Alex P. Tang

The stock return effect of political risk event on foreign joint ventures: evidence from the Tiananmen Square Incident

Abstract This study examines how political risk events affect the value of foreign investing firms. A unique event, the Tiananmen Square Incident, is selected to examine this issue because we believe this incident exacerbated the political risk of doing business in China. We examine the impact of the incident on the stock returns of U.S. firms with joint ventures in China. The results show that this incident indeed had a significant impact on U.S. firms with joint ventures in China, and the market had reacted to this event in an efficient manner. The results also indicate that the impact of this incident on U.S. firms was relatively small in magnitude. Further, the sharp increase of joint ventures after the incident and the significant results in high-risk group vs. the insignificant results in low-risk group provide evidence suggesting that the effect of this incident was temporary rather than long-term and regional rather than national.

Stock reaction to dividend savings of convertible preferred calls: Free cash flow or price pressure effects?

Abstract Calls of in-the-money convertible preferred stock typically induce dividend savings for the firm, since preferred dividends exceed common stock dividends. Prior research finds that these savings are negatively related to stock returns at call announcement and argues that the market expects managers to abuse the increased free cash flow. This paper finds that dividend savings are closely related to call size, suggesting other explanations. Larger calls experience a more negative announcement reaction. Consistent with temporary liquidity effects, there is a price reversal during the conversion period, which is greater for larger calls.

Internal Control Material Weakness and Real Earnings Management

Abstract This study examines the relation between internal control material weakness (ICMW) under Section 404 of the Sarbanes-Oxley Act (SOX) and real earnings management. Our measures of real earnings management are abnormal cash flow from operations (ABCFOs), abnormal discretionary expenses (ABDISEXP), and abnormal production cost (ABPROD). We use a sample of 1,824 manufacturing firms over the period 2004–2011 to run regressions of ABCFO, ABDISEXP, and ABPROD on ICMW and other independent variables. We find that ICMW is negatively associated with ABCFOs. Another result that emerges from this study is a positive relation between ICMW and ABPROD. Our results imply that manufacturing firms with materially weak internal controls predominantly use overproduction and excessive price discounts to manage operational activities to achieve earnings targets. As SOX Section 404 is designed to reduce the instances of firms having ICMW, our finding that ICMW firms engage in real earnings management suggests that the use of real earnings management could be reduced as SOX Section 404 succeeds in reducing ICMW.