Bok Baik

Local Institutional Investors, Information Asymmetries, and Equity Returns

We examine the informational role of geographically proximate institutions in stock markets. We find that both the level of and change in local institutional ownership predict future stock returns, particularly for firms with high information asymmetry; in contrast, such predictive abilities are relatively weak for nonlocal institutional ownership. The local advantage is especially evident for local investment advisors, high local ownership institutions, and high local turnover institutions. We also find that the stocks that local institutional investors hold (trade) earn higher excess returns around future earnings announcements than those that nonlocal institutional investors hold (trade). & 2010 Elsevier B.V. All rights reserved. All rights reserved. providing us with rm) data and Russ ted returns. We are

Why Are Analysts Less Likely to Follow Firms with High Managerial Ownership

Prior research finding a negative relation between managerial ownership and analyst coverage argues that greater managerial ownership lessens the need for external monitoring by financial analysts due to fewer agency problems (Moyer, Chatfield, and Sisneros [1989]). Other research, based on foreign firms, argues that greater managerial ownership leads to entrenchment, and the negative relation with analyst following reflects analyst reluctance to follow firms with incentives to withhold information (Lang, Lins, and Miller [2004]). We further evaluate these two explanations by directly examining the link between ownership structure and a firms disclosure environment. Using a sample of 25,855 U.S. firm-year observations from 1995 to 2006, we confirm a negative relation between managerial ownership and analyst coverage. We also find that managerial ownership is negatively related to the likelihood of management issuing earnings forecasts and find that this negative relation is most pronounced for firms with impending “bad news.” Furthermore, firms with higher managerial ownership release less accurate and more optimistic forecasts, particularly when faced with bad news. Overall, our results support the view that agency problems associated with greater managerial ownership contribute to less disclosure and a more opaque information environment, which discourage analyst following. We examine these two explanations from an investor perspective and find that the joint effect of greater managerial ownership and greater analyst coverage enhance firm value. This result is again inconsistent with the notion that greater managerial ownership reduces the need for analyst monitoring.

Detecting financial misstatements with fraud intention using multi-class cost-sensitive learning

Multi-class financial misstatement detection models are developed.The models classify financial misstatements according to fraud intention.MetaCost is employed to perform cost-sensitive learning in a multi-class setting.Features are evaluated to detect fraud intention and material misstatements. We develop multi-class financial misstatement detection models to detect misstatements with fraud intention. Hennes, Leone and Miller (2008) conducted a post-event analysis of financial restatements and classified restatements as intentional or unintentional. Using their results (along with non-misstated firms) in the form of a three-class target variable, we develop three multi-class classifiers, multinomial logistic regression, support vector machine, and Bayesian networks, as predictive tools to detect and classify misstatements according to the presence of fraud intention. To deal with class imbalance and asymmetric misclassification costs, we undertake cost-sensitive learning using MetaCost. We evaluate features from previous studies of detecting fraudulent intention and material misstatements. Features such as the short interest ratio and the firm-efficiency measure show discriminatory potential. The yearly and quarterly context-based feature set created further improves the performance of the classifiers.

Earnings Management in Takeovers of Privately Held Targets

We investigate patterns of earnings management by the acquiring firm in a merger, considering both the form of payment and the target firms listing status. We find that the acquiring firm is more likely to report income-increasing abnormal accruals when it uses stock to acquire a privately held target. The bidders abnormal accruals are also higher when it acquires a privately held target operating in a different industry and when it acquires a smaller target. These results suggest that greater estimation risk in the valuation of an acquisition target motivates the bidder to avoid overpayment by manipulating earnings upward prior to the merger. We also find that for a bidder acquiring a privately held target, stock returns around the merger announcement are negatively related to the abnormal accruals, but long-term returns show no relation to the abnormal accruals. Thus, it appears that investors price the bidders earnings management at the time of the acquisition, and we find no evidence of a delayed market reaction or price correction.

Pre-Tax Income Forecasts and Tax Avoidance

When analysts issue both earnings and pre-tax income forecasts, they implicitly provide a forecast of income tax expense. We find that these pre-tax income forecasts have a negative (positive) effect on corporate tax avoidance for firms with relatively aggressive (non-aggressive) tax policy. We also find evidence that analysts providing implicit income tax expense forecasts have more accurate earnings forecasts and have a better appreciation of how tax expense affects future earnings. Overall, these results suggest that analysts’ implicit tax expense forecasts increase transparency and play an important role in deterring both overly aggressive and overly conservative corporate tax avoidance.

Detecting Financial Misreporting with Real Production Activity

This study examines whether real production activity measures available to auditors, and in some cases regulators and investors, are useful in detecting financial misreporting. In contrast to accounting performance measures drawn from accrual-basis accounting, this study employs firm-level electricity consumption data which represents a firm’s real production activities in a timely and unbiased manner. Accordingly, we posit that inconsistent growth patterns between accounting performance and electricity consumption are a useful indicator in detecting financial misreporting. Using electricity consumption data for Korean firms from 2006 to 2014, we find that discretionary accruals are increasing in the growth difference between a firm’s revenue and electricity consumption. We also find that this growth difference increases the likelihood of subsequent adverse financial accounting restatements. Our findings are robust to alternative measures of financial misreporting including accounting enforcement actions and qualified audit opinions. Overall, our study documents new evidence on the role of real production activities in detecting financial misreporting.

Shocks to Product Networks and Post-Earnings Announcement Drift

This paper examines whether shocks to less visible product market network peers explain industry level post-earnings announcement drift (IPEAD). On the real-side, we find that peer earnings shocks propagate slowly through the peer network, creating a complex and conditional autocorrelation structure in earnings shocks. This impacts the financial-side, and IPEAD arises only when shocked peers are less visible in the network and when shocks are driven by persistent supply-side shocks to expenses rather than by demand-side shocks to sales. In addition, IPEAD is particularly strong when 10-K expense disclosures are opaque. Collectively, our results suggest that inattention to less visible peers, complex autocorrelation in earnings shocks, and a poor informational environment on the expense side are likely channels that generate IPEAD. IPEAD returns are economically large in subsamples motivated by this explanation.

Managerial Ability and the Quality of Firms’ Information Environment:

In this study, we examine the relation between managerial ability and the quality of a firm’s information environment. An emerging stream of research has identified managerial ability as an important determinant of accruals quality and management forecast quality. However, our understanding of the impact of managerial ability on a firm’s broader information environment is incomplete because it captures more than these specific financial reporting disclosures. Using a composite index based on various proxies for a firm’s information environment, we find a positive relation between managerial ability and a firm’s information environment. Consistent with our argument that managers’ equity incentives improve disclosure quality, we find that the quality of a firm’s information environment improves when managers have higher levels of equity incentives. We contribute to the literature by providing more complete and conclusive evidence about the impact of managerial ability on a firm’s broader information environment.

Local Twitter Activity and Stock Returns

In this study, we use geographic proximity as a measure of private information and examine the informational role of social media in stock markets. Using a large sample of individual messages (tweets) collected from Twitter during the period July 2011–March 2012, we find that local Twitter users are more likely to tweet about firms with high information asymmetry, and their Twitter activity in turn increases the trading volume of local stocks. More importantly, we find that the negative tone of local tweets predicts future stock returns and subsequent earnings announcement returns, while nonlocal tweets present no such predictability. These results suggest that local social media activity reflects new information, contributing to price discovery. We also find that the negative tone of local tweets is associated with higher bid-ask spreads and lower market depths. This finding suggests that social media – in contrast to traditional news media, which reduce firms’ information asymmetry – serve to share information with an audience in their networks and therefore increase information asymmetry among investors. Overall, our findings suggest that local social media contain value-relevant information and affect firms’ information environments.