Kristian D. Allee

Private versus Public Corporate Ownership: Implications for Future Profitability

We investigate the association between public versus private ownership and future long-term changes in profitability. Managers have long debated the implications of public and private corporate ownership; however, little empirical research has provided insight into the issue. We find robust evidence that public firms are associated with significantly lower future long-term changes in operating profitability compared to private firms matched on current profitability, size, growth and industry. We also find that the differential future long-term changes in profitability of public and private firms manifests in both future changes in profit margins and changes in asset turnovers. Additionally, we find evidence consistent with an association between short-termism, competition, and agency costs and the lower future long-term changes in profitability for public versus private firms. The results provide insight for managers and investors into the differential future changes in profitability of public versus private firms and into the factors that drive the differential profitability.

Estimating the Equity Risk Premium with Time-Series Forecasts of Earnings

The size of the equity risk premium remains an unanswered question in the accounting and finance literature. This study proposes a new approach to reverse-engineer the equity risk premium, distinct from prior research, in that it does not rely on analysts’ forecasts to proxy for the market’s earnings expectations. That I instead use time-series earnings forecasts allows an investigation of the equity risk premium across a broader cross-section of firms, including smaller firms that are not covered by analysts. This study finds that risk premia are significantly higher for firms not followed by analysts. This suggests that studies requiring analysts’ earnings forecasts to estimate the equity risk premium have likely underestimated its overall level. Additional validity tests on my firm- and year-specific risk premium estimates reveal that these estimates consistently and predictably relate to multiple measures of risk, particularly for firms not followed by analysts.

Independent Analysts’ Estimates of Firm Value

We provide new evidence on the quality of independent analysts’ firm value estimates (i.e., price targets). Whereas prior literature generally finds that independent analysts’ research underperforms that of sell-side analysts using earlier sample periods, we show that, in a recent sample period, independent analysts’ research performs more favorably. That is, we find independent analysts’ price targets are less optimistic than investment-bank analysts’ forecasts with limited evidence of lower accuracy. Moreover, independent analysts’ price targets are less optimistic for firms with characteristics previously associated with overall analyst optimism, including higher stock price momentum and higher valuations. Our evaluation of the fundamental inputs from which independent analysts form their price targets suggests that less optimistic long-term growth forecasts could be responsible for the lower relative optimism in their price targets. Yet, even though independent analysts’ price targets provide less optimistic forecasts of firm value, the market reacts relatively less strongly to independent analysts’ price target revisions. These findings suggest that investors as well as those interested in extending empirical research into firm valuation can benefit from independent analysts’ price targets.

Detecting Financial Misreporting with Real Production Activity

This study examines whether real production activity measures available to auditors, and in some cases regulators and investors, are useful in detecting financial misreporting. In contrast to accounting performance measures drawn from accrual-basis accounting, this study employs firm-level electricity consumption data which represents a firm’s real production activities in a timely and unbiased manner. Accordingly, we posit that inconsistent growth patterns between accounting performance and electricity consumption are a useful indicator in detecting financial misreporting. Using electricity consumption data for Korean firms from 2006 to 2014, we find that discretionary accruals are increasing in the growth difference between a firm’s revenue and electricity consumption. We also find that this growth difference increases the likelihood of subsequent adverse financial accounting restatements. Our findings are robust to alternative measures of financial misreporting including accounting enforcement actions and qualified audit opinions. Overall, our study documents new evidence on the role of real production activities in detecting financial misreporting.

The Genesis of Voluntary Disclosure: An Analysis of Firms’ First Earnings Guidance

The decision to provide earnings guidance for the first time is an important disclosure decision that has a significant effect on subsequent earnings guidance decisions. We explore how soon managers initiate earnings guidance after an initial public offering (IPO) and the factors associated with the adoption of this new disclosure policy. Our results suggest that managers in the current environment often initiate public guidance soon after their IPOs. Specifically, we find that more than 31 (59) percent of our sample firms provide earnings guidance within 90 (365) days of going public. We explore factors that are likely related to the supply of and demand for early earnings guidance. We find evidence of a positive association between the timing of earnings guidance initiation and the involvement of influential external parties (analysts, venture capital firms, and private equity firms) and the proportion of industry peers that guide and a negative association between the timing of first guidance and IPO information uncertainty. In addition, we find a positive association between abnormal returns and first guidance forecast news, consistent with investors generally relying on first-time guidance. We also find that firms in short-term focused industries tend to provide shorter-horizon initial guidance. Overall, the results indicate that, while the timing of first guidance varies with firm-specific measures of the costs and benefits of disclosure predicted by theory, the horizon of first guidance depends mostly on industry factors.

Initiating earnings guidance: Factors related to IPO firms’ first guidance decision

The decision to provide earnings guidance for the first time is an important disclosure decision that has a significant effect on subsequent earnings guidance decisions. We explore how soon managers initiate earnings guidance after an initial public offering (IPO) and the factors associated with the adoption of this new disclosure policy. Our results suggest that managers in the current environment often initiate public guidance soon after their IPOs. Specifically, we find that more than 31 (59) percent of our sample firms provide earnings guidance within 90 (365) days of going public. We explore factors that are likely related to the supply of and demand for early earnings guidance. We find evidence of a positive association between the timing of earnings guidance initiation and the involvement of influential external parties (analysts, venture capital firms, and private equity firms) and the proportion of industry peers that guide and a negative association between the timing of first guidance and IPO information uncertainty. In addition, we find a positive association between abnormal returns and first guidance forecast news, consistent with investors generally relying on first-time guidance. We also find that firms in short-term focused industries tend to provide shorter-horizon initial guidance. Overall, the results indicate that, while the timing of first guidance varies with firm-specific measures of the costs and benefits of disclosure predicted by theory, the horizon of first guidance depends mostly on industry factors.