Advances in Quantitative Analysis of Finance and Accounting
Center for PBBEFR & Ainosco Press,正常發行
選擇卷期
- 期刊
In designing an executive bonus compensation contract, a compensation committee, usually with help from a professional executive compensation consulting firm, uses measures of short-term accounting performance as proxies for executive cash bonuses (McLaughlin & Foulks, 1991). Two measures commonly used are cash flows (CF) and accrual accounting income (INC). We show, analytically, that an implication of the Feltham, Ohlson framework is that the relationship between CF and INC differs depending on whether cash investment is growing, constant or declining over some time period. Through simulation, we provide evidence of this differential relationship. We also provide evidence through simulation that the relationship between CF and INC differs depending on whether the variance of the shocks is low, medium or high. We argue that executive cash bonuses can be excessive depending on these properties. Finally, we find evidence suggesting that economic income (E) may be a poor measure of earnings for which to base executive cash bonuses.
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This paper examines whether and to what extent a firm's performance pricing loans provide an incentive for managers to manipulate earnings more aggressively. We find that firms with a higher slope of the performance pricing schedule have significantly larger discretionary accruals, which is consistent with the prediction of the positive accounting theory (Watts & Zimmerman, 1986, 1990). However, the positive relationship between the slope of performance pricing schedule and discretionary accruals is significantly attenuated in firms borrowing from high reputation banks or banks with a prior lending relationship. These results suggest that bank reputation and prior lending relation serve as an effective monitoring mechanism, which in turn mitigates managers' incentive and ability to manipulate earnings.
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The paper uses a sample of seasoned equity offerings (SEO) to investigate the effects of earnings management and compensation committee structures on executives' compensation incentives. We control for the potential endogeneity of the choice of executives' compensation incentives using Heckman's two-stage approach. We show that firms with strong compensation committee structures upwardly manage earnings more in the year before SEOs and do not engage in earnings manipulation in the years of SEOs. Executives do not exercise stock options to gain more compensation during the SEOs. However, strong compensation committee structures reverse the usually negative relationship between SEOs and percentage changes in executive holdings of stock options. We also show that firms with seasoned equity offerings engage in earnings management prior to SEOs in order to change executives' compensation incentives, but strong compensation committee structures reduce the positive relationship between earnings management and seasoned equity offerings and mitigate executive opportunistic trading activities during the SEOs. Our evidence indicates that a strong compensation committee is an effective internal control mechanism that supports strong corporate governance in a firm.
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We examine the effect of R&D REM, a form of real earnings management (REM) by cutting research and development (R&D) expenditures abnormally to meet earnings targets, on firms' subsequent innovation productivity measured by the scale and the novelty of patents. In the within-firm analysis, we find that R&D REM adversely affects the number of innovations, technological importance, and novelty of innovation in the subsequent periods. In the cross-sectional analysis, after controlling for other related factors, we find that, relative to the matched sample firms that likely cut R&D expenditures for reasons other than manipulating earnings, R&D REM firms produce fewer innovations with significantly less novelty.
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Prior literature suggests that classified boards may have the opposite impacts on financial restatements: some emphasize the exacerbating impact, while others advocate the mitigating impact. This study extends prior research by investigating whether classified boards exacerbate or mitigate restatements. Specifically, this study empirically examines the relation between the presence of classified boards and the incidence of financial restatement during the period 1998 to 2012 of publicly-traded and widely-held firms in United States. We find a strong negative association between classified boards and financial restatements. We also find evidence that classified boards are negatively related to financial misstatements with high-concern reasons (fraud, reserve estimation failures, and revenue recognition issues). Our results are robust to a number of sensitivity tests. Overall, this study casts doubt on the view of the exacerbating impact, while it supports the argument on the mitigating impact as shown by the reduction in the incidence of restatements in firms with classified boards.
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This paper introduces an alternative methodology for event studies as in Jeng (2015) and applies it to the case of mergers and acquisitions. The methodology develops alternative test statistics that are based on the occupation times of cumulative abnormal returns when exceeding some arbitrary thresholds. The statistics for the length of responses using cumulative abnormal returns will converge to the occupation time of a reflected Brownian motion under the null when the corporate events are not influential. In addition, by applying the Banach-valued Central Limit Theorem on these occupation times across all firms, and under the null hypothesis that the corporate events are not essential corporate events, the test statistics based on cross-sectional average of these occupation times will converge to a normally-distributed random variable with mean and variance provided by Takacs (1998). Application of the test statistics on the stock returns of acquiring firms shows, unlike conventional methods, that mergers and acquisitions are essential corporate events such that the market adjusts to the announcements faster than the occupation time of a reflected Brownian motion. This shows that the announcement of a merger and acquisition actually resolves the uncertainty the capital markets have regarding the corporation's future.
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Prior research shows that easily discernable patterns in earnings - strings of earnings increases (decreases) and breaks in such strings - affect investors' long-term valuation of stocks. We examine short-term market reaction before, during, and after earnings announcements to formally test how investors process news of continuation or the end of strings relatively to non-patterned firms. Our results confirm differential reaction measured with cumulative abnormal returns (CARs) between patterned and non-patterned firms. However, we observe the strongest market response to announcements of breaks, than to strings or non-patterned firms. Post-announcement drift (PEAD) and pre-announcement ＂leakage＂ is mostly attributable to break firms as well. Our results hold after controlling for information released in earnings announcements and characteristics of firms, patterns and information environment. Breaks in earnings strings might be one of the driving forces behind previously documented market anomalies surrounding earnings announcements, as investors need to revaluate the stocks when earnings patterns end.
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This paper uses variance decomposition of stock returns to study the movements of unexpected stock returns by using Australian data. ＂News about future stock returns＂ and ＂news about future cash flows＂ are the two components affecting the unexpected stock returns. The relative importance of the two components depends not only on the forecastibility of the returns but also on the time series' properties of the forecastable components of returns. It is found that expected stock returns do not change through time in a persistent fashion. ＂News about future cash flows＂ account for majority of the volatility in unexpected stock returns. This implies that fundamental values drive the Australian stock market, which is contrary to U.S. findings but similar to prior evidence on Japanese stock market. By using implied variance ratios, it is suspected that risk factors change over time.
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This paper explores the effects of price limits on the Chinese stock market during the global market crisis in 2008. In particular, we focus on investigating the characteristics of stocks that hit price limits more frequently under market turmoil. It is found that the price limit system increases volatility of the market significantly during downward price movements. Moreover, price limit delays the efficient price discovery for upward and downward price movements. Finally, actively-traded stocks with a higher positive correlation with the entire market in the property industry hit price limits more frequently.
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Researchers have shown that stock options contain more information than their underlying stocks. This information efficiency may reflect on firm value. For example, Roll, Schwartz, and Subrahmanyam (2009) argue that there is a positive relation between option trading activities and firm values. However, there might be some space for further analysis: call and put options may present different implications separately on firm values. Although Johnson and So (2012) indicate that call-put volume differences and future return skewness have a positive relation, they do not connect these results to firm values. We use call options/put options trading ratio (C/P) to measure whether firms with more call (put) options than put (call) options trading have higher (decreasing) firm values. Empirical results indicate that C/P ratio is positively and significantly correlated with Tobin's Q. Our results are valid after considering several robustness checks.