Henry He Huang

Hedge Fund Intervention and Accounting Conservatism

Hedge fund intervention has been associated with many positive corporate changes and is an important vehicle for informed shareholder monitoring. Effective monitoring has also been positively associated with accounting conservatism. Building upon these prior results, we predict an increase in accounting conservatism after hedge fund intervention. We use a large sample of hedge fund activist events and identify control firms with similar likelihoods of being targeted using the propensity score matching method to apply difference-in-difference tests. We find that when hedge fund activists have relatively large ownership and sufficient time to exert their monitoring power, target firms experience significant increases in conditional conservatism. CFO turnovers, upward/lateral auditor switches, and improvements in audit committee independence after intervention are accompanied by greater increases in conditional conservatism. Finally, we find greater increases in conditional conservatism when there is a lack of monitoring by dedicated institutional investors before the intervention. Our study suggests that hedge fund activists improve accounting monitoring tools and thus adds important new evidence on the effectiveness of shareholder monitoring on accounting practices.

Determinants and Accounting Consequences of Forming a Governance Committee: Evidence from the United States

This study examines a sample of S&P 1,500 firms over the period of 1996 to 2002. It finds that firms with a larger, more independent, and more active board, higher agency costs (as indicated by lower managerial ownership and lower takeover vulnerability), and past occurrence of class-action lawsuits are more likely to voluntarily form a governance committee. This study also provides evidence that having a governance committee brings real consequences in that it constrains managerial opportunism by reducing aggressive financial reporting.

Shareholder Rights, Insider Ownership and Earnings Management

This paper examines whether shareholder rights, which enable shareholders to replace managers, can constrain earnings management, and whether this effect is conditional on the level of insider ownership. Using the comprehensive shareholder rights measure constructed by Gompers et al. (2003), we find that firms with stronger shareholder rights are associated with fewer income-increasing discretionary accruals, suggesting that stronger shareholder rights deter managers from reporting aggressive earnings. Moreover, if insider ownership introduces managerial entrenchment, managers with higher ownership would be insulated from shareholder discipline. Consistent with this entrenchment theory, we find that the association between shareholder rights and earnings management becomes insignificant in the presence of higher levels of insider ownership. Shareholder rights are negatively associated with earnings management only when insider ownership is low. Our results indicate that the disciplinary effect of shareholder rights can be attenuated by high levels of insider ownership.

Customer Concentration and Corporate Tax Avoidance

Firms with a concentrated corporate customer base need to hold more cash and have a stronger incentive to manage earnings upwards. Since tax planning can increase both cash flow and accounting earnings, firms with a concentrated customer base may be more likely to engage in tax avoidance. We find evidence of a positive association between the level of corporate customer concentration and the extent of tax avoidance. In addition, we find that the positive relation between corporate customer concentration and tax avoidance is more pronounced when a firm has a lower Market Share in its industry, enjoys less revenue diversification, and engages less in real earnings management. In contrast to corporate major customers, governmental major customers provide stable cash flow to suppliers, which is likely to alleviate supplier firms’ need for tax avoidance. We find that firms engage in lower levels of tax avoidance when they have a governmental major customer, and that this association is less pronounced under Democratic presidencies. Taken together, our findings indicate that a firms customer concentration (i.e., corporate and governmental major customers) has a significant effect on the extent to which it avoids taxes.

Does Shareholder Litigation Deter Insider Trading

While prior literature focuses on the effect of ex ante litigation occurrence risk on insider trading, this paper examines how the merits and rigorousness of actual litigation affect insider trading behavior for both defendant firms and their industry peers. Using a large litigation sample from 1996 to 2009, we find a significant decrease in the intensity of the insider stock sales for defendant firms following lawsuits that score high in a composite strength index that captures the merits and rigorousness of the litigation. Further analyses indicate that the decrease is mainly driven by the decline in opportunistic insider selling. We also find the decrease to be more pronounced for the defendant firms with lower levels of ex ante litigation risk. Finally, we find a significant decrease in opportunistic insider selling for industry peers of defendant firms following lawsuits, especially when the lawsuits are strong, suggesting a positive externality of shareholder litigation. This paper provides the first evidence on the existence of and variations in the deterrent effect of actual class action lawsuits on insider trading.

Do Banks Price Independent Directors’ Attention?

Masulis and Mobbs (2014), (2015) find that independent directors with multiple directorships allocate their monitoring efforts unequally based on a directorship’s relative prestige. We investigate whether bank loan contract terms reflect such unequal allocation of directors’ monitoring effort. We find that bank loans of firms with a greater proportion of independent directors for whom the board is among their most prestigious have lower spreads, longer maturities, fewer covenants, lower syndicate concentration, lower likelihood of collateral requirement, lower annual loan fees, and higher bond ratings. Our evidence indicates that independent directors’ attention is associated with lower cost of borrowing.

The impact of climate risk on firm performance and financing choices : an international comparison

Increasingly adverse climatic conditions have created greater systematic risk for companies throughout the global economy. Few studies have directly examined the consequences of climate-related risk on financing choices by publicly listed firms across the globe. We attempt to do so using the Global Climate Risk Index compiled and published by Germanwatch (Kreft & Eckstein, 2014), which captures at the country level the extent of losses from extreme weather events. As expected, we find the likelihood of loss from major storms, flooding, heat waves, etc. to be associated with lower and more volatile earnings and cash flows. Consistent with policies that attempt to moderate such effects, we show that firms located in countries characterized by more severe weather are likelier to hold more cash so as to build financial slack and thereby organizational resilience to climatic threats. Those firms also tend to have less short-term debt but more long-term debt, and to be less likely to distribute cash dividends. In addition, we find that certain industries are less vulnerable to extreme weather and so face less climate-related risk. Our results are robust to using an instrumental variable approach, a propensity-score-matched sample, and path analysis, and remain unchanged when we consider an alternative measure of climate risk. Finally, our conclusions are invariant to the timing of financial crises that can affect different countries at different times.RésuméDes conditions climatiques de plus en plus défavorables ont créé un risque systématique plus important pour les entreprises partout dans l’économie globale. Peu d’études ont directement analysé les conséquences du risque climatique sur les choix de financement des firmes cotées en bourse dans le monde. Nous tentons de le faire en utilisant l’index du risque du climat global développé et publié par Germanwatch (Kreft et Eckstein, 2014) qui mesure à l’échelle d’un pays le niveau des pertes liées aux événements climatiques extrêmes. Comme cela était attendu, nous constatons que la probabilité de pertes liées à de fortes tempêtes, des inondations, des vagues de chaleur… est associée à des profits et des flux financiers moins élevés et plus volatils. En cohérence avec les politiques qui tentent de modérer ces effets, nous montrons que les firmes localisées dans des pays caractérisés par un climat plus sévère sont plus susceptibles de détenir plus de liquidités pour bâtir un système financier et ainsi une résilience organisationnelle aux menaces climatiques. Ces firmes tendent aussi à avoir moins de dettes à court terme, mais plus de dettes à long terme; elles sont moins susceptibles de distribuer des dividendes en espèces. Par ailleurs, nous constatons que certaines industries sont moins vulnérables aux conditions climatiques extrêmes et sont ainsi moins confrontées au risque lié au climat. Nos résultats sont robustes et reposent sur l’approche fondée sur des variables instrumentales, un échantillon compatible aux scores de propension et une analyse de trajectoires ; ils restent inchangés quand nous considérons une mesure alternative du risque climatique. Enfin, nos conclusions sont invariables par rapport au calendrier des crises financières qui peuvent affecter des pays différents à des moments différents.ResumenLas crecientes condiciones climáticas adversas han creado riesgos sistemáticos aún mayores para las empresas en toda la economía global. Pocos estudios han examinado directamente las consecuencias de los riesgos relacionados con el clima en las opciones financieras de empresas que cotizan en bolsa en todo el planeta. Intentamos hacerlo usando el Índice de Riesgos Climáticos Globales recopilado y publicado por Germanwatch (Kreft & Eckstein, 2014), el cual captura a nivel país el alcance de las pérdidas por eventos extremos de clima. Como se esperaba, encontramos que la probabilidad de pérdidas por tormentas mayores, inundaciones, olas de calor, etc., se asocia con menores y más volátiles ganancias y liquidez. Consistente con las políticas que intentan moderar estos efectos, mostramos que las empresas ubicadas en países caracterizados con condiciones de tiempo más severo son más propensas a conservar más dinero con el fin de construir músculo financiero y de este modo resiliencia organizacional a amenazas climáticas. Esas empresas también tienden a tener menos deuda de corto plazo, pero más deuda a largo plazo, y a tener menor probabilidades de distribuir dividendos en efectivo. Adicionalmente, encontramos que ciertas industrias son menos vulnerables al estado de tiempo más severo y por esto enfrentar menos riesgos asociados al clima. Nuestros resultados son robustos para usar un enfoque de variable instrumental, una muestra de puntaje de proclividad (propensity-score-matched), y un análisis de trayectoria, y permaneció sin cambios cuando consideramos una medida alternativa de riesgo climático. Finalmente, nuestras conclusiones no cambian con los momentos de crisis financieras que pueden afectar países diferentes en diferentes tiempos.ResumoCondições climáticas cada vez mais adversas criaram maior risco sistemático para as empresas em toda a economia global. Poucos estudos examinaram diretamente as consequências do risco relacionado ao clima em escolhas financeiras por empresas listadas em todo o mundo. Nós tentamos fazê-lo usando o Índice de Risco Climático Global compilado e publicado pela Germanwatch (Kreft & Eckstein, 2014), que capta a nível de país a extensão das perdas em eventos climáticos extremos. Como esperado, encontramos a probabilidade de perda em grandes tempestades, inundações, ondas de calor, etc., associadas a resultados e fluxos de caixa mais baixos e voláteis. Em consonância com políticas que tentam minimizar esses efeitos, mostramos que as empresas localizadas em países caracterizados por um clima mais severo têm mais probabilidade de manter mais dinheiro em caixa, de modo a estabelecer uma folga financeira e, assim, uma resiliência organizacional às ameaças climáticas. Essas empresas também tendem a ter menos dívidas de curto prazo, mas mais dívidas de longo prazo, e ser menos propensas a distribuir dividendos em dinheiro. Além disso, achamos que certas indústrias são menos vulneráveis a climas extremos e, portanto, enfrentam menos riscos relacionados ao clima. Nossos resultados são robustos ao usar uma abordagem com variáveis instrumentais, uma amostra compatibilizada com propensity score e análise de trajetória, e permanecem inalterados quando consideramos uma medida alternativa de risco climático. Finalmente, nossas conclusões não variam com o momento de crises financeiras que podem afetar diferentes países em momentos distintos.概要越来越不利的气候条件对全球经济中的公司带来了更大的系统风险。很少有研究去直接调查气候相关风险对全球各地的上市公司融资选择的影响。我们试图通过用德国观察(Kreft&Eckstein,2014)编制出版的全球气候风险指数来进行这项研究,在国家层面上去认识极端的天气事件所造成损失的程度。如预期的那样,我们发现了大风暴、洪水、热浪等所造成的损失与较低的和更易变的收益和现金流相关的可能。 与试图缓解这种影响的政策一致,我们显示,位于更恶劣天气国家的公司更有可能持有更多的现金,从而建立财务空隙及对气候威胁的组织韧性。这些公司也往往有较少的短期债务,但有较多的长期债务,而且不太可能有现金分红。另外,我们发现某些行业在极端天气下不那么脆弱,所以面临较少的气候相关风险。我们的结果对使用工具变量法、倾向评分匹配样本、及路径分析是稳健的,而且当我们考虑气候风险的替代量表时,它们保持不变。最后,我们的结论对在不同时期可能影响不同国家发生金融危机的时间是不变的。