Differences in Prior Beliefs, Differential Interpretation, and the Consensus Effect of Quarterly Earnings Signals and Trading Volume
Atiase, Rowland K.; Dontoh, Alex K.; Gift, Michael J. Journal of Accounting, Auditing & Finance. Oct2016, Vol. 31 Issue 4, p483-514.
Models of financial economists including Karpoff, Varian, Holthausen and Verrecchia, and Dontoh and Ronen have demonstrated that there are three distinct fundamental determinants of trading volume reaction to new information releases: first, the extent of differences in investors’ prior beliefs; second, differences in their interpretations of the information; and third, the level of consensus that the information release induces among them. Although these effects are well understood theoretically, empirical studies that investigate trading volume reaction to the arrival of new information have tended to combine these three fundamental determinants, thereby masking their distinct incremental effects on trade. In this article, we examine all three potential sources of trade in response to information: heterogeneous prior beliefs, differential interpretation, and the consensus effect of the news. We find that all three of these effects have a distinct incremental impact on trading volume, thereby corroborating the theoretical models of financial economists.
A New Measure of Disclosure Quality: The Level of Disaggregation of Accounting Data in Annual Reports
Shuping, Chen; Bin Miao; Terry Shevlin. Journal of Accounting Research. Dec2015, Vol. 53 Issue 5, p1017-1054
We construct a new, parsimonious, measure of disclosure quality-- disaggregation quality (DQ)--and offer validation tests. DQ captures the level of disaggregation of accounting data through a count of nonmissing Compustat line items, and reflects the extent of details in firms' annual reports. Conceptually, DQ differs from existing disclosure measures in that it captures the "fineness" of data and is based on a comprehensive set of accounting line items in annual reports. Unlike existing measures, which are usually applicable for a subset of firms or are based on a subset of information items, DQ can be generated for the universe of Compustat industrial firms. We conduct three sets of validation tests by examining DQ's association with variables predicted by prior literature to be associated with information quality. DQ is negatively (positively) associated with analyst forecast dispersion (accuracy) and negatively associated with bid-ask spreads and cost of equity. These associations continue to hold after we control for firm fundamentals. Taken together, results from this battery of validation tests are consistent with our measure capturing disclosure quality.
Spring-Loading Future Performance When No One is Looking? Earnings and Cash Flow Management Around Acquisitions
Chen, Shuping; Thomas, Jake; Zhang, Frank. Review of Accounting Studies. Dec2016, Vol. 21 Issue 4, p1081-1115
We find evidence that performance-reflected in earnings and cash flows-is transferred from targets to acquirers around acquisitions. Using a sample of 2128 completed deals from 1985 to 2010, our results suggest that targets depress performance when investor attention declines once the deal parameters are set, and much of that performance understatement is transferred to boost post-acquisition acquirer performance. Evidence of variation across subsamples provides additional confirmation: transfers are more visible for large deals (with transfers large enough to be detected) and muted for pooling transactions (with lower incentives to transfer). We contribute to the earnings management literature by showing that earnings and cash flows are transferred not just within firms but also across firms, and to the mergers and acquisitions literature by documenting that performance is managed not only before but also after deals are announced.
Large Market Declines and Securities Litigation: Implications for Disclosing Adverse Earnings News
Donelson, Dain C.; Hopkins, Justin J. Management Science. Nov2016, Vol. 62 Issue 11, p3183-3198.
This study finds that large marketwide declines in stock prices are associated with higher litigation incidence and settlements even though marketwide events are legally irrelevant. The probability of litigation nearly doubles (from 0.29% to 0.55%) and the amount of settlements also doubles (from $5.0 million to $10.1 million) when earnings disclosures occur during a large market decline, even after controlling for the firm's market-adjusted return. Furthermore, judges with (without) specialized experience in securities litigation are more (less) likely to dismiss cases triggered by disclosures during large market declines. This pattern is consistent with experienced judges recognizing and dismissing weaker cases. Finally, managers are less likely to disclose adverse news at the end of trading days with large market declines. Although we cannot definitively identify the motive behind this pattern, it is consistent with managers recognizing increased litigation risk during large market declines. This paper was accepted by Mary Barth, accounting.
A 10-K for the Taxpayer
Granof, Michael; Bell, Scott. Journal of Accountancy. Oct2016, Vol. 222 Issue 4, p1-8.
The article provides an overview of the "2015 Financial Report of the United States Government" to help accountants understand the financial position and condition of the federal government. Topics discussed include the financial report prepared by the Treasury Department in cooperation with the Office of Management and Budget, basic financial statements and fiscal sustainability and social insurance.
Communicated Values as Informal Controls: Promoting Quality While Undermining Productivity?
Kachelmeier, Steven J.; Thornock, Todd A.; Williamson, Michael G. Contemporary Accounting Research. Winter2016, Vol. 33 Issue 4, p1411-1434.
We find that the effectiveness of piece-rate compensation relative to fixed pay in a laboratory letter-search task hinges on the presence or absence of a nonbinding statement to participants that the experimenter values correct responses. In the absence of the value statement, participants with piece-rate rewards for correct responses generate more correct and incorrect responses than do their counterparts with fixed pay, correcting errors as they go along to maximize compensation. Essentially, piece-rate compensation acts as an output control, incentivizing participants to maximize correct responses through a 'produce-and-improve' strategy. The value statement suppresses this strategy because participants appear to perceive it as an input constraint, prompting greater initial care at the expense of lower overall productivity. As a result, the value statement eliminates the gains in correct responses that piece-rate incentivized participants otherwise realize. Thus, in settings in which individuals can gain efficiency by working expeditiously and improving quality when necessary, our results suggest the possibility that organizations could be better off just letting incentive schemes operate, rather than emphasizing quality in ways that could overly constrain productivity.
How Do Experienced Users Evaluate Hybrid Financial Instruments?
Clor-Proell, Shana; Koonce, Lisa; White, Brian. Journal of Accounting Research. Dec2016, Vol. 54 Issue 5, p1267-1296.
Hybrid financial instruments contain features of both liabilities and equity. Standard setters continue to struggle with 'getting the classification right' for these complex instruments. In this paper, we experimentally test whether the features of hybrid instruments affect the credit-related judgments of experienced finance professionals, even when the hybrid instruments are already classified as liabilities or equity. Our results suggest that getting the classification right is not of primary importance for these experienced users, as they largely rely on the underlying features of the instrument to make their judgments. A second experiment shows that experienced users' reliance on features generalizes to several features that often characterize hybrid instruments. However, we also find that experienced users vary in their beliefs about which individual features are most important in distinguishing between liabilities and equity. Together, our results highlight the importance of effective disclosure of hybrid instruments' features.
Renewable Natural Resource Shocks and Conflict Intensity
Gawande, Kishore; Kapur, Devesh; Satyanath, Shanker. Journal of Conflict Resolution. Jan2017, Vol. 61 Issue 1, p140-172.
An interesting stream of the civil conflict literature has identified an important subset of civil conflicts with disastrous consequences, that is, those that emerge as a consequence of shocks to renewable natural resources like land and water. This literature is, however, reliant on qualitative case studies when claiming a causal relationship leading from renewable resource shocks to conflict. In this article, we seek to advance the literature by drawing out the implications of a well-known formal model of the renewable resources–conflict relationship and then conducting rigorous statistical tests of its implications in the case of a serious ongoing civil conflict in India. We find that a one standard deviation decrease in our measure of renewable resources increases killings by nearly 60 percent over the long run.
Bridging Qualitative and Quantitative Methods in Organizational Research: Applications of Synthetic Control Methodology in the US Automobile Industry
Fremeth, AR (Fremeth, Adam R.); Holburn, GLF (Holburn, Guy L. F.); Richter, BK (Richter, Brian K.) Organization Science 2016, 27(2):462-482.
We assess the utility of synthetic control, a recently developed empirical methodology, for applications in organizational research. Synthetic control acts as a bridge between qualitative and quantitative research methods by enabling researchers to estimate treatment effects in contexts with small samples or few occurrences of a phenomenon or treatment event. The method constructs a counterfactual of a focal firm, or other observational unit, based on an objectively weighted combination of a small number of comparable but untreated firms. By comparing the firm's actual performance to its counterfactual replica without treatment, synthetic control estimates, under certain assumptions, the magnitude and direction of treatment effects. We illustrate and critique the method in the context of the U.S. auto industry by estimating ( a) the effect of government intervention in Chrysler's management from 2009 to 2011 on its sales volumes and (b) the impact of Toyota's 2010 "acceleration crisis" on Camry sales.
Motivations for Corporate Political Activity
Adam Fremeth, Brian Kelleher Richter, Brandon Schaufele. [Chapter in] Strategy Beyond Markets (Advances in Strategic Management, Vol. 34) (ed. John M. De Figueiredo, Michael Lenox, Felix Oberholzer-Gee, Richard G. Vanden Bergh). 2016. Emerald Group Publishing Limited, 161-191.
Campaign contributions are typically seen as a strategic investment for firms; recent empirical evidence, however, has shown few connections between firms’ contributions and regulatory or performance improvements, prompting researchers to explore agency-based explanations for corporate politics. By studying intrafirm campaign contributions of CEOs and political action committees (PACs), we investigate two hypotheses related to public politics and demonstrate that strategic and agency-based motivations may hold simultaneously. Exploiting transaction-level data, with over 6.8 million observations, we show that (i) when PACs give to specific candidates, executives give to the same candidates, especially those who are strategically important to the firm; and (ii) when executives give to candidates who are not strategically important, PACs give to the same candidates potentially due to agency problems within the firm.
Why President-Elect Trump Could Disappoint the Coal Miners Counting on Him
Spence, David. Fortune.com. 11/18/2016, p1-1.
[Opening of 1-page paper] Most prognosticators thinking about energy policy in a Trump Administration foresee a reversal of the Obama Administration's efforts to combat climate change and a series of regulatory and legislative adjustments designed to favor fossil fuels and disfavor renewables in energy markets. These predictions make sense given the strong support for Trump in coal-producing states and the fact that the Trump EPA transition team is led by a climate science denier. Trump has said that climate change is a hoax, "created by and for the Chinese in order to make U.S. manufacturing non-competitive." It is also true that a Trump Administration will be able to repeal existing rules regulating pollution from fossil fuel combustion -- including the GHG emissions rules under the Clean Power Plan - without the need for congressional approval.
That is a shame because the benefits of those rules exceed their costs by a substantial margin -- not just nationally but within each individual electricity market region -- as demonstrated in my latest paper with UT Austin Law Professor David Adelman.