Gilad Livne

The Association of R&D and Capital Expenditures with Subsequent Earnings Variability

We examine whether the sensitivity of pay to performance is associated with the amount of insider trading that managers undertake. Because insider trading profits represent an alternative form of compensation, we expect that firms will consider the compensation component provided by insider trading when designing remuneration contracts. Employing a proxy for insider trading that captures the degree to which managers trade on private information, we find evidence that an increased (a decreased) level of insider trading is associated with a decreased (an increased) pay-performance sensitivity. Copyright Blackwell Publishers Ltd, 2005.We examine whether the sensitivity of pay to performance is associated with the amount of insider trading that managers undertake. Because insider trading profits represent an alternative form of compensation, we expect that firms will consider the compensation component provided by insider trading when designing remuneration contracts. Employing a proxy for insider trading that captures the degree to which managers trade on private information, we find evidence that an increased (a decreased) level of insider trading is associated with a decreased (an increased) pay performance sensitivity.

Do Customer Acquisition Cost, Retention and Usage Matter to Firm Performance and Valuation?

We examine the valuation role of customer acquisition cost, retention and usage in the wireless industry during the period 1997–2004. We develop and test a model that links customer acquisition cost, customer retention and call usage to future financial performance and valuation. In doing so, we control for the role of traditional accounting measures as predictors of firm performance. Although the wireless industry maintains a rapid pace of technological and commercial changes, fundamental accounting numbers are found to be value relevant. We provide new evidence that customer acquisition cost is likely a firm value driver. Specifically, we show that this cost is positively associated with customer retention, future profits and current market values. However, customer acquisition cost is not associated with future revenues, suggesting that successful investment in customer acquisition is capable of saving future expenses and hence of improving profitability. There does not seem to be a direct association between customer retention and usage. Nevertheless, we document a positive relation between retention and future revenues, as well as a positive association between usage and future profits. Collectively, these results suggest that retention and usage play an important mediating role linking customer acquisition with benefit generation. Consistent with this, we find some evidence that customer retention and usage enhance market values.

Do Customer Acquisition Cost, Retention and Usage Matter to Firm Performance and Valuation?: CUSTOMER ACQUISITION COST, FIRM PERFORMANCE AND VALUATION

We examine the valuation role of customer acquisition cost, retention and usage in the wireless industry during the period 1997-2004. We develop and test a model that links customer acquisition cost, customer retention and call usage to future financial performance and valuation. In doing so, we control for the role of traditional accounting measures as predictors of firm performance. Although the wireless industry maintains a rapid pace of technological and commercial changes, fundamental accounting numbers are found to be value relevant. We provide new evidence that customer acquisition cost is likely a firm value driver. Specifically, we show that this cost is positively associated with customer retention, future profits and current market values. However, customer acquisition cost is not associated with future revenues, suggesting that successful investment in customer acquisition is capable of saving future expenses and hence of improving profitability. There does not seem to be a direct association between customer retention and usage. Nevertheless, we document a positive relation between retention and future revenues, as well as a positive association between usage and future profits. Collectively, these results suggest that retention and usage play an important mediating role linking customer acquisition with benefit generation. Consistent with this, we find some evidence that customer retention and usage enhance market values.

Information Asymmetry, Investment Horizons and the Dual Role of Public Announcements

This paper investigates inter-temporal relations in market liquidity and price efficiency in a setting that is more descriptive of trading patterns around public announcements than those typically analyzed in the existing literature. The model incorporates both strategic investors who behave as short-term, profit-taking traders, and traders who invest in the security over a long-term horizon. It is shown that an anticipated increase in market liquidity in the announcement period will lead short-term investors to trade more aggressively in the pre-announcement period. This results in improved price efficiency and, in some cases, increased market liquidity in the pre-announcement period. However, a higher propensity to behave as a profit-taker in the announcement period leads to less efficient prices in the pre-announcement period.

The Association between the Uncertainty of Future Economic Benefits and Current R&D and Capital Expenditures: Industry and Intertemporal Analyses

Since 1974, R&D expenditures have been fully expensed when incurred partly because R&D activities are claimed to be associated with a high degree of uncertainty in future economic benefits. In this study, we estimate the association between R&D expenditures and capital expenditures (CAPEX) and the variance of future earnings per share and operating income. We show that R&D expenditures lead to higher volatility of future earnings than capital expenditures only in R&D-intensive industries, where industry R&D intensity is measured as the R&D-to-CAPEX ratio. We also find that the stronger association of R&D with uncertainty in future earnings is a recent phenomenon. Finally, we show that in industries that are relatively less dependent on R&D activities, the probability of recovering R&D expenditures is similar to that of capital expenditures. Overall, our results suggest that while some industries engage in a more innovative and uncertain R&D activities, R&D in other industries is less uncertain. These results suggest that the impact of R&D on future performance considerably varies across industries and time periods.