This study provides evidence regarding the importance that boards of directors place on effective communication with the investor community by examining whether CEO and CFO compensation are related ...to the quality of the firm's financial disclosures. Using an index derived from analyst forecast characteristics and management forecast accuracy to measure disclosure quality, we find changes in the annual bonus for both the CEO and CFO to be positively associated with changes in disclosure quality. We also find that the relation is stronger for high-growth firms, firms that have stronger governance structures, and for executives with lower equity incentives. Overall, our findings provide insight into the importance that boards place on effective communication with investors as a responsibility of the CEO and CFO and, therefore, provide them with contractual incentives to address the moral hazard problem associated with voluntary disclosures.
Economic theory suggests that the industry-wide component of firm performance is more persistent than the firm-specific component. This paper provides evidence on this assertion and tests whether ...investors misprice these components of earnings. Consistent with predictions, we find greater persistence in the industry-wide component of earnings that is not fully recognized in stock prices. We show that these effects are partially driven by the market׳s inability to recognize the differential persistence of industry-wide earnings in homogenous industries or in the presence of a large business shock. Finally, we show that industry-wide cash flows is the most persistent component of earnings while firm-specific accruals is the least persistent, suggesting that economic fundamentals and accounting constructs are jointly informative about firms׳ future earnings. The market predictably misprices these components, however, significantly underweighting the persistence of industry-wide cash flows and overweighting the persistence of firm-specific accruals.
We test whether the post-forecast revision drift is mainly attributable to investors' underreaction to industry-wide earnings news conveyed by analysts' forecast revisions. We find a large drift ...associated with industry-wide earnings news but no drift associated with firm-specific earnings news. Consistent with the functional fixation hypothesis, we provide evidence that the post-forecast revision drift is driven by investors' underreaction to the higher persistence of industry-wide earnings. Although prior research has focused on differential persistence of earnings components stemming from managerial reporting discretion, we provide evidence suggesting that investors do not fully understand the differential earnings persistence attributable to industry fundamentals.
Positive emotions are linked to numerous benefits, but not everyone appreciates the same kinds of positive emotional experiences. We examine how distinct positive emotions are perceived and whether ...individuals’ perceptions are linked to how societies evaluate those emotions. Participants from Hong Kong and Netherlands rated 23 positive emotions based on their individual perceptions (positivity, arousal, and socially engaging) and societal evaluations (appropriate, valued, and approved of). We found that (1) there were cultural differences in judgments about all six aspects of positive emotions; (2) positivity, arousal, and social engagement predicted emotions being positively regarded at the societal level in both cultures; and (3) that positivity mattered more for the Dutch participants, although arousal and social engagement mattered more in Hong Kong for societal evaluations. These findings provide a granular map of the perception and evaluation of distinct positive emotions in two cultures and highlight the role of cultures in the understanding how positive emotions are perceived and evaluated.
We examine how corporate culture influences firm behavior. Prior research suggests a link between individual religiosity and risk aversion. We find that this relationship also influences ...organizational behavior. Firms located in counties with higher levels of religiosity display lower degrees of risk exposure, as measured by variances in equity returns or returns on assets. They exhibit a lower investment rate and less growth, but generate a more positive market reaction, when they announce new investments. Finally, chief executive officers are more likely to join a firm with a similar religious environment as in their previous firm when they switch employers.
We investigate the empirical relation between a firm's accounting conservatism and management's issuance of quantitative earnings forecasts. Using three measures of conservatism from prior ...literature, along with two aggregate measures, we find a negative association between conservatism and the frequency, specificity, and timeliness of management forecasts. The results are robust to estimating the regression in changes, using firm fixed-effects, and using a two-stage instrumental variables approach. Overall, these results suggest that accounting conservatism acts as a substitute for management forecasts by decreasing information asymmetry in the market and reducing potential litigation through the timely reporting of bad news.
ABSTRACT
Drawing on the political theory of judicial decision making, our paper proposes a new and parsimonious ex ante litigation risk measure: federal judge ideology. We find that judge ideology ...complements existing measures of litigation risk based on industry membership and firm characteristics. Firms in liberal circuits (the third quartile in ideology) are 33.5% more likely to be sued in securities class action lawsuits than those in conservative circuits (the first quartile in ideology). This result is stronger after the U.S. Supreme Court's ruling in the Tellabs case. We next show that the effect of judge ideology on litigation risk is greater for firms with more sophisticated shareholders and with higher expected litigation costs. Furthermore, judicial appointments affect litigation risk and the value of firms in the circuit, highlighting the economic consequences of political appointments of judges. Finally, using our new measure, we document that litigation risk deters managers from providing long‐term earnings guidance, a result that existing measures of litigation risk cannot show.
We test two potential hypotheses regarding the effects of major customer concentration on firm profitability. Under the collaboration hypothesis, customer power facilitates collaboration, and both ...the supplier firm and its major customers obtain benefits. Under the competition hypothesis, customer power results in rent extraction, and the major customers benefit at the expense of the supplier firm. We document that major customer concentration is negatively associated with the supplier firm’s profitability but positively associated with the major customers’ profitability. We demonstrate that these effects weaken as the supplier firm’s own power grows over its relationship with major customers, supporting the competition hypothesis. We carefully reconcile our results with prior studies’ findings that focus only on the supplier firm’s profitability and identify their research design and interpretation problems. We obtain similar inferences in a setting of major customers’ horizontal mergers and when we use an alternative measure of major customer power.
Abstract This study examines the properties of innovation disclosures contained in new product announcements, a form of voluntary, nonfinancial disclosure. We analyze these properties using a novel, ...text-based measure of the extent of product innovation disclosed in new product announcements. We find that stock prices react more positively to announcements with more extensive innovation disclosure. In our main analyses, we first find that a higher level of innovation disclosure predicts a greater increase in future sales. We further find that this predictive ability falls when managers have stronger incentives to maximize their wealth and when the corporate governance structure and customers’ bargaining power weaken. Our research enhances the understanding of the properties of managerial voluntary, nonfinancial disclosures and contributes a text-based measure of innovation that captures managerial assessment of the extent of product innovation. This new measure is more generalizable and incrementally informative for firm value and future performance than conventional innovation measures that depend on the existence of patents or research and development expenses.
We argue that a firm's suppliers and customers prefer it to account more conservatively due to information asymmetry and these stakeholders' asymmetric payoffs with respect to the firm's performance. ...We predict that a firm meets this demand for accounting conservatism when suppliers or customers have bargaining advantages over it that enable them to dictate terms of trade or whether trade occurs at all. We show that when a firm's suppliers or customers have greater bargaining power, the firm recognizes losses more quickly. Our findings provide insights into how a firm's powerful suppliers and customers are associated with its accounting practices and also support the contracting explanation for accounting conservatism.
► We argue that a firm's suppliers and customers prefer it to account more conservatively. ► We predict that a firm meets this demand for accounting conservatism when suppliers or customers have bargaining advantages. ► We show that when a firm's suppliers or customers have greater bargaining power, the firm recognizes losses more quickly. ► Our findings support the contracting explanation for accounting conservatism.
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