1,720,968 research outputs found
Real Options Models of the Firm, Capacity Overhang, and the Cross-Section of Stock Returns
Full text linkWe use a stochastic frontier model to obtain a stock-level estimate of the difference between a firm's installed production capacity and its optimal capacity. We show that this “capacity overhang” estimate relates significantly negatively to the cross-section of stock returns, even when controlling for popular pricing factors. The negative relation persists among small and large stocks, stocks with more or less reversible investments, and in good and bad economic states. Capacity overhang helps explain momentum and profitability anomalies, but not value and investment anomalies. Our evidence supports real options models of the firm featuring valuable divestment options
Common factors in default risk across countries and industries
No full textGlobal economic crises appear to strongly affect corporate bankruptcy rates. However, several prior studies indicate that changes in default risk are strongly negatively related to equity returns, which in turn depend predominately on country-specific factors. This suggests that country effects – and not global effects – should dominate changes in default risk. To analyse this issue, we decompose changes in default risk, changes in the fundamental determinants of default risk and equity returns into global, country and industry effects. We proxy for default risk through Merton (1974) default risk estimates and CDS rates. Our evidence reveals that changes in default risk always depend most strongly on global and industry effects. However, the magnitude of country effects in equity returns correlates positively with economic stability, rendering it dependent on the sample period. Our results have implications for the management of credit-sensitive securities
Mandatory IFRS adoption and institutional investment decisions
No full textWe examine whether the mandatory introduction of International Financial Reporting Standards leads to an increase in institutional investor demand for equities. Using a large ownership database covering all types of institutional investors from around the world, we find that institutional holdings increase for mandatory IFRS adopters. Changes in holdings are concentrated around first-time annual reporting events. Second, we document that the positive IFRS effects on institutional holdings are concentrated among investors whose orientation and styles suggest they are most likely to benefit from higher quality financial statements, including active, value, and growth investors. These results are consistent with holdings changes being associated with the financial reporting regime change. Finally, we show that increased institutional holdings are concentrated in countries in which enforcement and reporting incentives are strongest, and where the differences between local GAAP and IFRS are relatively high. Overall, our study helps shed new light on the channels by which IFRS information becomes impounded in market outcomes
Forecasting risk in earnings
Full text linkConventional measures of risk in earnings based on historical standard deviation require long time series data and are inadequate when the distribution of earnings deviates from normality. We introduce a methodology based on current fundamentals and quantile regression to forecast risk reflected in the shape of the distribution of future earnings. We derive measures of dispersion, asymmetry and tail risk in future earnings using quantile forecasts as inputs. Our analysis shows that a parsimonious model based on accruals, cash flow, special items and a loss indicator can predict the shape of the distribution of earnings with reasonable power. We provide evidence that out-of-sample quantile-based risk forecasts explain incrementally analysts’ equity and credit risk ratings, future return volatility, corporate bond spreads and analyst-based measures of future earnings uncertainty. Our study provides insights into the relations between earnings components and risk in future earnings. It also introduces risk measures that will be useful for participants in both the equity and credit markets
Pension deficits and corporate financial policy: does accounting transparency matter?
Full text linkWe study changes in financial policies following a regulatory shock to the accounting transparency of defined benefit pension plans. We estimate the hidden pension deficits of French companies subject to mandatory IAS 19 adoption in 2005 using disclosures of early adopters of IAS 19. We find that financially risky companies reporting unexpectedly high pension deficits on first-time IAS 19 adoption subsequently reduce leverage and incur higher cost of debt. Our results suggest that in the absence of transparency the credit market anticipates off-balance sheet pension deficits. However, the introduction of the more transparent IAS 19 regime allows the credit market to correct estimation errors. Our study is one of the first to show that the greater transparency offered by IFRS has negative economic consequences for some companies
Are international accounting standards more credit relevant than domestic standards?
Full text linkWe examine whether the credit relevance of financial statements, defined as the ability of accounting numbers to explain credit ratings, is higher after firms are required to report under International Financial Reporting Standards (IFRS). We find an improvement in credit relevance for firms in 17 countries after mandatory IFRS reporting is introduced in 2005; this increase is higher than that reported for a matched sample of US firms. The increase in credit relevance is particularly pronounced for higher risk speculative-grade issuers, where accounting information is predicted to be more important; and for IFRS adopters with large first-time reconciliations, where the impact of IFRS is expected to be greater. These tests provide reassurance that the overall enhancement in estimated credit relevance is driven by accounting changes related to IFRS adoption. Our results suggest that credit rating analysts’ views of economic fundamentals are more closely aligned with IFRS numbers, and that analysts anticipate at least some of the effects of the IFRS transition
Macroeconomic risks and characteristic-based factor models.
Full text linkWe show that book-to-market, size, and momentum capture cross-sectional variation in exposures to a broad set of macroeconomic factors identified in the prior literature as potentially important for pricing equities. The factors considered include innovations in economic growth expectations, inflation, the aggregate survival probability, the term structure of interest rates, and the exchange rate. Factor mimicking portfolios constructed on the basis of book-to-market, size, and momentum therefore, serve as proxy composite macroeconomic risk factors. Conditional and unconditional cross-sectional asset pricing tests indicate that most of the macroeconomic factors considered are priced. The performance of an asset pricing model based on the macroeconomic factors is comparable to the performance of the Fama and French (1993) model. However, the momentum factor is found to contain incremental information for asset pricing
Conservative accounting and linear information valuation models
No full textPrior research using the residual income valuation model and linear information models has generally found that estimates of firm value are negatively biased. We argue that this could result from the way in which accounting conservatism effects are reflected in such models. We build on the conservative accounting model of Feltham and Ohlson 1995 and the Dechow, Hutton, and Sloan 1999 (DHS) methodology to propose a valuation model that includes a conservatism-correction term, based on the properties of past realizations of residual income and “other information”. “Other information” is measured using analyst forecast-based predictions of residual income. We use data comparable to the DHS sample to compare the bias and inaccuracy of value estimates from our model and from models similar to those used by DHS and Myers 1999. Valuation biases are substantially less negative for our model, but valuation inaccuracy is not markedly reduced
Essays in audit quality and earnings quality in business groups
Full text linkThe aim of this thesis is to fill some of the gaps in the audit quality/pricing and financial reporting quality literatures by showing how group audit composition and parent-subsidiary relationships can explain group-level outcomes. Empirical proxies we observe for constructs such as audit risk, audit quality and earnings quality depend on the regulatory setting, and on the management/auditor decisions and incentives in both the parent company and group subsidiaries. Yet, the majority of accounting and auditing research has focused on group-level outcomes largely due to the non-availability of granular financial reporting or audit data at the subsidiary level, especially in the United States. In this thesis, I exploit the availability of private company subsidiary data in Europe to answer three main research questions that can be of interest to both regulators and financial statements’ users. In the first chapter, I investigate whether and how unaudited subsidiaries affect the overall group audit quality. I find that unaudited subsidiaries impair group audit quality and that this result is likely driven by group auditors underestimating audit risks when selecting the subsidiaries to be audited in a group. In the second chapter (co-authored), we try to understand whether group fee disclosure requirements and the misalignment between the parent auditor and subsidiary auditors can explain one of the most robust findings in the audit pricing literature, i.e., the audit fee low balling. We show that the first-year audit fee discount (low balling) is an artifact of a higher subsidiary auditor misalignment in the first year of the parent auditor’s appointment, with the fees paid to misaligned subsidiary auditors not being included and reported in group audit fees. In the last chapter, I show how the parent companies of listed domestic groups can conveniently locate earnings management in their domestic subsidiaries in order to manage group earnings, and I model the factors determining the location choice. I find that the earnings management location in the subsidiaries of domestic groups depends on the opportunities and risks of earnings management detection that subsidiaries have compared to the parent company
Essays on Empirical Finance
Full text linkThis dissertation consists of three essays on empirical finance. In the first essay (job market paper) entitled "Why do analysts differ in forecast provision? A signaling explanation", I study financial analysts' forecast reporting behaviors. In the second essay entitled "Capacity overhang, investment, and accruals" (co-authored with Professor Peter Pope at Bocconi University), we study the dynamics of firms' investment and accruals. In the third essay entitled "How do asset pricing models capture leverage effects?" (also co-authored with Professor Peter Pope at Bocconi University), we study how empirical asset pricing models capture leverage effects in the cross section of expected stock returns
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