Browsing by Subject "Corporations--Finance"

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Effects on investor judgments from expanded disclosures of non-financial intangibles information
(2004) Yen, Alex Ching-Chung; Hirst, D. Eric
In response to evidence of an increasing disconnect between financial reporting and firm value, a number of commentators have called upon firms to expand their disclosures of intangibles information, particularly disclosures of non-financial measures. In this study, I use an experiment to examine whether and when expanded disclosures of non-financial intangibles information affect investor judgments of financial performance. I propose that, given the complexity of the relationships between today’s intangibles activities and future financial results, investors may fail to retain and/or use the information contained in nonfinancial intangibles disclosures, and performance on non-financial measures may not be reflected in their judgments of future financial performance. Certain investors, those who have high familiarity with the industry setting, should have well-developed causal models that allow them to use the non-financial measures and relate them to judgments of future financial performance. On the other hand, investors who have low familiarity with the industry setting may not have welldeveloped causal models, so that expanded disclosure of non-financial information may not be sufficient to influence these investors’ judgments. Instead, these investors may need to receive supplemental discussion of how a firm’s non-financial measures are causally linked to future financial performance in order to use the non-financial information. Experimental results for the full sample, combining high familiarity and low familiarity investors, are mixed, and are related to which performance measure is used as the dependent variable. I also examine the results for the subset of investors with relatively low familiarity with the industry setting used in the study. For these investors, disclosure of non-financial measures alone is not sufficient to influence their performance judgments, and non-financial measures are incorporated into performance judgments only when the supplemental causal links discussion is provided. Additional analysis suggests that these results for the low familiarity investors are due to supplemental causal links discussion affecting the use of non-financial information in investors’ performance judgments, and are not due to causal links discussion affecting retention of nonfinancial information. This study provides evidence on the effects on investor judgments from expanded intangibles disclosures and the necessary conditions for achieving such effects.
Essays in financial propagation and corporate inventory investment behavior
(2006) Yang, Xiaolou, 1973-; Cooper, Russell W., 1955-
The three chapters comprising this Ph.D. dissertation focus on how financial propagation affects firms’ inventory investment dynamics. These studies will enrich the current literature on inventory behavior and macroeconomic activities. In the first chapter, I investigate the role of financ ial frictions on corporate inventory investment dynamics. The prevailing production smoothing inventory theory can not explain the empirical findings—why production is more volatile than sales and why inventories and sales are positively correlated? I deve lop a tractable linearized version of equation based on a firm’s optimization problem which describes the joint evolution of inventory investment and financial variables. The empirical results support the significance of financial frictions for firms’ inventory investment behavior. In the second chapter, I incorporate both trade credit and bank loans into the traditional production smoothing inventory model. The main purposes of this study are to first investigate the impact of trade credit for firm’s inventory investment dynamics in imperfect capital markets, and second to test whether the use of trade credit is a substitution or a complement for bank loans. I find that the use of trade credit can significantly mitigates financial stress and helps firms overcome liquidity shortages. This finding illustrates a channel to dampen the impact of contractionary monetary policy and make the consequent reduction of the inventory investment less severe. Moreover, this study provides evidence showing that trade credit and bank loans are not perfect substitutes. These findings have important implications for both monetary policy and corporate financing management. In the last chapter, I present a decision-making process that incorporates a Genetic Algorithm (GA) into a state dependent dynamic portfolio optimization system. A GA solves the model by forward-looking and backward-induction, which incorporates both historical information and future uncertainty when estimating the asset returns. It significantly improves the accuracy of expected return estimation and thus improves the overall portfolio efficiency over the classical mean-variance method.
Essays on the accounting accruals anomaly
(2003-05) Zou, Fei; Titman, Sheridan
This dissertation focuses on two issues related to the accounting accrual anomaly documented by Sloan (1996). In the first essay, I study the industry effect of the accrual anomaly. Contrary to the belief demonstrated in prior literature, I find industry membership only has a weak effect in explaining accruals of individual firms. The effect of industry membership is stronger when analysis is conducted on a group of homogenous industries categorized by 4-digit SIC code. Nevertheless, even for these homogenous industries, industry accruals can only explain less than 1/3 of total variation of accruals of individual firms. Although industry accruals seem to be able to explain a small portion of accruals of individual firms, both portfolio- and regression-based results indicate that information embedded in accounting accruals is primarily contained in the industry-neutral portion of accruals, or firm-specific accruals. In the second essay, I study the relationship between the accounting accrual effect and the momentum effect documented by Jegadeesh and Titman (1993). I provide evidence to suggest that the two effects do not subsume each other contemporaneously. However, accruals do seem to affect the subsequent return behaviors of the momentum portfolios in the post-holding period due to investors’ cognitive errors regarding the persistence level of the accrual component in reported earnings. Using the absolute value of accruals as a proxy for the ex-ante probability of future earnings surprises, I show that the ex-ante probability of future earnings surprises is related to the return reversals of the momentum portfolios. When this probability is sufficiently controlled, return reversals of the momentum portfolios become less significant. Although it becomes less significant, prior return momentum is still significantly related to the reversals of momentum returns. Nevertheless, compared to accruals the effect of prior return momentum as a predictor of stock returns in the post-holding period is much weaker. In addition, this paper also provides evidence that suggests besides reflecting the quality of earnings phenomenon as suggested by Sloan (1996), and acting as a proxy for the growth or glamour effect as advocated by Fairfield, Whisenant and Yohn (2002), accounting accruals also serve as proxies for other unknown effects.
Preferred stocks : a critical study of the preferences given corporate industrial capital securites
(1934) Raisty, Lloyd Bernard; Not available
Three essays in corporate finance: predation and financial structure; patent litigation and deep pockets; why do firms go dark?
(2005) Marosi, Andras; Titman, Sheridan
My doctoral dissertation is composed of three essays in corporate finance. The first essay examines how the financial structure of a firm affects the extent to which it will be subject to predation when there is asymmetric information between firms and investors. Myers and Majluf have shown that a firm may forego a positive net present value investment when financing the project would require it to issue undervalued stock. As I show, in a similar setting where giving up the project benefits competitors, rivals may compete more aggressively in order to lower the prey’s stock price. The second essay investigates whether aggressive patent litigation could in part be driven by the predatory motives of deep pocketed firms. I examine whether the share price reaction to the announcement of patent litigation is related to the relative financial strength of defendant and plaintiff firms, and whether firms that become the target of patent litigation are different from firms that were not sued over the same period. I find that the greater the size of the plaintiff relative to the defendant, the lower the cumulative abnormal returns (CARs) that accrue to defendants sued by their competitors. This work adds to earlier empirical research on patent litigation as well as the literature on the relationship between product market competition and financial structure. The third essay (joint work with Nadia Massoud) seeks to answer two important questions. First, why do firms choose to “go dark”, i.e. deregister with the Securities and Exchange Commission (SEC) and delist from the major exchanges despite having a large number of outside shareholders? Second, what are the consequences of going dark for shareholders? We find that firms with fewer valuable growth opportunities, greater insider ownership, lower institutional ownership, higher leverage and lower market momentum are more likely to go dark. Furthermore, the cost of complying with the Sarbanes-Oxley Act, as reflected in audit fees, has also been a driving force behind the going dark phenomenon. Finally, shareholders suffer significant negative cumulative abnormal returns upon the announcement of the firms’ deregistration.
Two essays in empirical capital structure
(2002) Molina, Carlos A. (Carlos Alberto); Almazan, Andres; Titman, Sheridan
Two essays on international corporate finance
(2002) Wei, Dan; Starks, Laura T.
The increasing globalization in recent years means that issues related to cross- border transactions have greater impact on firm value. In this paper I examine two aspects of them: asymmetric information and foreign exchange risk. In the first essay, I empirically examine the impact of information asymmetry on characteristics of cross-border mergers. The role of asymmetric information regarding the acquirerís quality is motivated in the context of an entry decision model where there exists a fixed entry cost associated with direct entry and asymmetric information in the merger process. I find that acquisitions will more likely be foreign firmsí mode of entry for those industries that are less competitive or have higher entry costs. Further, I show that acquirers (targets) in cross-border deals experience smaller (larger) wealth gains than do acquir- ers (targets) in domestic cross-industry deals. These differences in takeover premiums are mainly driven by entries into those industries with small fixed entry cost or high level of competition. Finally, I find that target and bidder takeover premiums vary systematically across different industries and bidders from different countries according to the degree of information asymmetry involved. The empirical results imply that asymmetric information affects foreign firmsí mode of foreign direct investment and causes the market to react differently to domestic cross-industry and cross-border mergers in the U.S. In the second essay, I investigate another problem that widely affects all firms in- volved in foreign businesses. That is, I try to explain how much a firmís stock price should be affected the currency risk. Using a sample of U.S. manufactur- ing firms, I find that firms with higher expected costs of financial distress, as proxied by lower liquidity, higher level of short-term leverage, smaller size and greater growth opportunity, are more likely to exhibit significant exchange rate exposures. At the industry level, the relation between exchange rate exposure and expected cost of financial distress appears to be even stronger. Finally, using an event study methodology, I provide evidence that firms with higher expected costs of financial distress show larger reactions to large, unexpected exchange rate shocks.
Two essays on market behavior
(2006) Glushkov, Denys Vitalievich; Titman, Sheridan; Wessels, Roberto
My dissertation consists of two essays which investigate how the reaction of market participants to aggregate and firm-specific information affects asset prices and firms’ corporate choices. The first essay studies the implications of investor sentiment for asset prices. It develops a novel stock-by-stock measure of investor sentiment which I call sentiment beta. Using this measure I test several hypotheses. First hypothesis postulates that sentiment affects stocks of some firms more than others due to differences in firm characteristics. Second hypothesis predicts that more sentiment sensitive stocks are more likely to be held by individual investors. Consistent with the first hypothesis, I find that more sentiment-sensitive stocks are smaller, younger, have greater short-sales constraints, idiosyncratic volatility and lower dividend yields. Given size and volatility, high sentiment beta stocks have greater analyst coverage and institutional ownership, higher likelihood of S&P500 membership, higher turnover and lower book-to-market ratios. Stocks that are more exposed to sentiment changes deliver lower future returns, which is inconsistent with the risk factor interpretation of investor sentiment. Institutional analysis reveals that institutions stayed away from sentiment-sensitive stocks in the 1980’s, but held more of these stocks since the early 1990’s. The second essay tests a catering hypothesis which predicts that firm managers concerned about the current stock price will deviate from the optimal policy in setting profitability and revenue growth targets due to the incentives to cater to the time-varying relative investor demand for firms with different composition between revenue growth and profit margins. I develop a measure which I call a revenue growth premium and document three results consistent with catering interpretation: 1) time periods when the premium is high tend to be followed by “higher-than-expected” sales and investment growth, advertising, acquisitions and R&D; 2) catering to the premium is more pronounced among firms where managers care more about the short-term stock price; 3) consistent with “bounded rationality” version of catering story, trading strategy based on longing stocks of firms with high margin surprises and shorting firms with low margin surprises when the premium is high yields 40/bp per month after adjusting for risk and post-earnings announcement drift.
Two essays on the corporate governance for real estate investment trusts (REITs)
(2006) Sun, Libo; Titman, Sheridan; Hartzell, Jay
Essay one investigates the relation between firms’ investment choices and various governance mechanisms, using a sample of Real Estate Investment Trusts (REITs). We find evidence that the responsiveness of REITs’ investment expenditures to their opportunities depends on their corporate governance structures. Within the set of governance mechanisms that we examine, we find particularly strong links between investment behavior and ownership. Specifically, we find that the investment choices of REITs are more closely tied to Tobin’s q if they have greater institutional ownership, or lower director and officer stock ownership. These results are consistent with institutional owners monitoring the firm’s investment policies, and with high insider ownership allowing managers to follow their own investment agendas. Essay two reexamines the diversification discount using a sample of REITs from 1995 to 2003. We investigate the wealth effect of diversification across property type and regional locations. We find that regional diversification has a significant negative impact on firm value. Examining the determinants of corporate diversification, we discover that past growth opportunities are negatively related to the probability of diversifying choices. Moreover, this effect is mitigated in firms with high institutional ownership. This is consistent with the agency cost hypothesis that managers engage in buying-growth diversification and institutions could reduce the probability of such behavior. The influence of institutional investors has a significant value impact as well: firms with high institutional ownership are associated with lower regional diversification discount. Within two institutional sub-groups -- potentially active and passive monitoring institutions, it is potentially active ones that display such value impact, not the potentially passive ones. We conduct several tests to distinguish two hypotheses: that institutions play a monitoring role, or they selectively hold shares of certain firms. The results from simultaneous equation models support the monitoring story. Last, we also investigate the effect of other governance variables in firms’ diversifying choices and the diversification discount. We find that direct effect of other governance variables on diversifying decision is weak. Yet, as a group they significantly influence the regional diversification discount.
The use of trade credit under extreme conditions: financial distress and financial crisis
(2004) Preve, Lorenzo A.; Titman, Sheridan
I investigate how firms use trade credit under extreme conditions when alternative sources of finance are restricted or even non-existent. My objective in this dissertation is to test the hypothesis that the use of trade credit in extreme financial situations is significantly different from its use in “more normal” situations. The cost associated with a different use of trade credit during distress is likely to increase the costs of financial distress. These costs in turn, are an important determinant of the firm's capital structure, and understanding the use and cost of trade credit under extreme situations will help to better understand the tradeoffs that firms face when making capital structure choices. I consider two different types of extreme conditions; financial distress and financial crises. The manner in which firms operate under the conditions described above provide a laboratory setting for investigating the costs they bear when trying to avoid failure by making incremental recourse to trade credit.