The Incentives for Vertical Mergers and Vertical Integration; firms in high R&D industries are less likely to vertically integrate or engage in vertical mergers, and are more likely to initiate customer or supplier relationships outside of the firm

The Incentives for Vertical Mergers and Vertical Integration

Laurent Frésard University of Maryland – Robert H. Smith School of Business

Gerard Hoberg University of Maryland – Department of Finance

Gordon M. Phillips University of Southern California; National Bureau of Economic Research (NBER)

March 31, 2013

Abstract: 
We examine the incentives for firms to vertically integrate through vertical mergers and production. We develop a new firm-specific measure of vertical integration using 10-K text to identify the extent a firm’s products span vertically related product markets. We find that firms in high R&D industries are less likely to vertically integrate or engage in vertical mergers, and are more likely to initiate customer or supplier relationships outside of the firm. These findings are consistent with firms with unrealized innovation avoiding integration to maintain ex ante incentives to make relationship specific investments and maintain residual rights of control as in Grossman and Hart (1986). In contrast, firms in high patenting industries with stable product markets are more likely to vertically integrate consistent with control rights being obtained by firms to facilitate commercialization of already realized innovation.

Discriminatory Related Party Transactions: A New Measure

Discriminatory Related Party Transactions: A New Measure

Mohammad Tareq RMIT University; University of Dhaka

Dennis William Taylor RMIT University

Clive Morley RMIT University – Graduate School of Business and Law

Nurul Houqe Victoria University of Wellington – Victoria Business School

December 18, 2012
2013 Financial Markets & Corporate Governance Conference

Abstract: 
Discretionary related party transactions (also known as tunnelling or self-dealing transactions) are non-arms length transactions with related parties of controlling shareholders for private benefit at the cost of other shareholders. Though there are studies on discriminatory related party transactions, there has been limited effort to develop a measure for such discriminatory transactions. Current measures are based on weak theoretical underpinnings and prone to high measurement error. This paper develops and tests a new measure for these discriminatory transactions. Type 1, Type 2 error rates and power of the new measurement are compared with an existing measure using computer simulated and real data. The capital market sensitivity of the new measure is also tested and compared with an existing measure. The new measure is found to be superior. This is the first systematic effort to develop a measure for discriminatory related party transactions. It will contribute in policy-making in relation to discriminatory related party transactions.

Ultimate Controlling Shareholders and Dividend Payout Policy in Chinese Stock Market

Ultimate Controlling Shareholders and Dividend Payout Policy in Chinese Stock Market

Jianan Guo School of Accounting, Economics and Finance, Deakin University

April 1, 2013

Abstract: 
Departing from the traditional cash flow rights-dividend policy framework, this study investigates whether the level of control rights and the types of control of the ultimate controlling shareholders (UCSs) of listed firms in China influence their cash dividend policy. We find that the level of control rights is positively associated with both the propensity to pay and the level of cash dividend payout, which indicates that the ultimate controlling shareholders are likely to use cash dividends to redirect financial resources from the firms as other channels of tunnelling are blocked by Chinese security regulatory body. Furthermore, different types of ultimate controllers exert dissimilar influences on the controlled firms’ cash dividend policy. The difference might stem from the historical nature of these ultimate controlling shareholders originating from China’s unique partial share issuance privatization process.

Ownership Structure and Divestiture Decisions: Evidence from Australian Firms

Ownership Structure and Divestiture Decisions: Evidence from Australian Firms

Pascal Nguyen University of Technology, Sydney (UTS); Financial Research Network (FIRN)

Nahid I. Rahman University of Technology, Sydney (UTS); Financial Research Network (FIRN)

Lucy Zhao University of Technology, Sydney (UTS); Financial Research Network (FIRN)

January 9, 2013
2013 Financial Markets & Corporate Governance Conference

Abstract: 
Divestitures have the potential to create shareholder value by helping firms optimize their portfolio of assets. Even so, firms do not necessarily take up divestitures because of agency problems. In fact, large controlling shareholders may prefer to extract private benefits of control at the expense of minority shareholders. In addition, divestitures may expose the misappropriation of corporate resources. In this paper, we explore the role that other blockholders play in constraining the largest shareholder’s influence. The results indicate that divestiture activity decreases with the ownership of the largest shareholder, which imposes a cost to minority shareholders since the firm’s value is not maximized. The presence of another significant blockholder appears to curb this negative bias towards divestitures. This finding provides an economic rationale for the higher performance of firms characterized by more balanced ownership structures. Involvement of family owners also appears to provide similar benefits.

Do Strong Shareholder Rights Mitigate Earnings Management?

Do Strong Shareholder Rights Mitigate Earnings Management?

Marshall A. Geiger University of Richmond – E. Claiborne Robins School of Business – Economics

David S. North University of Richmond – E. Claiborne Robins School of Business

April 5, 2013
Journal of Accounting, Ethics and Public Policy, Vol. 14 No. 2, 2013

Abstract: 
In this paper we examine the relationship between the strength of a firm’s shareholders rights, as part of their overall corporate governance structure, and the discretionary financial reporting choices made by the firm’s financial executives. Specifically, we examine the strength of shareholders rights and the reported levels of discretionary accounting accruals and the use of special reporting items on the income statement. We posit and find that in settings where shareholder rights are strong, after controlling for other reporting related factors, managers report lower levels of discretionary accruals and special reporting items, and use special reporting items significantly less frequently compared to firms with weak shareholder rights. Our findings suggest that having strong shareholder rights imposes additional monitoring on the firm’s financial reporting executives, leading to reduced earnings management attempts by financial executives and higher quality financial reporting.

The Separation of Investments and Management

The Separation of Investments and Management

John Morley University of Virginia School of Law

March 27, 2013
Yale Law Journal, Forthcoming

Abstract: 
This paper suggests a basic shift in the way we think about investment funds. The essence of these funds and their regulation lies not just in the nature of their investments, as is widely supposed, but also and more importantly in the nature of their organization. All types of investment funds — including hedge funds, private equity funds, venture capital funds, mutual funds, exchange-traded funds and closed-end funds — adopt a structure that I term “the separation of investments and management.” Investment enterprises place all of their investment assets into a “fund” with one set of owners, and all of their managers, workers and operational assets into a “management company” or “adviser” with a different set of owners. Investment funds also radically limit investors’ control, sometimes eliminating voting rights and boards of directors entirely. This pattern of organization has never been clearly explained or identified as a common feature of investment funds, but it has often worried and confused commentators and was recently the subject of a case in the U.S. Supreme Court. This paper explains this pattern by showing how it limits fund investors’ control over their managers and exposure to their managers’ profits and liabilities. Investors benefit from these limits for a combination of reasons having to do with exit rights, risk management and the economies of scale that managers can achieve by operating multiple funds. This pattern of organization is a large part of what defines investment funds and animates their regulation.

Pyramid IPOs on the Chinese Growth Enterprise Market

Pyramid IPOs on the Chinese Growth Enterprise Market

Martin Holmen University of Gothenburg – Department of Economics; Göteborg University – Centre for Finance; Hanken School of Economics

Peng Wang Hanken School of Economics

March 7, 2013

Abstract: 
This paper investigates Initial Public Offerings (IPOs) of high-tech firms on the Chinese Growth Enterprise Market (GEM). Almost half of the high tech IPOs on the GEM are set up in pyramid structures. The likelihood of a pyramid structure increases with the size of the IPO firm and state control. Our results do not suggest that pyramids are set up to overcome financial constraints. However, we document that pyramid IPOs are discounted before the IPO. The price to book ratio estimated at the subscription price is significantly lower for pyramid IPOs compared to stand-alone IPOs. Furthermore, the underpricing is higher and the oversubscription is lower for pyramid IPOs. We conclude that IPO investors are reluctant to invest in pyramid firms and demand a higher risk-premium which translates into a lower subscription price and higher underpricing.

Can Internal Governance Mechanisms Prevent Asset Appropriation? Examination of Type I Tunneling in China

Can Internal Governance Mechanisms Prevent Asset Appropriation? Examination of Type I Tunneling in China

Yuan George Shan University of Adelaide – Business School

May 2013
Corporate Governance: An International Review, Vol. 21, Issue 3, pp. 225-241, 2013

Abstract: 
Manuscript Type. Empirical. Research Question/Issue. Direct transfer (Type I tunneling) means that the controlling shareholders transfer resources from the firm for their own benefit. This study aims to investigate the impact of internal and external governance mechanisms from the perspective of principal‐principal (P‐P) conflicts on Type I tunneling. Research Findings/Insights. Using hand‐collected data comprising 117 Chinese listed companies with 540 firm‐year observations during 2001–2005, the results show that state ownership and the number of board of directors’ meetings are positively correlated with Type I tunneling, whereas the number of independent directors reveals a negative association. Other internal governance mechanisms including foreign ownership, the size of the board of directors, supervisory board size, number of professional supervisors, and the number of supervisory board meetings were found to have no impact. Theoretical/Academic Implications. Several implications can be drawn. First, this study has modeled tunneling using a well‐accepted theoretical perspective – agency theory of P‐P conflicts. But the results show that agency theory does not appropriately explain tunneling behavior in China and so institutional theory is suggested as an alternative theoretical perspective for future research. Second, corporate governance reforms relating to supervisory boards have not been sufficient to ensure that they properly fulfill their role of oversight. Rather, such supervisory boards are perhaps playing more of a “rubber stamp” role. Practitioner/Policy Implications. This study recommends prescribing the legal responsibilities and obligations for two‐tier boards in the Chinese context, allowing them to undertake their duties diligently.

Journal of Accounting and Economics: Performance Shocks and Misreporting

Performance Shocks and Misreporting

Joseph Gerakos University of Chicago – Booth School of Business

Andrei Kovrijnykh University of Chicago – Booth School of Business

February 1, 2013
Journal of Accounting and Economics, Forthcoming 
Chicago Booth Research Paper No. 10-12 

Abstract:      
We propose a parsimonious stochastic model of reported earnings that links misreporting to performance shocks. Our main analytical prediction is that misreporting leads to a negative second-order autocorrelation in the residuals from a regression of current earnings on lagged earnings. We also propose a stylized dynamic model of earnings manipulation and demonstrate that both earnings smoothing and target-beating considerations result in the same predictions of negative second-order autocorrelations. Empirically, we find that the distribution of this measure is asymmetric around zero with 27 percent of the firms having significantly negative estimates. Using this measure, we specify a methodology to estimate the intensity of misreporting and to create estimates of unmanipulated earnings. Our estimates of unmanipulated earnings are more correlated with contemporaneous returns and have higher volatility than reported earnings. With respect to economic magnitude, we find that, in absolute terms, median misreporting is 0.7 percent of total assets. Moreover, firms in our sample subject to SEC AAERs have significantly higher estimates of manipulation intensity.

Chinese Accounting Restatement and the Timeliness of Annual Report

Chinese Accounting Restatement and the Timeliness of Annual Report

Chen Ma Xi’an Jiaotong University (XJTU)

Junrui Zhang Xi’an Jiaotong University (XJTU)

Hui Du University of Houston – Clear Lake

April 3, 2013

Abstract: 
Chinese accounting restatements are mainly disclosed in companies’ annual reports due to unique Chinese institutional background and regulatory setting. Using manually collected data of 1050 accounting restatements from 2003 to 2011, we study the association between Chinese accounting restatement and the timeliness of annual report. The results from our difference-in-difference research design indicate that with an accounting restatement, a company takes longer to file its annual reports in the post-restatement period than in the pre-restatement period, suggesting a negative association between Chinese accounting restatements and timeliness of annual reports. When further examining the association between various restatement characteristics and timeliness of annual reports, we find an overall negative association between restatement severity and the timeliness of annual reports. We contribute to the existing accounting restatement literature from international perspective with evidence that restatements delay the timeliness of financial reporting.

Restraining Overconfident CEOs

Restraining Overconfident CEOs

Suman Banerjee Nanyang Business School

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

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

March 26, 2013

Abstract: 
Prior literature posits that while some CEO overconfidence may benefit shareholders, high levels of overconfidence do not. We investigate whether improvements in governance can help to mitigate the adverse effects of overconfidence while preserving its positive aspects. We use the passage of the Sarbanes-Oxley (SOX) Act as a natural experiment to examine whether improvements in regulation and governance help to mitigate investment distortions and moderate risk-taking tendencies of the more overconfident CEOs. We conduct tests using options-based proxies for CEO overconfidence. The results indicate that, after SOX, overconfident CEOs reduced investment, improved performance and market value, reduced their risk-exposure, increased dividends and substantially improved long-term performance following acquisitions. We also find that these SOX-related benefits are concentrated in the firms that were SOX non-compliant prior to its passage. While the beneficial aspects of SOX in restraining overconfident CEOs may have been an unintended consequence, the message of our paper is simple: CEO over-confidence can be monitored and regulated — just like any other CEO attribute. 

Contemporary Accounting Research: The Construction of a Trustworthy Investment Opportunity: Insights from the Madoff Fraud

The Construction of a Trustworthy Investment Opportunity: Insights from the Madoff Fraud

Hervé Stolowy HEC Paris – Accounting

Martin Messner University of Innsbruck

Thomas Jeanjean ESSEC Business School

C. Richard Baker Adelphi University – School of Business

March 9, 2013
HEC Paris Research Paper No. 971/2013
Contemporary Accounting Research, Forthcoming 

Abstract: 
In this paper, we use the investment fraud of Bernard Madoff to inquire into the production of trust in the context of financial markets. Drawing upon empirical data related to U.S. individual investors (interviews and letters) as well as documentary material, we investigate the mechanisms through which investing with Madoff came to be seen as a trustworthy investment opportunity. We show how different types of information contributed to construct Bernard Madoff as a trustworthy investment manager and how Madoff avoided meeting demands for accountability by manipulating investors in face-to-face encounters. We shed particular light on the role of institution-based forms of trust which play a critical role in facilitating economic exchanges. More specifically, we suggest that the Madoff case illuminates how the provision of information can lead to an “illusion of trustworthiness” that is difficult to escape for investors. An element of such illusion, we suggest, is inherent to the functioning of financial markets more generally.

Earnings Management and Annual General Meetings: The Role of Managerial Entrenchment

Earnings Management and Annual General Meetings: The Role of Managerial Entrenchment

John Banko University of Florida

Melissa B. Frye University of Central Florida – College of Business Administration

Weishen Wang College of Charleston

Ann Marie Whyte University of Central Florida

May 2013
Financial Review, Vol. 48, Issue 2, pp. 259-282, 2013 

Abstract: 
We examine earnings management around the annual general meeting (AGM) and assess the influence of managerial entrenchment. Consistent with prior research, we show positive and statistically significant abnormal returns surrounding AGMs regardless of the level of managerial entrenchment. We find evidence of significant earnings manipulation primarily among entrenched managers. Specifically, they manage abnormal accruals downward two quarters prior to the AGM and significantly increase abnormal accruals in the quarter immediately before the AGM. Our evidence is consistent with AGMs triggering managers to disseminate information in a manner that shapes the market’s perception of the firm.

If it’s Good for the Firm, it’s Good for Me: Insider Trading and Repurchases Motivated by Undervaluation

If it’s Good for the Firm, it’s Good for Me: Insider Trading and Repurchases Motivated by Undervaluation

Shrikant Jategaonkar Southern Illinois University at Edwardsville

May 2013
Financial Review, Vol. 48, Issue 2, pp. 179-203, 2013 

Abstract: 
My findings suggest that information inherent in insider trading can be used to identify undervalued repurchasing firms. I examine the relation between insider trading and the performance of open market repurchase (OMR) firms. I show that firms with high net insider buying prior to OMR announcements not only earn abnormal stock returns in both the short‐ and long‐run, but also exhibit better operating performance. Overall, the evidence is consistent with insiders timing their trades prior to OMR announcements.

Venture Capital Backing and Overvaluation: Evidence from the High‐Tech Bubble

Venture Capital Backing and Overvaluation: Evidence from the High‐Tech Bubble

Lanfang Wang 

Susheng Wang Hong Kong University of Science & Technology (HKUST) – Department of Economics

Jin Zhang Nankai University

May 2013
Financial Review, Vol. 48, Issue 2, pp. 283-310, 2013 

Abstract: 
We investigate the association between venture capital (VC) backing and the likelihood of firm overvaluation in the high‐tech bubble period. We find strong evidence that a VC‐backed firm is more likely than a non‐VC‐backed firm to be overvalued during the bubble period. A further investigation suggests that such an association exists only for VC‐backed firms that have gone public recently and VC‐backed firms over which venture capitalists (VCs) have high ownership or control. But outside the bubble period, all the differences in overvaluation between VC‐backed and non‐VC‐backed firms disappear. Our findings provide additional evidence supporting VC opportunism in boom periods.

Due Diligence and Investee Performance

Due Diligence and Investee Performance

Douglas Cumming York University – Schulich School of Business

Simona Zambelli University of Bologna – Department of Management

March 22, 2013

Abstract: 
We quantify the value of due diligence (DD) in the context of private equity (PE) investments. We relate DD to performance, including changes in return on assets and EBITDA/sales over the first three years after the investment. Based on a new and novel dataset comprising the majority of PE investors in Italy, we find evidence highly consistent with the view that DD improves performance. The statistical and economic significance of our findings is robust to consideration of endogenous determinants of DD. Our analyses of various sample-subsets also highlight that the DD carried out internally by fund managers has a more pronounced impact on performance. Puzzling results emerge, instead, for the DD performed by external agents, highlighting the existence of apparent agency costs associated with external DD.

Listing Standards and Fraud

Listing Standards and Fraud

Douglas Cumming York University – Schulich School of Business

Sofia Johan York University – Schulich School of Business; Tilburg Law and Economics Center (TILEC)

March 31, 2013
Managerial and Decision Economics, Forthcoming 

Abstract: 
Statistics reporting litigated cases of fraud on an exchange-by-exchange basis are not readily available to investors. This paper introduces data from three countries with multiple exchanges operating under different listing standards – Canada, the United Kingdom and the United States – to show litigated cases of fraud significantly vary by country, and the different exchanges within the country. Comparisons are also made to Brazil, China and Germany to assess out-of-sample inferences. The data examined suggest there are significant differences in the nature of observed fraud across exchanges within the United States; by contrast, outside the United States there appears to be a comparative lack of enforcement. The data also suggest policy implications for the ways in which fraud should ideally be reported to improve investor knowledge, market transparency and market quality.

Market Valuation of Intangible Capital in China; at the firm level, human capital has the strongest influence on firms’ market performance

Market Valuation of Intangible Capital in China

Yin Yu University of Reading – ICMA Centre

Carol Padgett University of Reading – ICMA Centre

March 21, 2013

Abstract: 
We introduce a new model to identify and value firms’ intangible capital relative to that of their industry peers and competitors. The model introduced in this paper distinguishes effects from human capital, external capital, and organizational capital at both industry level and firm level. Using firm data from Shanghai Stock Exchange, we find that the traditional asset pricing model could be statistically enhanced by the presence of intangible capital and that market is able to recognize the value of intangible capital. We also look into the interactive effect from different types of intangible capital by dividing firms into portfolios according to their model value. Our results suggest that at the firm level, human capital has the strongest influence on firms’ market performance and that external capital is the most difficult to capture.

Corporate Funding: Who Finances Externally? We document a surprising reliance on internal finance among eleven thousand U.S. public industrial companies over the past quarter-century

Corporate Funding: Who Finances Externally?

B. Espen Eckbo Dartmouth College – Tuck School of Business; European Corporate Governance Institute (ECGI)

Michael Kisser Norwegian School of Economics

March 28, 2013
Tuck School of Business Working Paper No. 2012-110 

Abstract: 
We document a surprising reliance on internal finance among eleven thousand U.S. public industrial companies over the past quarter-century. Pooling all sources of cash, the median contribution from net debt issues (above debt repurchases) is zero for the period, and two percent for equity issues. Fifty-six percent of the firms issue positive net debt at most twice over the quarter-century. As predicted, low-frequency issuers exhibit significantly higher fixed direct issue costs than low-frequency issuers. After the IPO year, debt issues are overwhelmingly rollovers, supporting a relatively stable average leverage ratio. In an average year, firms raise twelve percent of total funds externally, but the top two hundred issuers receive eighty-four percent of the total net debt issue proceeds. We also discover that funding decisions differ significantly in response to positive and negative net operating cash flows. Negative operating cash flow triggering primarily equity issues. However, in years with positive operating cash flow, the correlation between debt issues and profitability is positive, which helps resolve a long-standing capital structure puzzle.

Dissemination, Direct-Access Information Technology and Information Asymmetry; firms that are not highly visible can disseminate firm-initiated news via Twitter to increase liquidity and market depth

Dissemination, Direct-Access Information Technology and Information Asymmetry

Elizabeth Blankespoor Stanford University – Graduate School of Business

Gregory S. Miller University of Michigan – Ross School of Business

Hal D. White University of Michigan – Ross School of Business

January 25, 2013

Abstract: 
Firm disclosures often reach only a portion of investors, which results in information asymmetry among investors, and therefore lower market liquidity. This issue is particularly salient for firms that are not highly visible, as they tend not to receive broad news dissemination via traditional intermediaries, such as the press. This paper examines whether firms can reduce information asymmetry by using a new information technology to increase the breadth of dissemination of firm disclosures. Using a sample of technology firms, we examine the impact of using Twitter to send market participants links to press releases that are provided via traditional disclosure methods. We find this additional dissemination of firm-initiated news via Twitter is associated with lower abnormal bid-ask spreads and greater abnormal depths, consistent with a reduction in information asymmetry. Moreover, this result holds mainly for firms that are not highly visible, consistent with them being in greater need of this additional dissemination channel. We also examine the impact of dissemination on a volume-based measure of liquidity, and find that dissemination is positively associated with liquidity.

The Role of the Media in Disseminating Insider Trading News

The Role of the Media in Disseminating Insider Trading News

Jonathan L. Rogers University of Chicago – Booth School of Business

Douglas J. Skinner The University of Chicago – Booth School of Business

Sarah L. C. Zechman University of Chicago – Booth School of Business

March 1, 2013
Chicago Booth Research Paper No. 13-34
Fama-Miller Working Paper 

Abstract: 
We use the disclosure of insiders’ trades to investigate whether the way in which news is disseminated by the media affects the market response. To do this, we use recent changes in the disclosure rules governing insider trades and an exogenous change in media coverage to cleanly identify media effects. Using high-resolution intraday data and a plausibly exogenous change in media coverage, we find clear media effects in the price and volume response to news. These results help resolve open questions regarding the importance of investor inattention and help explain why apparently “second hand” news affects securities prices.

Save the Companion: Why Technological Leaders Share the Research Output with Competitors

Save the Companion: Why Technological Leaders Share the Research Output with Competitors

Yuri Jo KAIST Business School

Chang-Yang Lee Korea Advanced Institute of Science & Technology (KAIST)

March 1, 2013
KAIST Business School Working Paper Series No. 2013-005 

Abstract: 
This paper investigates the reasons why technological leaders voluntarily share their research outputs with competitors, especially those with lower research capability. Building a two-stage analytical model, we show that technological leaders have incentives to create cooperative knowledge partnership in order to induce competitors to commit more efforts to R&D. With weak knowledge spillovers, firms with low research capability are discouraged from doing R&D because they lack research capability to compete for innovation. Under some conditions, those discouraged competitors harm leading firms’ profitability because the leaders produce most knowledge for the industry. Hence, the leading firms have incentives to share their R&D outputs to encourage competitors to contribute more to the knowledge pool in the industry, which is beneficial to both of them. The leader’s incentive increases as unintended knowledge leakage is in low level, the leader’s research capability is moderate and capability gap between firms is small. Interestingly, a high level of capability gap also makes it possible for firms to form knowledge partnership if the lagging competitor is far inefficient. We found supportive empirical evidence for our model. Competing firms are more likely to cooperate in R&D as the level of unintended knowledge spillovers is lower and the asymmetry in their R&D productivities is larger. Our study sheds new light on firm cooperative behavior by providing theoretical foundation for knowledge partnering among asymmetric competitors.

Can Institutional Investors Cherry-Pick Hot IPOs?

Can Institutional Investors Cherry-Pick Hot IPOs?

Ufuk Gucbilmez University of Edinburgh – Business School

March 20, 2013

Abstract: 
Using a unique set of bookbuilding data, we provide comprehensive tests of Rock’s (1986) theory of IPO underpricing. In particular, we examine whether uninformed and informed investors coexist in the IPO market. We find that alongside uninformed institutional investors who regularly participate in the IPO market, there exist informed ones who can avoid cold issues and cherry-pick the hot ones to appropriate higher average initial returns. Finally, the results tie together competing explanations of positive IPO initial returns based on the winner’s curse and the investor sentiment.

Facilitating Successful Failures; Approximately 80,000 businesses fail each year in the United States

Facilitating Successful Failures

Michelle M. Harner University of Maryland Francis King Carey School of Law

Jamie Marincic Mathematica Policy Research, Inc.

2013
Florida Law Review, Vol. 65, 2013
U of Maryland Legal Studies Research Paper No. 2013-14 

Abstract: 
Approximately 80,000 businesses fail each year in the United States. This article presents an original empirical study of over 400 business restructuring professionals focused on a critical, arguably contributing factor to these failures – the conduct of boards of directors and management. Anecdotal evidence suggests that management of distressed companies often bury their heads in the sand until it is too late to remedy the companies’ problems, a phenomenon commonly called “ostrich syndrome.” The data confirm this behavior, show a prevalent use of loss framing, and suggest trends consistent with prospect theory. The article draws on these data and behavioral economics to examine the genesis and contours of this problem. It then discusses potential changes to applicable law and introduces a new “meet and confer” process for encouraging timely restructuring negotiations. The meet and confer process is designed to promote meaningful changes in management conduct and to facilitate more “successful failures.” Policymakers should adopt regulations fostering that mentality, rather than rewarding fear or ignorance in the face of failure.

Playing Favorites: How Firms Prevent the Revelation of Bad News

Playing Favorites: How Firms Prevent the Revelation of Bad News

Lauren Cohen, Harvard Business School and NBER

Dong Lou, London School of Economics

Christopher Malloy, Harvard Business School and NBER

This Draft: February 24, 2013; First Draft: November 18, 2012

ABSTRACT

We explore a subtle but important mechanism through which firms manipulate their information environments. We show that firms control information flow to the market through their specific organization and choreographing of earnings conference calls. Firms that “cast” their conference calls by disproportionately calling on bullish analysts tend to underperform in the future. A long-short portfolio that exploits this differential firm behavior earns abnormal returns of up to 95 basis points per month. Firms that call on more favorable analysts experience more negative future earnings surprises and more future earnings restatements. Further, firms that cast their calls have higher accruals, barely exceed/meet earnings forecasts, and subsequently issue equity.

The Real Exit: Selling Strategies Subsequent to Private Equity Backed IPOs

The Real Exit: Selling Strategies Subsequent to Private Equity Backed IPOs

Nikolai Visnjic Goethe University Frankfurt

March 4, 2013

Abstract: 
This study examines the exit strategy of private equity investors after they take their portfolio companies public. Recent empirical studies considering private equity exit channel and timing generally fail to expose the investor’s strategy after the IPO. For this purpose I use a comprehensive set of PE backed IPOs from 1996 to 2005 in the United States and subsequently track governance characteristics until investors exit their controlling stakes. I find strong evidence that PE investors strategically choose whether to sell their position en bloc in a trade sale or gradually to dispersed shareholders on the secondary market. Severe governance differences between the two groups of exit strategies at IPO and evolving from IPO to exit suggest that PE investors anticipate and actively plan an eventual trade sale well in advance.

Hole in the Wall: A Study of Short Selling and Private Placements

Hole in the Wall: A Study of Short Selling and Private Placements

Henk Berkman University of Auckland – Faculty of Business & Economics

Michael D. McKenzie University of Sydney – Discipline of Finance; University of Cambridge – Cambridge Endowment for Research in Finance (CERF); Financial Research Network (FIRN)

Patrick Verwijmeren Erasmus University Rotterdam (EUR) – Erasmus School of Economics (ESE)

March 23, 2013

Abstract: 
Companies planning a private placement typically gauge the interest of institutional buyers before the offering is publicly announced. Regulators are concerned with this practice, called wall-crossing, as it might invite insider trading, especially when the potential investors are hedge funds. We examine privately placed common stock and convertible offerings and find widespread evidence of pre-announcement short selling. We show that pre-announcement short sellers are able to predict announcement day returns. The effects are especially strong when hedge funds are involved and when the number of buyers is high.

Making Sense of CEOs’ Facebook Pages and Corporate Wikis: Drivers of Enterprise 2.0 Success in TMT Industries

Making Sense of CEOs’ Facebook Pages and Corporate Wikis: Drivers of Enterprise 2.0 Success in TMT Industries

Jacques R. Bughin Université Libre de Bruxelles (ULB) – European Center for Advanced Research in Economics and Statistics (ECORE) ; McKinsey & Company

March 5, 2013

Abstract: 
This paper investigates whether, and if yes, under what conditions, cloud-based collaboration technologies have improved company performance in the high-tech, media and telecom (TMT) industries. Two results stand out. First, while adoption of collaboration technologies in TMT is ahead of other industries, collaboration technologies diffusion is correlated with improved company performance. Second, the extent of performance impact is strongly firm-specific, but common factors to all firms explain success, such as the intensity of collaboration within employees, and through suppliers and customers; and the extent to which organizational changes have been made to effectively leverage those technologies.

Aristotelian Accounting

Aristotelian Accounting

Gerhard Michael Ambrosi Jean Monnet Chair ad personam

November 1, 2012

Abstract: 
Aristotle’s analysis of economic exchange in the Nicomachen Ethics involves two paradigms which he addresses separately but then stresses that there is no difference between them: barter and monetary exchange. Each one of them can be rendered separately but in a mutually consistent way by using geometrical methods which were well established and widely used at Aristotle’s time, namely by the ‘algebra of areas’. In this framework Aristotle’s ‘monetary equivalence’ in exchange appears as an application of Euclid’s proposition Elements I,43 about the equality of complements. Aristotle insists that the analysis of exchange must account also for the artisans’ respective ‘own production’. In modern parlance this is their (yearly) income. Comparing, say, farmer and shoemaker in these terms leads to the accounting statement: as farmer to shoemaker, so shoes to food, namely in terms of percentage sold out of own production. The explanation of this relation solves one of the major puzzles of Aristotle’s text. But this analysis deals with accounting and not with justice. Indeed, it is Aristotle’s central critique against the Pythagoreans that they wrongly take the formal conditions of exchange as the essence of justice. But justice is a topic which goes beyond the scope of the present paper. The paper shows that Aristotle used a consistent and interesting system of geometrical accounting in exchange. It definitely merits his listing as one of the ancestors of economic analysis.