Helen Lu

Stock Price Response to New CEO Earnings News

New-CEO earnings news exhibits asymmetric effects on stock prices. Stock prices rise more on good earnings news announced by firms with new CEOs compared with those with established CEOs. By contrast, stock prices tend to fall by a smaller amount on bad earnings news for new CEOs. Both the new-CEO quality effect and the new-CEO honeymoon effect are more pronounced for CEOs appointed during challenging situations. The new-CEO quality effect is stronger for firms followed by fewer analysts, while the honeymoon effect is stronger for firms followed by more analysts – illustrating the importance of a transparent information environment.

The Correlation Structure of Anomaly Strategies

We use cluster analysis to reveal the underlying correlation structure of anomaly strategies. Under the best performing benchmark model more than half of equal-weighted cluster strategies remain significant (|t|>2). We rank cluster strategies by their ability to explain cross-sectional returns. Factors relating to accruals and operating assets are highly ranked but absent from current benchmark models. A rolling window out-of-sample mean-variance efficient (MVE) portfolio of clusters generates more than three times the Sharpe ratio of the market portfolio. A MVE portfolio restricted to long-only stock holdings remains profitable, but would likely not survive transaction costs.

Real Earnings Management Around CEO Turnovers

Following CEO turnovers, US firms adjust real business activities to manage earnings downward (REM bath). This effect is most pronounced in firms with low levels of institutional ownership. REM baths early in CEOs’ tenure can be confounded with legitimate adjustments to business activities. However, we show that they are not accompanied by increases in R&D or capital expenses, nor are they explained by restructuring expenses. CEOs with short tenure record more negative REM measures in their first year of tenure, when compared with CEOs with long tenure.