Jennifer Wu Tucker

Is Openness Penalized? Stock Returns around Earnings Warnings

Prior research finds that firms warning investors of an earnings shortfall experience lower returns than non-warning firms with similar risks and earnings news. Openness thus appears to be penalized by investors. Yet, this finding may be due to a self-selection bias that occurs when firms with a larger amount of unfavorable non-earnings news (‘‘other bad news’’) are more likely to warn. In this paper I use a Heckman selection model to infer the amount of other bad news and document that, on average, warning firms have a larger amount of other bad news than non-warning firms. After controlling for this effect, I find that warning firms’ returns remain lower than those of non-warning firms in a short-term window ending five days after earnings announcement. When this window is extended by three months, however, warning and non-warning firms exhibit similar returns. My evidence suggests that openness is ultimately not penalized by investors.

Causes and Consequences of Disaggregating Earnings Guidance

Whether managers should provide earnings guidance, especially quarterly guidance, has been a hotly debated policy issue. Influential organizations have urged firms to stop providing earnings guidance to reduce earnings fixation and short-termism in the capital markets. Little attention has been paid to an alternative proposal: instead of ceasing earnings guidance, companies could provide disaggregated earnings guidance. No archival evidence exists regarding the determinants of disaggregated earnings guidance and its effects on the firm and its information environment. We find that once managers provide guidance, the decision to disaggregate this guidance is primarily driven by demand-and-supply factors that exhibit little change from year to year rather than by opportunistic factors. We find more timely analyst forecast revisions (with no compromise of forecast accuracy), a greater magnitude of revisions, and a larger reduction in analyst disagreement for disaggregating firms than for non-disaggregating firms. These findings suggest that disaggregation enriches a firm’s information environment. We also find that disaggregation helps managers align analyst expectations with their own, but firms are punished by investors for providing multiple performance targets but missing them.

Nonearnings Corporate Guidance

We examine nonearnings related disclosure and find that many firms voluntarily provided guidance on capital expenditure (CAPEX) and provided strategic plan disclosure (SPD) before recent proposals to increase nonearnings information disclosure. Furthermore, we find that firms with high long-term institutional ownership tend to provide both earnings and CAPEX guidance; that turnaround firms tend to provide SPD in lieu of earnings guidance; and growth firms tend to provide earnings guidance without SPD. Our results suggest that unconstrained firms make optimal disclosure decisions and that corporate guidance behaviors might not have contributed to earnings fixation and myopia in capital markets.

Securitization and Insider Trading

Securitizations are complex and opaque transactions. We hypothesize that bank insiders trade on private information about banks’: (1) securitization-related recourse risks, (2) not-yet-reported current-quarter securitization income, and (3) securitization-based business model sustainability. We provide evidence that proxies for each of these types of insider information are positively associated with insider trading. Specifically, we find that net insider sales in the 2001Q2-2007Q2 pre-financial crisis quarters predict not-yet-reported non-performing securitized loans and securitization income for those quarters and that net insider sales during 2006Q4 predict write-downs of securitization-related assets during the 2007Q3-2008Q4 crisis period. We find that net insider sales are more negatively associated with banks’ subsequent stock returns in their securitization quarters than in other quarters. In supplemental analysis, we show that the above findings are driven by trades by banks’ CEOs and CFOs, and that insiders avoid larger stock price losses through 10b5-1 plan sales than through non-plan sales.

Classification and Market Pricing of the Cash Flows and Accruals on Trading Positions

We investigate whether the market prices the change in net trading assets as an operating or non-operating activity or some mixture of the two, and whether this market pricing is consistent with the (fundamental) association of the change in net trading assets with future cash flows from operations. Our investigation is motivated by the observation that despite the classification of the cash flows on trading positions as operating under FAS 102 trading is economically a hybrid operating/non-operating activity. Reflecting this hybrid nature, we hypothesize and find that the change in net trading assets has a less positive association with returns and future CFO than do the pure operating components of cash flows and accruals, and that it has a more positive association with returns and future CFO than do the pure non-operating components of cash flows. To the best of our knowledge, our paper is the first to propose and test hypotheses about the valuation implications of such hybrid cash flows and accruals.

The Effects of a Mixed Approach toward Management Earnings Forecasts: Evidence from China

Chinese regulators mandate management earnings forecasts when managers’ earnings expectations meet bright-line thresholds and allow voluntary forecasts in other circumstances. We examine the effects of this mixed approach. We find that Chinese mandatory forecasts have significant information content. Moreover, we observe a learning effect: mandatory forecasts appear to stimulate voluntary forecasts in subsequent periods as managers become familiar with the forecasting and disclosing procedures through forced experience. We find one negative consequence of the mixed approach, however: managers appear to manipulate earnings to avoid the forecast threshold of large earnings decreases. Overall, we document the pros and cons of a mixed approach toward management earnings forecasts in a major emerging market.

Corporate disclosure and research opportunities in China

Abstract This article is developed from the authors’ keynote speeches at the Second Research Conference of the China Journal of Accounting Studies in November 2014 in Beijing, sponsored by the Accounting Society of China. We first discuss the importance of corporate disclosure and the importance of disclosure research in the US. We then discuss the opportunities of disclosure research in the Chinese setting and provide advice.

Annoncer ou ne pas annoncer? Causes et conséquences de l’abandon des annonces de résultats trimestriels prévisionnels

Depuis quelques annA©es, les annonces de rA©sultats trimestriels prA©visionnels font l’objet de sA©vA¨res critiques, leurs dA©tracteurs affirmant qu’elles incitent A la gestion A courte vue et A d’autres pA©chA©s. C’est pourquoi les institutions influentes enjoignent aux dirigeants de cesser la publication de rA©sultats trimestriels prA©visionnels. Les auteurs examinent empiriquement les causes de cet abandon de la publication de rA©sultats trimestriels prA©visionnels et constatent que la piA¨tre performance opA©rationnelle — bA©nA©fices A la baisse, rA©sultats infA©rieurs aux prA©visions des analystes et rentabilitA© prA©vue plus faible — est le principal motif pour lequel les entreprises abandonnent les annonces de rA©sultats trimestriels prA©visionnels. Dans les entreprises qui ont abandonnA© ces annonces, les auteurs n’observent pas de croissance apprA©ciable de l’investissement A long terme aprA¨s que les dirigeants se soient libA©rA©s de la myopie des investisseurs. Contrairement A l’affirmation selon laquelle les entreprises publieraient davantage d’autres informations A caractA¨re prA©visionnel en remplacement des annonces de rA©sultats trimestriels et prA©visionnels, les auteurs constatent que les entreprises se dA©robent. Ils observent A©galement une dA©tA©rioration de l’environnement informationnel des entreprises qui cessent la publication de rA©sultats trimestriels prA©visionnels, dA©tA©rioration qui se manifeste par un plus grand nombre d’erreurs dans les prA©visions des analystes et une plus grande dispersion des prA©visions et par une diminution de l’intA©rAat des analystes. Ces constatations rA©vA¨lent, dans leur ensemble, que les entreprises qui abandonnent les annonces de rA©sultats trimestriels prA©visionnels sont principalement des entreprises en difficultA©, et que la dA©cision d’abandon n’est avantageuse ni pour les entreprises qui la prennent ni pour leurs investisseurs.