Marilyn F. Johnson

Shareholder Wealth Effects of the Private Securities Litigation Reform Act of 1995

This paper investigates the reaction ofstock prices to enactment of the Private Securities LitigationReform Act of 1995 (PSLRA). Based on a sample of 489 high-technologyfirms, we find that the PSLRA was wealth-increasing, on average,and that the market reaction is more positive for firms at greatestrisk of being sued in a securities class action. However, wealso show that the PSLRA was less beneficial for firms likelyto be the subject of a meritorious lawsuit. Collectively, ourevidence implies that shareholders generally benefit from restrictionson private securities litigation, although these benefits aremitigated when other mechanisms for curbing fraudulent activityare inadequate.

Business Cycles and the Relation between Security Returns and Earnings

This paper examines business cycle variation in the earnings-returns relation. Earnings are more persistent when growth rates are high (i.e., in an expansion) than when growth rates are low (i.e., in a recession). Earnings are more persistent when production is high (i.e., in a credit crunch period) than when production is low (i.e., in a reliquification period). Relatedly, earnings response coefficients are larger in expansions (credit crunch periods) than in recessions (reliquification periods). Thus, earnings persistence and earnings response coefficients are positively associated with the rate of growth in economic activity and the level of economic activity.

Determinants of the Timing of Quarterly Earnings Announcements

Previous empirical research provides descriptive evidence on the timing pattern of earnings announcements but does not attempt to investigate potential explanations. Because some stakeholders are not likely to find it cost-effective to monitor the firm actively, managers have the opportunity to influence the perceptions of relatively uninformed stakeholders through accounting decisions such as the timing of earnings announcements. We provide evidence on this stakeholder explanation of timing decisions by identifying a setting that has the potential to discriminate between this and a confounding explanation for the normal timing pattern suggested in prior studies. Specifically, if managers rushed to report bad news following the October 1987 stock market crash in the belief that the ongoing market chaos reduced the reactions of stakeholders to the news, “normal” timing patterns would be (at least partially) reversed. Our results are generally consistent with prior research in that we document a (somewhat weak) association between earnings news and timing. However, consistent with the stakeholder explanation, we find that the earliest reporting group exhibited, on average, bad news. Thus, we infer that timing decisions for some firms are motivated by a desire to minimize the adverse reaction of stakeholders to bad news. In addition, we report evidence that suggests managers reduced the magnitude of reported earnings following the crash. This evidence corroborates our conclusion that managers are attempting to influence stakeholder perceptions of the firms earnings performance.

Stranded Costs and Competitive Forces in the Electric Utility Industry

It is likely that deregulation of the electric utility industry will force high-cost electric utilities to write off the “stranded” cost of plant and equipment that would be rendered obsolete in a competitive marketplace. In this paper, we examine the financial statement analysis implications of ongoing deregulation. Based on 1993 data for a sample of 111 large investor-owned electric utilities, our analyses suggest that it is possible to use financial statement data to form estimates of these potentially stranded costs. In addition, we find that recent trends toward deregulation are associated with an increase in the significance of the firms cost structure in explaining the relation between market values and book values of equity.

Financing Constraints and the Role of Cash Flow from Operations in the Prediction of Future Profitability

In this paper, we identify the economic contexts in which cash flow from operations (CFO) provides information about future profitability that is incremental to the information provided by current earnings. Prior research has yielded weak, inconsistent results that suggest that CFO provides incremental information in only extreme situations.’ In contrast, we provide strong evidence that CFO is value relevant across a broad class of observations. This paper is motivated by Bernard and Stober (1989, p. 648) and Wilson (1987, p. 320)’ who conclude that further progress in explaining the incremental information provided by cash flow will require an understanding of the economic contexts in which accrual earnings and cash flow disclosures are interpreted, and by Bowen, Burgstahler, and Daley (1987, p. 746), who suggest that market participants use CFO as a signal about liquidity. We use economic theory to show that CFO provides incremental information about a firm’s financing opportunity set. We rely on the work of Myers (1984) and others, who document that the existence of market imperfections gives rise to a financing hierarchy. When internal funds are preferred to external funds as a source of investment financing, the level of a firm’s investment expenditures will be influenced by the firm’s ability

Executive compensation contracts and voluntary disclosure to security analysts

We hypothesize that a CEO’s responsiveness to security analysts’ demands for information about the firm is influenced by the structure of the CEO’s compensation package. Our analysis is based on a sample of 469 CEO presentations to security analyst societies by 149 firms during the period 1984‐1988. Consistent with the argu ments of Nagar (1999; 1998) that CEO shareholdings and golden parachutes reduce the cost to the CEO of disclosing proprietary information, we find that CEO share holdings and the presence of golden parachutes are positively associated with the total amount of information that a CEO discloses at an analyst society presentation. Consistent with the argument that CEOs whose cash compensation is sensitive to firm performance have incentives to release bad news so as to lower expectations about future performance and, hence, bonus targets, CEO cash compensation performance sensitivities are positively associated with the CEO’s willingness to disclose bad news.

Federal Tax Law Trumps Indian Canon Implications for the Gaming Industry

On November 27, 2001, the Supreme Court ruled in Chickasaw v. United States that Native American gaming (NAG) firms are subject to federal excise and occupational taxes. Prior to the decision, these firms had been exempt from all federal taxation. We hypothesize that Chickasaw improves the competitive position of publicly traded gaming firms and their suppliers by leveling the playing field for publicly traded firms. Consistent with this argument, we find that the stock prices of publicly traded gaming firms and their suppliers reacted positively to the announcement of the Chickasaw Supreme Court and Tenth Circuit decisions. We also hypothesize that Nevada casinos are relatively insulated from competition because they offer a unique experience that is not easily replicated by NAG firms. Consistent with this argument, we find smaller stock price reactions for firms with Nevada operations.