Charles C.Y. Wang

Staggered Boards and the Wealth of Shareholders: Evidence from Two Natural Experiments

While staggered boards have been documented to be negatively correlated with firm valuation, such association might be due to staggered boards either bringing about lower firm value or merely reflecting the tendency of low-value firms to have staggered boards. In this paper, we use two natural experiments to shed light on the causality question. In particular, we focus on two recent court rulings, separated by several weeks, that affected in opposite directions the antitakeover force of staggered boards: (i) a ruling by the Delaware Chancery Court approving the legality of shareholder-adopted bylaws that weaken the antitakeover force of a staggered board by moving the companys annual meeting up from later parts of the calendar year to January, and (ii) the subsequent decision by the Delaware Supreme Court to overturn the Chancery Court ruling and invalidate such bylaws. We find evidence consistent with the hypothesis that the Chancery Court ruling increased the value of affected companies - namely, companies with a staggered board and an annual meeting in later parts of the calendar year - and that the Supreme Court ruling produced a reduction in the affected companies value. The identified effects were most pronounced for firms for which control contests are especially relevant due to relative underperformance, small firm size, high asset pledgibility, or high takeover intensity in their industry. Our findings have implications for the long-standing debate on staggered boards. The findings are consistent with the markets viewing staggered boards as bringing about a reduction in firm value. Our findings are thus consistent with leading institutional investors policies in favor of board de-staggering, and with the view that the ongoing process of board de-staggering in public firms can be expected to enhance shareholder value.

Measurement Errors of Expected-Return Proxies and the Implied Cost of Capital

Despite their popularity as proxies of expected returns, the implied cost of capitals (ICC) measurement error properties are relatively unknown. Through an in-depth analysis of a popular implementation of ICCs by Gebhardt, Lee, and Swaminathan (2001) (GLS), I show that ICC measurement errors can be not only nonrandom and persistent, but can also be associated with firms risk or growth characteristics, implying that ICC regressions are likely confounded by spurious correlations. Moreover, I document that biases in GLS measurement errors are driven not only by analysts systematic forecast errors but also by functional form assumptions, so that correcting for the former - a primary focus of the ICC literature - is insufficient by itself. From these findings, I argue that the choice between ICCs and realized returns involves a tradeoff between bias and efficiency, and suggest that realized returns should be used in conjunction with ICCs to make more robust inferences about expected returns.

Accounting Data, Market Values, and the Cross Section of Expected Returns Worldwide

Under fairly general assumptions, expected stock returns are a linear combination of two accounting fundamentals ― book to market and ROE. Empirical estimates based on this relation predict the cross section of out-of-sample returns in 26 of 29 international equity markets, with a highly significant average slope coefficient of 1.05. In sharp contrast, standard factor-model-based proxies fail to exhibit predictive power internationally. We show analytically and empirically that the importance of ROE in forecasting returns depends on the quality of accounting information. Overall, a tractable accounting-based valuation model provides a unifying framework for obtaining reliable proxies of expected returns worldwide.

Can Staggered Boards Improve Value? Evidence from the Massachusetts Natural Experiment

We study the effect of staggered boards on long-run firm value, using a natural experiment: a 1990 law that imposed a staggered board on all firms incorporated in Massachusetts. We find a significant and positive average increase in Tobins Q among the Massachusetts treated firms, suggesting that staggered boards can be beneficial for early-life-cycle firms, which exhibit greater information asymmetries between insiders and investors. These results are validated using a larger sample of firms from the Investor Responsibility Research Center. In exploring possible channels for these effects, we find that the effects are stronger among innovating Massachusetts firms, particularly those facing greater Wall Street scrutiny. The evidence is consistent with staggered boards improving managers incentives to make long-term investments.

Government Incentives and Financial Intermediaries: The Case of Chinese Sell-Side Analysts

We study how sell-side analysts produce information in a context where the central government can influence financial intermediaries. Leveraging seven economic periods between 2005 and 2015 when the Chinese government had strong incentives to prop up the stock market, we show that sell-side analysts employed at state-owned brokerages issued relatively optimistic earnings forecasts and stock recommendations during these periods. This relative optimism is particularly pronounced in earnings forecasts for larger firms and for state-owned enterprises, and is found regardless of analysts’ experience or star status, or of their brokerages’ degree of dependence on commissions. Although these optimistic forecasts are also relatively less accurate, the evidence suggests that they influence investors’ beliefs. These findings highlight the role of government incentives in the behavior and output of analysts in emerging-market contexts.

Expected Stock Returns Worldwide: A Log-Linear Present-Value Approach

This is the first large-scale study of the performance of expected-return proxies (ERPs) internationally. Analyst-forecast-based ICCs are commonly used to study how policies affect expected returns in international settings, but they are sparsely populated and not robustly associated with future returns. Earnings-model-forecast-based ICCs are well populated, but are unreliable outside the U.S. We provide a solution from a log-linear and present-value (LPV) framework-- combining an accounting valuation anchor, its expected growth, and market prices-- and adapt it to estimate ERPs in a global context. An LPV ERP anchored on the book value of equity is associated with future returns in each of the 29 equity markets we study, and largely subsumes the out-of-sample predictive ability of the most common firm characteristics that have been shown to be associated with expected returns. Our findings also suggest that a firms life-cycle stage provides useful information for ERP estimation.