David Aboody

Information Asymmetry, R&D, and Insider Gains

Although researchers have documented gains from insider trading, the sources of private information leading to information asymmetry and insider gains have not been comprehensively investigated. We focus on research and development (R&D)-an increasingly important yet poorly disclosed productive input-as a potential source of insider gains. Our findings, for the period from 1985 to 1997 indicate that insider gains in R&D-intensive firms are substantially larger than insider gains in firms without R&D. Insiders also take advantage of information on planned changes in R&D budgets. R&D is thus a major contributor to information asymmetry and insider gains, raising issues concerning management compensation, incentives, and disclosure policies. Copyright The American Finance Association 2000.

Revaluations of fixed assets and future firm performance: Evidence from the UK1

A gravity force driven device and associated methods for the sustained release of a fluid such as a volatile substance into a local environment. The device includes a housing having a lumen and a first open end, at least one porous plug permeable to volatilized substance positioned within the housings first open end and partially occupying the lumen thereby, a reservoir, defined by the lumen and porous plug, and a quantity of the fluid contained within the reservoir. In use, the device is oriented so that the substance contained within the reservoir is in constant fluid communication with the porous plug. The device may further include an inlet port for refilling the device with the substance in fluid communication with the reservoir, and, for home use, may have an ornamental piece associated with (e.g. affixed to) the device. The device may also use an electrochemical gas generating cell to assist the gravity-driven dispersal. In certain embodiments, the device will be associated with, or further include, a heating element for volatilizing the substance. In one embodiment, the device is used to deliver a beneficial agent to the skin of an animal such as a mammal. The invention also includes associated methods for using the device. The delivery devices of the instant invention are rugged and may be mass-produced at a relatively low cost. Volatile substances which can be dispensed include fragrances, perfumes, volatile insecticides, pest repellent fluids, and volatile medicament fluid compounds.

SFAS No. 123 Stock‐Based Compensation Expense and Equity Market Values

This study investigates the relation between share price and stock‐based compensation expense that is disclosed but not recognized under SFAS No. 123, after controlling for net income, equity book value, and expected earnings growth. Our instrumental variables approach controls for the mechanical relation between share price and option values. We find that investors view SFAS No. 123 expense as an expense of the firm, and as sufficiently reliable to be reflected in their valuation assessments. Findings based on annual returns indicate SFAS No. 123 expense reflects on a timely basis changes in investor‐perceived costs associated with stock‐based compensation.

Corporate Bond Returns and the Financial Crisis

We examine effects of government actions and related accounting policies on the corporate bond market implied by changes in relations between aggregate bond returns and cash flow and discount rate news. We capture the influence of risk by partitioning bonds into investment and speculative grades. We use earnings changes as a proxy for cash flow news and T-Bill rate changes as a proxy for discount rate news. As expected, during non-crisis periods, we observe a positive relation between earnings changes and bond returns and a negative relation for T-Bill rate changes. A combination of government bailouts of large financial institutions and mark-to-market accounting preserves the positive relation for earnings changes during the crisis for investment grade bonds, while absence of these factors leads to an insignificant relation for speculative grade. Intervention by the Federal Reserve to induce lower interest rates as earnings were declining, a flight to safety shifting demand from corporate bonds to T-Bills, and low cost funds invested in risk free investments explain a reversal of the relation between bond returns and T-Bill rate changes for both grades.

Overnight Returns and Firm-Specific Investor Sentiment

We examine the suitability of using overnight returns to measure firm-specific investor sentiment by analyzing whether they possess characteristics expected of a sentiment measure. We document short-term overnight-return persistence, consistent with existing evidence of short-term persistence in the share demand of sentiment-influenced investors. We find that short-term persistence is stronger for harder-to-value firms, consistent with existing evidence that sentiment plays a larger role for such firms. We show that stocks with high (low) overnight returns underperform (outperform) over the longer term, consistent with prior evidence of temporary sentiment-driven mispricing. Overall, our evidence supports using overnight returns to measure firm-specific sentiment.

Evidence of Implicit Taxes on Equity Using Data from Futures Markets to Control for Risk

In this paper we investigate the existence and magnitudes of implicit taxes on equity. Specifically, using futures market data to control for risk, we test whether the pre-tax returns on bonds are higher than the pre-tax returns on four stock indices during the period 1993-1999. We compare the risk-free stock index returns (on perfectly hedged portfolios) to risk-free returns on taxable bonds, and estimate implicit taxes on equity. We find a moderate but significantly positive implicit tax for each stock index. Moreover, we find that cross-sectionally, implicit taxes are much larger for the low-dividend NASDAQ 100 than for the other three, substantially higher dividend-yielding indices. We also find that estimated implicit taxes have fallen significantly during the sample period. Our findings are consistent with a multiple clientele explanation, in which more than one tax clientele is the marginal investor in the stock market.

Managerial Incentives, Options, and Cost-Structure Choices

This study explores the relationship between changes in managerial risk-taking incentives and adjustments of firms’ cost structures, particularly the operating leverage (fixed-to-variable cost ratio). We find managers reduce operating leverage by substituting fixed costs with variable costs, mainly in the selling, general, and administrative (SG&A) and research and development (R&D) cost components, in response to reductions in option-based compensation following the issuance of FAS 123R. Managers facing a decrease in risk-taking incentives adjust operating leverage downward because high operating leverage intensifies the downside potential of earnings. Overall, we present compelling evidence that managers adjust the cost structure of their firms in response to a reduction in risk-taking incentives.