We test whether earnings management spreads between firms via shared directors. We find that a firm is more likely to manage earnings when it shares a common director with a firm that is currently ...managing earnings and is less likely to manage earnings when it shares a common director with a non-manipulator. Earnings management contagion is stronger when the shared director has a leadership or accounting-relevant position (e.g., audit committee chair or member) on its board or the contagious firm's board. Irregularity contagion is stronger than error contagion. The board contagion effect is robust to controlling for endogenous matching of firms with directors, fixed firm/director effects, incidence of M&A, industry, and contagion via a common auditor or geographical proximity. These findings support the view that board monitoring plays a key role in the contagion and quality of firms' financial reports.
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BFBNIB, IZUM, KILJ, NMLJ, NUK, PILJ, PNG, SAZU, UL, UM, UPUK
We investigate whether board-interlocked firms via an audit committee (AC) board member exhibit correlated non-audit service (NAS) purchases, and whether financial reporting quality and future firm ...performance vary with the amount of correlated NAS purchases from the AC interlock. We find that AC interlocked firms have positively correlated total NAS and three NAS subtypes—Tax, Assurance, and Other—in the overall sample period from 2000 to 2016, and in each of the subperiods pre- and post-SOX (Sarbanes–Oxley Act). Firms with a larger NAS component that is explained by the AC interlock tend to exhibit lower financial reporting quality. We also find evidence that firms with higher AC interlocked NAS purchases are associated with lower future performance, although this association exists only in the pre-SOX period. Overall, the evidence suggests that greater NAS purchases among AC interlocked firms can have a detrimental effect on financial reporting quality and auditor independence. While these detrimental effects are concentrated in the pre-SOX period when there were less restrictions on NAS purchases, we find some evidence that the association with lower financial reporting quality persists in the post-SOX period.
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IZUM, KILJ, NUK, OILJ, PILJ, SAZU, UKNU, UL, UM, UPUK
Recent studies propose that limited investor attention causes market underreactions. This paper directly tests this explanation by measuring the information load faced by investors. The "investor ...distraction hypothesis" holds that extraneous news inhibits market reactions to relevant news. We find that the immediate price and volume reaction to a firm's earnings surprise is much weaker, and post-announcement drift much stronger, when a greater number of same-day earnings announcements are made by other firms. We evaluate the economic importance of distraction effects through a trading strategy, which yields substantial alphas. Industry-unrelated news and large earnings surprises have a stronger distracting effect.
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BFBNIB, FZAB, GIS, IJS, INZLJ, KILJ, NLZOH, NMLJ, NUK, OILJ, PNG, SAZU, SBCE, SBMB, UL, UM, UPUK, ZRSKP
This paper uses pre-offer market valuations to evaluate the misvaluation and Q theories of takeovers. Bidder and target valuations (price-to-book, or price-to-residual-income-model-value) are related ...to means of payment, mode of acquisition, premia, target hostility, offer success, and bidder and target announcement-period returns. The evidence is broadly consistent with both hypotheses. The evidence for the Q hypothesis is stronger in the pre-1990 period than in the 1990-2000 period, whereas the evidence for the misvaluation hypothesis is stronger in the 1990-2000 period than in the pre-1990 period.
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BFBNIB, FZAB, GIS, IJS, INZLJ, KILJ, NLZOH, NMLJ, NUK, OILJ, PNG, SAZU, SBCE, SBMB, UL, UM, UPUK, ZRSKP
Misvaluation and Corporate Inventiveness Dong, Ming; Hirshleifer, David; Teoh, Siew Hong
Journal of financial and quantitative analysis,
12/2021, Volume:
56, Issue:
8
Journal Article
Peer reviewed
Open access
We test how market overvaluation affects corporate innovation. Estimated stock overvaluation is strongly associated with measures of innovative inventiveness (novelty, originality, and scope), as ...well as research and development (R&D) and innovative output (patent and citation counts). Misvaluation affects R&D more via a nonequity channel than via equity issuance. The sensitivity of innovative inventiveness to misvaluation increases with share turnover and overvaluation. The frequency of exceptionally high innovative inputs/outputs increases with overvaluation. This evidence suggests that market overvaluation may generate social value by increasing innovative output and encouraging firms to engage in “moon shots.”
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CEKLJ, IZUM, KILJ, NUK, PILJ, SAZU, UL, UM, UPUK
ABSTRACT
Using machine learning–based algorithms, we measure key impressions about sell‐side analysts using their LinkedIn photos. We find that impressions of analysts’ trustworthiness (TRUST) and ...dominance (DOM) are positively associated with forecast accuracy, especially after recent in‐person meetings between analysts and firm managers. High TRUST also enhances stock return sensitivity to forecast revisions, especially for stocks with high institutional ownership. In contrast, the impression of analysts’ attractiveness (ATTRACT) is only positively associated with accuracy for new analysts or when a firm has a new CEO or CFO. Furthermore, while high DOM helps male analysts’ chances of attaining All‐Star status, it reduces female analysts’ accuracy and the likelihood of winning the All‐Star award. In addition, the relation between TRUST and accuracy is modulated by the disclosure environment and is attenuated by Regulation Fair Disclosure. Our results suggest that face impressions influence analysts’ access to information and the perceived credibility of their reports.
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BFBNIB, FZAB, GIS, IJS, KILJ, NLZOH, NUK, OILJ, SAZU, SBCE, SBMB, UL, UM, UPUK
We find a positive association between short selling and accruals during 1988—2009, and that asymmetry between the up- and downsides of the accrual anomaly is stronger when constraints on short ...arbitrage are more severe (low availability of loanable shares as proxied by institutional holdings). Short arbitrage occurs primarily among firms in the top accrual decile. Asymmetry is present only on NASDAQ. Thus, there is short arbitrage of the accrual anomaly, but short-sale constraints limit its effectiveness.
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BFBNIB, INZLJ, NMLJ, NUK, PNG, SAZU, UL, UM, UPUK, ZRSKP
This paper models firms’ choices between alternative means of presenting information, and the effects of different presentations on market prices when investors have limited attention and processing ...power. In a market equilibrium with partially attentive investors, we examine the effects of alternative: levels of discretion in
pro forma earnings disclosure, methods of accounting for employee option compensation, and degrees of aggregation in reporting. We derive empirical implications relating
pro forma adjustments, option compensation, the growth, persistence, and informativeness of earnings, short-run managerial incentives, and other firm characteristics to stock price reactions, misvaluation, long-run abnormal returns, and corporate decisions.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPCLJ, UPUK
We define a delayed disclosure ratio (DD) as the fraction of 10-Q financial statement items that are withheld at the earlier quarterly earnings announcement. We find that higher DD firms have a ...greater delay in investor and analyst response to earnings surprises: (i) the fraction of total market reaction to quarterly earnings news realized around the earnings announcement (after the 10-Q filing) is smaller (greater), and (ii) analysts are more likely to defer issuing forecasts from immediately after the earnings announcement to after the 10-Q filing. Consistent with our limited attention model predictions, the response catch-up associated with DD is incomplete, even after the delayed items are fully disclosed at the 10-Q filing date, and persists until the next earnings announcement date. The return reaction to earnings news over the entire quarter does not vary with DD, so differences in earnings informativeness do not explain the DD effect. Our findings suggest that, for limited attention effects to be mitigated, the
timing
of disclosures must be coincident with the focal periods—at earnings announcement dates—when investors and analysts are paying the most attention.
We review theory and evidence relating to herd behaviour, payoff and reputational interactions, social learning, and informational cascades in capital markets. We offer a simple taxonomy of effects, ...and evaluate how alternative theories may help explain evidence on the behaviour of investors, firms, and analysts. We consider both incentives for parties to engage in herding or cascading, and the incentives for parties to protect against or take advantage of herding or cascading by others.
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BFBNIB, FZAB, GIS, IJS, IZUM, KILJ, NLZOH, NUK, OILJ, PILJ, SAZU, SBCE, SBMB, UL, UM, UPUK
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