Rodrigo S. Verdi

Adopting a Label: Heterogeneity in the Economic Consequences Around IAS/IFRS Adoptions

This study examines liquidity and cost of capital effects around voluntary and mandatory IAS/IFRS adoptions. In contrast to prior work, we focus on the firm-level heterogeneity in the economic consequences, recognizing that firms have considerable discretion in how they implement the new standards. Some firms may make very few changes and adopt IAS/IFRS more in name, while for others the change in standards could be part of a strategy to increase their commitment to transparency. To test these predictions, we classify firms into ‘label’ and ‘serious’ adopters using firm-level changes in reporting incentives, actual reporting behavior, and the external reporting environment around the switch to IAS/IFRS. We analyze whether capital-market effects are different across ‘serious’ and ‘label’ firms. While on average liquidity and costs of capital often do not change around voluntary IAS/IFRS adoptions, we find considerable heterogeneity: ‘Serious’ adoptions are associated with an increase in liquidity and a decline in cost of capital, whereas ‘label’ adoptions are not. We obtain similar results when classifying firms around mandatory IFRS adoption. Our findings imply that we have to exercise caution when interpreting capital-market effects around IAS/IFRS adoption as they also reflect changes in reporting incentives or broader changes in firms’ reporting strategies, and not just the standards.

Adopting a Label: Heterogeneity in the Economic Consequences Around IAS/IFRS Adoptions: adopting a label

This study examines liquidity and cost of capital effects around voluntary and mandatory IAS/IFRS adoptions. In contrast to prior work, we focus on the firm‐level heterogeneity in the economic consequences, recognizing that firms have considerable discretion in how they implement the new standards. Some firms may make very few changes and adopt IAS/IFRS more in name, while for others the change in standards could be part of a strategy to increase their commitment to transparency. To test these predictions, we classify firms into “label” and “serious” adopters using firm‐level changes in reporting incentives, actual reporting behavior, and the external reporting environment around the switch to IAS/IFRS. We analyze whether capital‐market effects are different across “serious” and “label” firms. While on average liquidity and cost of capital often do not change around voluntary IAS/IFRS adoptions, we find considerable heterogeneity: “Serious” adoptions are associated with an increase in liquidity and a decline in cost of capital, whereas “label” adoptions are not. We obtain similar results when classifying firms around mandatory IFRS adoption. Our findings imply that we have to exercise caution when interpreting capital‐market effects around IAS/IFRS adoption as they also reflect changes in reporting incentives or in firms’ broader reporting strategies, and not just the standards.

Peer Choice in CEO Compensation

Current research shows that firms are more likely to benchmark against peers that pay their Chief Executive Officers (CEOs) higher compensation, reflecting self-serving behavior. We propose an alternative explanation: the choice of highly paid peers represents a reward for unobserved CEO talent. We test this hypothesis by decomposing the effect of peer selection into talent and self-serving components. Consistent with our prediction, we find that the association between a firm’s selection of highly paid peers and CEO pay mostly represents compensation for CEO talent.

The Relation between Reporting Quality and Financing and Investment: Evidence from Changes in Financing Capacity

We use changes in the value of a firms real estate assets as an exogenous change in a firms financing capacity to examine (1) the relation between reporting quality and financing and investment conditional on this change, and (2) firms’ reporting quality responses to the change in financing capacity. We find that financing and investment by firms with higher reporting quality is less affected by changes in real estate values than are financing and investment by firms with lower reporting quality. Further, firms increase reporting quality in response to decreases in financing capacity. Our findings contribute to the literature on reporting quality and investment, and on the determinants of reporting quality choices.

Analysts’ Forecasts and Asset Pricing: A Survey

This survey reviews the literature on sell-side analysts’ forecasts and their implications for asset pricing. We review the literature on the supply and demand forces shaping analysts’ forecasting decisions as well as on the implications of the information they produce for both the cash flow and the discount rate components of security returns. Analysts’ forecasts bring prices in line with the expectations they embody, consistent with the notion that they contain information about future cash flows. However, analysts’ forecasts exhibit predictable biases, and the market appears to underreact to the information in forecasts and to not fully filter the biases in forecasts. Analysts’ forecasts are also helpful in estimating expected returns on securities, but evidence on the relation between analysts’ forecasts and expected returns is still scarce. We conclude by identifying unanswered questions and offering suggestions for future research. 197 Click here to view this articles online features: • Download figures as PPT slides • Navigate linked references • Download citations • Explore related articles • Search keywords ANNUAL REVIEWS Further A nn u. R ev . F in an c. E co n. 2 01 6. 8: 19 721 9. D ow nl oa de d fr om w w w .a nn ua lr ev ie w s. or g A cc es s pr ov id ed b y M as sa ch us et ts I ns tit ut e of T ec hn ol og y (M IT ) on 1 2/ 15 /1 6. F or p er so na l u se o nl y. FE08CH09-Kothari ARI 30 September 2016 8:6

Financial Reporting Regulation and Financing Decisions

We study the influence of a major reform in financial reporting regulation - the adoption of the International Financial Reporting Standards (IFRS) - on financial decisions around the world. Using IFRS as a setting with exogenous variation in information asymmetry, and relying on a pecking order theory framework, we test whether post-IFRS firms: (i) will be more likely to seek external (as opposed to internal) financing and (ii) conditional on raising external capital, will be relatively more likely to issue equity than debt. Further, we also study changes in financing choices conditional on financial distress. Our findings highlight the importance of disclosure regulation in explaining financing policies around the world.We study the influence of a major reform in financial reporting regulation on financing and capital structure decisions. Across a battery of tests, we document an increase in the issuance of external financing around the new regulation. Further, firms make different leverage decisions around the new regulation depending on their ex-ante debt capacity, and use their access to external financing to rebalance their capital structure. Our results are accentuated across firms facing higher adverse selection costs and in countries with stronger institutions. Our findings highlight the importance of financial reporting regulation in explaining financing as well as capital structure policies and provide insights into which firms are more likely to benefit from it.

Dividend clientele, new insights, and new questions: the Brazilian case

Este artigo analisa o efeito de clientela em dividendos e a hipotese de sinalizacao no mercado brasileiro de acoes entre 1996 e 2000. Neste periodo, a tributacao sobre dividendos era nula e sobre ganhos de capital variou entre zero e dez por cento. As firmas brasileiras enfrentam dois regimes de informacao, o que nos permite testar a hipotese de sinalizacao. De uma amostra com 394 observacoes, 39% possuem um preco de acao maior no primeiro dia ex-dividend do que no ultimo dia de cum-dividend. O preco de mercado e maior para dividendos nao antecipados, mas mesmo para dividendos pre-anunciados, os precos das acoes sao maiores do que o esperado, o que nao e coerente com a hipotese de clientela. Tambem encontramos evidencias de um volume de contratos positivamente anormal por volta da data nao antecipada de dividendo, o que e coerente com a hipotese de sinalizacao, mas nao se verificou nenhum volume de negociacoes anormal por volta das datas pre-anunciadas de dividendos. Nossos resultados sao inconsistentes com a hipotese de clientela, mas suportam a hipotese de sinalizacao.This paper analyzes the dividend clientele effect and the signaling hypothesis in the Brazilian stock market between 1996 and 2000. During this period, the dividend tax was zero and the capital gains tax varied between zero and 10%. Brazilian firms face two information regimes, which allow us to test the signaling hypothesis. From a sample of 394 observations studied, 39% show a first ex-dividend day stock price higher than the price on the last cum-dividend day. The market price is higher for unanticipated dividends but, even with pre-announced dividends, stock prices are higher than the expected level, which is inconsistent with the clientele hypothesis. We also find evidence of a positive abnormal volume around the unanticipated dividend date, which is consistent with the signaling hypothesis, but no abnormal trading volume around pre-announced dividend dates. Our findings are inconsistent with the clientele hypothesis but provide support for the signaling hypothesis.

The Effect of Economic Integration on Accounting Comparability: Evidence from the Adoption of the Euro

We examine the effect of economic integration on accounting comparability. Using the adoption of the euro as a shock to economic integration, we document two effects. First, we show a direct effect around the adoption of the euro – accounting comparability increases among industries in adopting countries relative to those in non-adopting ones and this effect is driven by increases in arm’s length financing. Second, economic integration also has an interactive effect, by influencing the effect of accounting standards harmonization (proxied by IFRS adoption) on accounting comparability. Specifically, the effect of IFRS adoption on accounting comparability is approximately three times larger for euro members than it is for non-euro members. Our paper highlights the role of economic integration and its interplay with accounting standards harmonization in shaping accounting comparability.

Clientela em dividendos, novos elementos e novas questões: o caso brasileiro

Este artigo analisa o efeito de clientela em dividendos e a hipotese de sinalizacao no mercado brasileiro de acoes entre 1996 e 2000. Neste periodo, a tributacao sobre dividendos era nula e sobre ganhos de capital variou entre zero e dez por cento. As firmas brasileiras enfrentam dois regimes de informacao, o que nos permite testar a hipotese de sinalizacao. De uma amostra com 394 observacoes, 39% possuem um preco de acao maior no primeiro dia ex-dividend do que no ultimo dia de cum-dividend. O preco de mercado e maior para dividendos nao antecipados, mas mesmo para dividendos pre-anunciados, os precos das acoes sao maiores do que o esperado, o que nao e coerente com a hipotese de clientela. Tambem encontramos evidencias de um volume de contratos positivamente anormal por volta da data nao antecipada de dividendo, o que e coerente com a hipotese de sinalizacao, mas nao se verificou nenhum volume de negociacoes anormal por volta das datas pre-anunciadas de dividendos. Nossos resultados sao inconsistentes com a hipotese de clientela, mas suportam a hipotese de sinalizacao.This paper analyzes the dividend clientele effect and the signaling hypothesis in the Brazilian stock market between 1996 and 2000. During this period, the dividend tax was zero and the capital gains tax varied between zero and 10%. Brazilian firms face two information regimes, which allow us to test the signaling hypothesis. From a sample of 394 observations studied, 39% show a first ex-dividend day stock price higher than the price on the last cum-dividend day. The market price is higher for unanticipated dividends but, even with pre-announced dividends, stock prices are higher than the expected level, which is inconsistent with the clientele hypothesis. We also find evidence of a positive abnormal volume around the unanticipated dividend date, which is consistent with the signaling hypothesis, but no abnormal trading volume around pre-announced dividend dates. Our findings are inconsistent with the clientele hypothesis but provide support for the signaling hypothesis.

The Feedback Effect of Disclosure Externalities

We investigate whether managers internalize the spillover effects of their disclosure on the stock price of related firms and strategically alter their disclosure decisions when doing so is beneficial. Using data on firm-initiated disclosures during all-cash acquisitions, we find that acquirers strategically generate news that they expect will depress the target’s stock price. The strategy generates a short-lived walk-down in the target firm’s stock price while the takeover price is being determined, reducing the acquisition cost for the acquirer. Our results are consistent with expected spillovers influencing the timing and content of firms’ disclosures.