test the hypothesis that the linguistic diversity of a stock’s investor base leads to more trading. Trading might be due to beliefs differing across languages or investor exposure to multiple languages leading to more trading ideas. Using stock message boards from China, which has ten languages, we measure the linguistic diversity of a stock’s investor base using a Herfindahl index of messages posted from different languages. A firm’s diversity increases in the number of languages spoken in the province where it is headquartered. Using the latter as the instrument, trading volume in a stock rises with its linguistic diversity. We then attempt to discriminate among competing mechanisms. We also show using a sample of forty-one countries that countries with more linguistic diversity have greater stock market turnover.

The History of the Decline and Fall of the American Accounting Profession; “I don’t trust doctors, dentists or auto mechanics because I don’t know what they are doing. I don’t trust lawyers or CPAs because I do know what they are doing.”

The History of the Decline and Fall of the American Accounting Profession

William Dennis Huber Capella University

May 4, 2013
International Journal of Economics and Accounting, Forthcoming

Abstract: 
“I don’t trust doctors, dentists or auto mechanics because I don’t know what they are doing. I don’t trust lawyers or CPAs because I do know what they are doing.”

There have been many articles and books published on the development of accounting and the accounting profession in the U.S., both historically and sociologically. Some have critically examined actions taken by the AICPA, and others that have studied the effects of legislation on the accounting profession such as the Sixteenth Amendment or the creation of the PCAOB. Still others have observed the decline in the American accounting profession‘s status and image as a result of various failures such as Enron. This is the first to combine systematically a sociological analysis of the accounting profession in the U.S. with the historical development of the profession‘s power and status, and the subsequent loss of its power and status. A sociological analysis of the American accounting profession strongly suggests that it is no longer a profession as conceived by sociologists.

Local Institutions, Audit Quality, and Financial Fraud of US-Listed Foreign Firms

Local Institutions, Audit Quality, and Financial Fraud of US-Listed Foreign Firms

Lei Chen London School of Economics & Political Science (LSE) – Department of Accounting

Jan 16, 2013

Abstract: 
Using data on shareholder-initiated class action lawsuits in the US, I investigate financial misconducts of US-listed foreign firms. After controlling for type I errors (e.g. frivolous lawsuits), I document that firms domiciled in the countries with weak corporate governance were more likely to commit fraud, but such relation could be moderated by the presence of Big 4 auditors. Investors automatically adjusted for type II errors (e.g. undiscovered fraud) when valuating the stocks of non-sued firms. That is, non-sued firms that shared the same countries of origin with their sued peers experienced valuation declines around class periods end dates (the dates when the scandals were exposed rather than the dates when the litigation was filed). Investors relied on audit quality to form their expectations about the severity of type II errors, and thus posed less negative spillovers on firms with Big 4 auditors, especially when the firms were from countries with weak corporate governance. Taken together, my results suggest that a listing on US exchanges does not fully compensate weak local institutions; voluntarily bonding to more stringent audit process has an incremental effect on protecting shareholder interests, and enhances the confidence of investors in firms’ financial integrity.

‘All in the Family’: Earnings Management Through Non-Listed Subsidiaries

‘All in the Family’: Earnings Management Through Non-Listed Subsidiaries

Massimiliano Bonacchi University of Naples “Parthenope”; New York University (NYU) – Leonard N. Stern School of Business; City University of New York, CUNY Baruch College, Zicklin School of Business

Fabrizio Cipollini Universita di Firenze, Dipartimento di Statistica

Paul Zarowin New York University (NYU) – Department of Accounting, Taxation & Business Law

May 7, 2013

Abstract: 
We find evidence consistent with the hypothesis that non-listed subsidiaries engage in accrual and real earnings management when their listed parent is reporting small annual profits. Our evidence is important, because it shows that business groups manage earnings differently from single firms. In particular, to avoid reporting annual losses, the parent company drives earnings management of the subsidiary. Cross-sectional analysis reveals that Big4 auditors mitigate accrual earnings management at the subsidiary level, and that family-owned firms are more likely to use earning management through non-listed subsidiaries to avoid losses.

Extraordinary Acquirers

Extraordinary Acquirers

Alfred Yawson City University London – Sir John Cass Business School; University of Adelaide Business School

Huizhong Jodie Zhang University of Adelaide – Business School

May 3, 2013

Abstract: 
We examine acquirers that persistently generate positive announcement returns in takeovers (extraordinary acquirers). Extraordinary acquirers constitute 14.9 percent of US acquiring firms during the period 1990-2011. The probability of observing an extraordinary acquirer from a takeover announcement is 2.41%. Extraordinary acquirers prefer subsidiary targets and cash deals but avoid using stocks to finance acquisitions. Further, we find strong evidence that the attainment and preservation of extraordinary acquirer status depend on top management team tenure and tenure heterogeneity. Compensation heterogeneity does not change after the transaction suggesting top team members contribute more equally to the acquisition success. Further we show that extraordinary acquirers possess strong negotiation skills which enable them to appropriate a larger share of the synergy gain.

The Impact of Brand Rating Dispersion on Firm Value

The Impact of Brand Rating Dispersion on Firm Value

Xueming Luo University of Texas at Arlington

Sascha Raithel Ludwig Maximilians University of Munich – Munich School of Management

Michael Wiles Arizona State University (ASU) – Marketing Department

April 30, 2013
Journal of Marketing Research, Forthcoming.

Abstract: 
This study examines brand dispersion — variance in brand ratings across consumers — and its role in the translation of brand assets into firm value. Dispersion captures the covert heterogeneity in evaluations of brands among consumers who like or dislike the brands, which would affect an investor’s decision to buy or sell a stock. The higher the dispersion, the more inconsistent and polarized cross-consumer ratings of the brands. Multiple analyses — from simple, model-free to time-series models — on 730,818 brand-day observations provide robust evidence that changes in brand dispersion matter for stock prices. Brand dispersion has Januslike effects: it harms returns but reduces firm risk. Further, downside dispersion has a stronger impact on abnormal returns than upside dispersion, indicating an asymmetry in brand dispersion’s effects. Moreover, dispersion tempers the risk-reduction benefits of higher brand rating in both short and long runs. Without modeling dispersion, brand rating’s impact on firm value can be over- or under-estimated. Managers should consider dispersion a vital brand-management metric and add this metric to the brand-performance dashboard.

Wharton’s Wachter, Raff, Yan: Real Estate Prices in Beijing, 1644 to 1840

Real Estate Prices in Beijing, 1644 to 1840

Daniel Raff and Susan Wachter, Wharton School of Management, University of Pennsylvania

Se Yan, Guanghua School of Management, Peking University

Abstract:

This paper provides the first estimates of housing price movements for Beijing in late pre-modern China. We hand-collect from archival sources transaction prices and other house attribute information from the 498 surviving house sale contracts for Beijing during the first two centuries of the Qing Dynasty (1644-1840), a long period without major wars, political turmoil, or significant institutional change in the Chinese capital. We use hedonic methods to construct a real estate price index for Beijing for the period. The regression analysis explains a major proportion of the variance of housing prices. We find that house prices grew steadily for the first half-century of the Qing Dynasty and declined afterwards in both nominal and real terms through the late eighteenth century. Nominal prices grew starting in the late eighteenth century and declined from the early nineteenth century through 1840. But these price changes occurred with contemporaneous price changes in basic measures of the cost of living: there was little change in real terms to the end of our period.

No Free Shop: Why Target Companies in MBOs and Private Equity Transactions Sometimes Choose Not to Buy ‘Go Shop’ Options

No Free Shop: Why Target Companies in MBOs and Private Equity Transactions Sometimes Choose Not to Buy ‘Go Shop’ Options

Adonis Antoniades Columbia University – Department of Economics

Charles W. Calomiris Columbia University – Columbia Business School; National Bureau of Economic Research (NBER)

Donna M. Hitscherich Columbia Business School – Finance and Economics

April 30, 2013
Columbia Business School Research Paper No. 13-25

Abstract: 
We study the decisions by targets in private equity and MBO transactions whether to actively “shop” their initial acquisition agreements prior to the shareholders’ approval of those contracts. Specifically, targets can insert a “go-shop” clause into their contracts, which permits them to use the agreement to solicit offers from other would-be acquirors during the “go-shop” window, during which the termination fee paid by the target is temporarily lowered. We consider the “go-shop” decision from the theoretical perspective of value maximization under asymmetric information, and also consider conflicts of interest on the parts of management, bankers, and attorneys that might affect the decision. Empirically, we find that the decision to retain the option to shop an offer is predicted by various firm attributes, including larger size, more fragmented ownership, and various characteristics of the firms’ legal advisory team and procedures. These can be interpreted as reflecting a combination of informational characteristics, litigation risk, and attorney conflicts of interest. We employ legal advisor characteristics as instruments when analyzing the effects of go-shop decisions on target acquisition premia and value. We find, as predicted in our theoretical framework, that go-shops are not a free option; they result in lower initial acquisition premia, ceteris paribus. Our theoretical framework has an ambiguous prediction about the effects of go-shop choice on target firm valuation. Consistent with theory, we find no significant effect on abnormal returns from choosing a “go-shop” option.

AQR: Low-Risk Investing Without Industry Bets

Low-Risk Investing Without Industry Bets

Clifford S. Asness AQR Capital Management, LLC

Andrea Frazzini AQR Capital Management, LLC

Lasse Heje Pedersen New York University (NYU) – Department of Finance; National Bureau of Economic Research (NBER)

March 20, 2013

Abstract:      
The strategy of buying safe low-beta stocks while shorting (or underweighting) riskier high-beta stocks has been shown to deliver significant risk-adjusted returns. However, it has been suggested that such “low-risk investing” delivers high returns primarily due to its industry bet, favoring a slowly changing set of stodgy, stable industries and disliking their opposites. We refute this. We show that a betting against beta (BAB) strategy has delivered positive returns both as an industry-neutral bet within each industry and as a pure bet across industries. In fact, the industry-neutral BAB strategy has performed stronger than the BAB strategy that only bets across industries and it has delivered positive returns in each of 49 U.S. industries and in 61 of 70 global industries. Our findings are consistent with the leverage aversion theory for why low beta investing is effective.

An Exploration of the Relationship between Language Choice in CEO Letters to Shareholders and Corporate Reputation

An Exploration of the Relationship between Language Choice in CEO Letters to Shareholders and Corporate Reputation

Russell Craig Australian National University (ANU) – School of Business and Information Management

Niamh M. Brennan University College Dublin (UCD) – Quinn School of Business

2012
Accounting Forum, 36(3): 166-177, 2012 

Abstract:      
This paper proposes a taxonomy to assist in more clearly locating research on aspects of the association between corporate reputation and corporate accountability reporting. We illustrate how our proposed taxonomy can be applied by using it to frame our exploration of the relationship between measures of reputation and characteristics of the language choices made in CEO letters to shareholders. Using DICTION 5.0 software we analyse the content of the CEO letters of 23 high reputation US firms and 23 low reputation US firms. Our results suggest that company size and visibility each have a positive influence on the extent to which corporate reputation is associated with the language choices made in CEO letters. These results, which are anomalous when compared with those of Geppert and Lawrence (2008), highlight the need for caution when assessing claims about the effects on corporate reputation arising from the language choice in narratives in corporate annual reports.

Contemporary Accounting Research: Family Ownership and CEO Turnovers

Family Ownership and CEO Turnovers

Xia Chen Singapore Management University

Qiang Cheng Singapore Management University

Zhonglan Dai University of Texas at Dallas – School of Management

May 30, 2013
Contemporary Accounting Research, Forthcoming

Abstract: 
This paper investigates the impact of the founding family’s presence on CEO turnover decisions. We find that family firms managed by CEOs outside the founding family (i.e., professional CEO family firms) have higher CEO turnover-performance sensitivity than family firms managed by family members (i.e., family CEO firms) or non-family firms. These results are robust to alternative performance measures and CEO turnover definitions. Additional analyses indicate that higher family ownership leads to even higher (lower) turnover-performance sensitivity in professional CEO family firms (family CEO firms). These results indicate that, with regard to CEO turnover decisions, better monitoring of CEOs by family owners leads to the alleviation of agency conflicts, but the power of family CEOs leads to potential family entrenchment.

Are the Life and Death of a Young Start-Up Indeed in the Power of the Tongue? Lessons from Online Crowdfunding Pitches

Are the Life and Death of a Young Start-Up Indeed in the Power of the Tongue? Lessons from Online Crowdfunding Pitches

Dan Marom Hebrew University of Jerusalem – Jerusalem School of Business Administration; Hebrew University of Jerusalem

Orly Sade Hebrew University of Jerusalem – Department of Finance

April 23, 2013

Abstract: 
Securing seed funding is one of the biggest challenges for any entrepreneur. While presenting an initiative to potential investors, the entrepreneur can choose the extent to which she presents herself, versus presenting the project idea. This research investigates not only this decision, but also the effect of this decision on the success of the fundraising in a leading crowdfunding financing platform (Kickstarter). In our empirical analysis, we use a text mining quantification method validated by experiment and robustness tests. This methodology was implemented on a dataset that was collected by custom software, and which includes more than 20,000 online business pitches and their crowdfunding results. Our findings indicate clearly that in Kickstarter fundraising, entrepreneurs’ descriptions do matter – projects which highlighted their entrepreneurs enjoyed higher rates of success, controlling for other relevant variables.

Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy

Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy

Lucian A. Bebchuk Harvard Law School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Alon P. Brav Duke University – Fuqua School of Business

Robert J. Jackson Jr.Columbia Law School

Wei Jiang Columbia Business School – Finance and Economics

April 1, 2013
Journal of Corporation Law, Volume 39, Fall 2013, Forthcoming

Abstract: 
The SEC is currently considering a rulemaking petition requesting that the Commission shorten the ten-day window, established by Section 13(d) of the Williams Act, within which investors must publicly disclose purchases of a 5% or greater stake in public companies. In this Article, we provide the first systematic empirical evidence on these disclosures and find that several of the petition’s factual premises are not consistent with the evidence. Our analysis is based on about 2,000 filings by activist hedge funds during the period of 1994-2007. We find that the data are inconsistent with the petition’s key claim that changes in market practices and technologies have operated over time to increase the magnitude of pre-disclosure accumulations, making existing rules “obsolete” and therefore requiring the petition’s proposed “modernization.” The median stake that these investors disclose in their 13(d) filings has remained stable throughout the 17-year period that we study, and regression analysis does not identify a trend over time of changes in the stake disclosed by investors. We also find that:
* A substantial majority of 13(d) filings are actually made by investors other than activist hedge funds, and these investors often use a substantial amount of the 10-day window before disclosing their stake.
* A significant proportion of poison pills have low thresholds of 15% or less, so that management can use 13(d) disclosures to adopt low-trigger pills to prevent any further stock accumulations by activists — a fact that any tightening of the SEC’s rules in this area should take into account.
* Even when activists wait the full ten days to disclose their stakes, their purchases seem to be disproportionately concentrated on the day they cross the threshold and the following day; thus, the practical difference in pre-disclosure accumulations between the existing regime and the rules in jurisdictions with shorter disclosure windows is likely much smaller than the petition assumes.
* About 10% of 13(d) filings seem to be made after the 10-day window has expired; the SEC may therefore want to consider tightening the enforcement of existing rules before examining the proposed acceleration of the deadline.
Our analysis provides new empirical evidence that should inform the SEC’s consideration of this subject — and a foundation on which subsequent empirical and policy analysis can build.

The Signals in the Noise: The Role of Reputable Investors in a Crowdfunding Market

The Signals in the Noise: The Role of Reputable Investors in a Crowdfunding Market

Keongtae Kim University of Maryland – Robert H. Smith School of Business

Siva Viswanathan University of Maryland – Robert H. Smith School of Business

April 29, 2013

Abstract: 
This paper examines the role of reputable investors in a crowdfunding market. Using a novel data set on individual investments in a crowdfunding market for mobile applications, we investigate whether early investments serve as signals of quality for later investors and if the value of these signals differs depending on the identity of early reputable investors. We find that reputable investors – app developer investors and experienced investors – tend to invest early. Both are likely to affect later investors, although their expertise determines their influence. App developer investors tend to have a better knowledge of the product and are found to be more influential for “concept apps” (apps that are in development), whereas experienced investors – investors with a better knowledge of market performance are found to be more influential for “live apps” (apps that are already being sold in the market). Our findings show that investors in this market, although inexperienced, are rather sophisticated in their ability to identify and exploit nuanced differences between various signals within the same market. In examining the ex-post performance of apps, we find that successful funding in the market is positively associated with ex-post app sales, providing some indication of rational herding among investors. Our study offers new insights for theories of opinion leadership and signaling, and also has practical implications for the design of crowdfunding markets.

The Relation between Earnings Management and Pro Forma Reporting

The Relation between Earnings Management and Pro Forma Reporting

Ervin L. Black Sr. Brigham Young University – Marriott School of Management

Theodore E. Christensen Brigham Young University – Marriott School of Management

T Taylor Joo University of Arkansas – Department of Accounting

Roy Schmardebeck University of Arkansas

May 1, 2013

Abstract: 
We investigate the association between past and current earnings management and the likelihood that companies will disclose pro forma earnings. Specifically, we investigate how prior earnings management, current-period operating performance, real earnings management, and accruals management influence the probability that a company will disclose an adjusted earnings metric in its earnings press release. We also explore how these same factors influence the likelihood of aggressive pro forma disclosures. We define aggressive disclosures as those that exclude recurring items, use earnings exclusions to convert a Generally Accepted Accounting Principles (GAAP) loss to a pro forma profit, or convert a GAAP earnings metric that falls short of earnings expectations to a pro forma earnings number that meets or exceeds expectations. The results indicate that companies with more constrained balance sheets (i.e., those that have used up their accruals in prior periods) and less current-period earnings management (i.e., those with lower abnormal accruals) are more likely to disclose pro forma earnings and do so aggressively. Moreover, we find some evidence that companies using more real earnings management and with better operating performance are less likely to report aggressive pro forma numbers. These results suggest that while more past earnings management is consistently positively associated with aggressive pro forma reporting, we find evidence of a substitute relation between aggressive pro forma reporting and both abnormal accruals and real earnings management. In sum, managers are more likely to disclose aggressive pro forma earnings when they (1) have a more constrained balance sheet, (2) are less able to manage earnings with accruals or real earnings management, and (3) have less profitable operations. Finally, we find evidence that investors appear to understand these tradeoffs as they discount pro forma disclosures in the presence of higher levels of prior earnings management.

CEO Implicit Motives: Their Impact on Firm Investment and Firm Performance; Using 6160 annual CEO letters to shareholders for 585 S&P 500 companies for the period 1992 to 2010 to examine how CEO implicit motives impact the quality of their judgment and decision making

CEO Implicit Motives: Their Impact on Firm Investment and Firm Performance

Kevin J. Veenstra McMaster University – DeGroote School of Business

April 30, 2013

Abstract: 
Using 6160 annual CEO letters to shareholders for 585 S&P 500 companies for the period 1992 to 2010, I examine how CEO implicit motives (need for Achievement, need for Power, and need for Affiliation) impact the quality of their judgment and decision making. I find that while implicit motives for CEOs as a group have not changed significantly over time, there is a marked relationship between the competitiveness of a company’s industry type and the implicit motive attributes of the CEO it hires. Using revenue growth, size adjusted stock returns, return on assets, and Tobin’s Q as proxies for JDM quality, I show that after controlling for firm and year fixed effects, performance is increasing in a CEO’s need for power and decreasing in a CEO’s need for achievement; and that the effects of implicit motives are persistent, even three years after being measured. My results suggest that, in addition to characteristics such as functional career track, military experience, and number of external board seats held, implicit motives play a significant role in the determination of what makes each CEO unique and drives subsequent firm performance. My results have practical implications for many company investor relations departments who in recent years have been discontinuing the annual CEO letter, but may have not considered this useful disclosure role.

‘Seize and Hold with Both Hands’: The Political Implications of Corporate and Securities Law Reforms Under Hu Jintao

‘Seize and Hold with Both Hands’: The Political Implications of Corporate and Securities Law Reforms Under Hu Jintao

Andrei Molchynsky McGill University

November 2012

Abstract: 
In March 2013, the Fifth generation of Chinese leaders, headed by Xi Jinping and Li Keqiang, officially took over from the previous leadership headed by Hu Jintao and Wen Jiabao. One of the most important corporate legal reforms during the Hu-Wen administration were the amendments of the PRC Securities Law and Company Law. In this article, the author argues that the Securities Law and Company Law reforms and the continued restructuring of the state enterprises may be viewed as the government’s attempt to uphold the legitimacy of the one-Party rule. More specifically, it is argued that the government regulation of the securities market has been serving the financing needs of state-owned enterprises, while promoting the political needs of the Party. This paper also discusses the involvement of the Chinese Communist Party in corporate governance, demonstrating the Party’s presence in the operation and management of listed and, to a lesser extent, non-listed companies. Finally, the author will show how China’s program of corporate and securities reform tries to reconcile with the official ideology of the Communist Party.

The Roots of the Industrial Revolution – Institutions or (Socially Embedded) Technological Know-How?

The Roots of the Industrial Revolution – Institutions or (Socially Embedded) Technological Know-How?

Carles Boix Princeton University – Department of Politics and Woodrow Wilson School of Public and International Affairs

Scott F. Abramson Independent
2012
EPSA 2013 Annual General Conference Paper 32A

Abstract: 
We reassess the literature of growth by looking at the evolution of the European economy from around 1200 to 1900. Employing a comprehensive dataset for the European continent that includes geographic and climate features (1200-1800), urbanization data (1200-1800), per capita income data in the second half of the 19th century, location of proto-industrial centers (textile and metal sectors from 1300 to the Industrial Revolution), political borders and political institutions, we estimate the geographic, economic and political covariates of urbanization (commonly used as a proxy for per capita income) and 19th-century per capita income. Taking an instrumental variables approach, exploiting random climatic variation across time and space in the propensity of territory to support large, urban, populations, we show that the process of economic take-off (and of a growing economic divergence across the European continent) was caused by the emergence and growth of cities and urban clusters in an European north-south corridor that broadly runs from southern England to northern Italy. In contrast to previous findings in the institutionalist literature, we then show that fortunes of parliamentary institutions in early modern Europe played a small part in the success of the industrial revolution and the distribution of income across the continent in late 19th century. Rather, industrialization took place in those territories that had a strong proto-industrial base, often regardless of the absence of executive constraints (in the two centuries preceding the industrial revolution).