Huai Zhang

Inventory Changes and Future Returns

We find that the negative relation between accruals and future abnormal returns documented by Sloan (1996) is due mainly to inventory changes. We propose three explanations for this result, derived from the prior literature, but find evidence inconsistent with all three explanations. To assist future investigations in formulating additional explanations, we document several empirical regularities for extreme inventory change deciles. We speculate that demand shifts explain our results, and examine the feasibility of alternative reasons for the stock markets apparent inability to recognize the impending profitability reversals. Our evidence is consistent with earnings management masking the implications of demand shifts.

Superstition and Financial Decision Making

In Chinese culture, certain digits are lucky and others unlucky. We test how such numerological superstition affects financial decision in the China IPO market. We find that the frequency of lucky numerical stock listing codes exceeds what would be expected by chance. Also consistent with superstition effects, newly listed firms with lucky listing codes experience inferior post-IPO abnormal returns. Further tests suggest that our conclusions are not driven by endogeneity.

Do Managers Choose the Proxy Material Delivery Method Strategically

Using hand-collected data for 2007-2008, we show that using the notice-only option to deliver proxy materials is an effective way to influence proxy voting outcomes in favor of the management. Firms performing poorly, firms with high CEO pay, and firms restating earnings are more likely to choose the notice-only option. In the subsequent year, notice-only firms experience lower stock returns and a drop in analysts’ earnings forecasts, consistent with that real economic factors drive the choice of the notice-only option. Overall, our findings suggest that the managers strategically use proxy delivery methods to control the negative impact of bad news.