Dalia Marciukaityte

Managerial Overoptimism and the Choice Between Debt and Equity Financing

This paper compares long-run stock performance following debt financing and equity financing for a sample of rapidly growing firms. If managers are subject to overly optimistic predictions for their asset acquisitions, they are more likely to finance asset growth by debt rather than by equity. The managerial overoptimism hypothesis predicts worse long-term performance for debt-financed asset acquisitions than equity-financed asset acquisitions. If, on the other hand, managers take advantage of “windows of opportunity” for issuing equity, we expect worse performance following equity issuance than following debt issuance. Consistent with the managerial overoptimism hypothesis, we find that debt financing is followed by significantly worse stock performance than equity financing. Managerial overoptimism seems to be a significant factor affecting the choice between debt and equity financing and post-financing stock performance.

Voluntary vs. Forced Financial Restatements: The Role of Board Independence

Using a sample of companies that restated their earnings over the period 1997–2002, this study finds that the probability of voluntary as opposed to forced restatements is positively related to the independence of both the board of directors and the audit committee. Following both voluntary and forced earnings restatements, companies increase the proportion of independent directors on both the board and the audit committee; three years after restatements, both types of restating companies attain similar levels of director independence. Moreover, the study finds comparable postrestatement long-run stock performance for all restating and matched companies, which suggests that postrestatement enhancements to internal control systems help restore companies’ blemished reputations. This article reports the results of our investigation of the role of corporate governance in monitoring earnings manipulation in which we examined the independence of boards of directors and audit committees in companies that restated their earnings. Extant empirical evidence on board independence and the incidence of accounting irregularities is mixed. Our investigation of 187 restatements from 1997 to 2002 finds that director independence is not associated with a lower incidence of earnings restatements. Companies that make voluntary restatements, however, have greater board and audit committee independence than do companies forced to restate earnings by the U.S. SEC and other external agencies. Moreover, the probability of voluntary restatements is positively related to board and audit committee independence. Our results also show that restating companies, especially those forced to restate, increase the independence of their boards and audit committees after restatements. And long-run stock performance after both voluntary and forced restatements is similar to that of matched companies. Our findings point to the importance of independent boards of directors and audit committees in improving the accuracy of financial reporting. Although director independence does not ensure a lower incidence of earnings restatements, it increases the probability that a company will initiate a restatement instead of waiting for outsiders to force it to restate. These findings are relevant to the current controversy surrounding the rising number of restatements since 2001 and support the requirements for greater board and audit committee independence mandated by the Sarbanes–Oxley Act and the rules of major exchanges. Our findings suggest that greater director independence is associated with more efficient internal monitoring of financial reporting and results in a greater number of voluntary restatements. Consequently, the recent increase in restatements may indicate that the corporate governance laws enacted in this decade have taken root rather than the contrary, as some observers believe. The restating companies in our sample responded to the significant cost imposed on them by financial markets by making reputation-enhancing changes to their internal monitoring systems, changes that are evidenced by the increase in the independence of their boards and audit committees. The incentive that restating companies have to maintain their reputations with investors in the capital markets ensures that the negative impact of restatements is short-lived. Our results indicate comparable postrestatement long-run stock performance for all restating and matched companies, which suggests that postrestatement enhancements to internal control systems help restore both blemished reputations and investor confidence. Thus, concerns that the current increase in restatements will erode investor confidence may be unwarranted.

Equity With Warrants in Private Placements

We examine private equity with warrant (unit) placements and compare them with private equity placements. Firms making unit placements are smaller, younger, riskier, and characterized by higher information asymmetry than equity-placing firms. Furthermore, unit-placing firms experience good pre-placement stock performance; however, their post-placement performance is poor and worse than that of equity-placing firms. We also find that very few of the placed warrants are in the money at expiration. Our results are consistent with the window of opportunity hypothesis and the theory that warrants are especially desirable to a clientele of overoptimistic investors.

Earnings smoothing around open-market share repurchases

Purpose - – The purpose of this paper is to examine whether firms engage in earnings decreasing management before share repurchases to mislead investors or to smooth earnings and improve earnings informativeness. Design/methodology/approach - – The authors examine discretionary accruals and cash flows around open-market share repurchases. The primary discretionary accruals measure is industry- and performance-adjusted discretionary current accruals estimated from cash-flow data. Findings - – Results show that, firms experience temporary increases in operating cash flows and use negative discretionary accruals to smooth earnings before share repurchases. Firms with the highest pre-repurchase cash flows use the lowest pre-repurchase discretionary accruals. Moreover, pre-repurchase discretionary accruals reflect expectations about future operating cash flows. Firms with the strongest deterioration in operating cash flows after repurchases use the lowest pre-repurchase discretionary accruals. These findings suggest that repurchasing firms use earnings management to increase smoothness and predictability of reported earnings rather than to mislead investors. Originality/value - – This paper provides an alternative explanation to the finding of negative discretionary accruals before share repurchases. It adds to the literature on repurchases and earnings smoothing by showing that firms use earnings management around share repurchases to smooth earnings.

Labor Laws and Firm Performance

U.S. labor laws impose higher costs on unionized firms in states without right†to†work (RTW) laws. I find that these firms experience poor stock performance. The difference†in†differences analysis comparing the effect of RTW laws on unionized and nonunionized firms shows that unionized firms in states without RTW laws underperform by about 7 percentage points per year. I find further evidence of underperformance using alternative methods to estimate abnormal stock performance, examining a natural experiment, showing expected cross†sectional patterns, and assessing profitability and the market reaction to earnings announcements.

Labor Laws and Corporate Investment

In the U.S., the costs of unionized labor are higher in states without right-to-work (RTW) laws. I show that unionized firms located in these states invest less. These firms have about four percentage points lower capital expenditures (normalized by net property, plant, and equipment) than other firms. I confirm these findings by examining a natural experiment created by the adoption of RTW laws in Oklahoma and examining union certification elections using regression discontinuity design.

Changes in Capital Structure: Asset Characteristics or Managerial Preferences

We examine leverage changes around mergers by similar-size firms. If asset characteristics drive leverage, both acquirer and target pre-merger leverage should predict long-term post-merger leverage. We find that only acquirer pre-merger leverage has a long-term effect. The effect of target pre-merger leverage, while highly significant right after the merger, disappears after two years. These findings cannot be explained by suboptimal pre-merger leverage of targets, sales of target assets, or corporate governance characteristics. As acquirer managers usually manage the merged firm, our findings support the hypothesis that managerial preferences have a strong effect on firm leverage.