Ron Shalev

CEO Compensation and Fair Value Accounting: Evidence from Purchase Price Allocation

This study investigates the impact of CEO compensation structure on post-acquisition purchase price allocation, an accounting procedure that involves fair value estimation of various assets and liabilities. We find that CEOs whose compensation packages rely more on earnings-based bonuses are more likely to overallocate the purchase price to goodwill, the largest asset recorded post-acquisition. Because goodwill is not amortized, the overallocation likely increases post-acquisition earnings and bonuses. We also find that, when the acquirers CEO bonus plan includes performance measures that are not affected, or are less affected, by the overstatement of goodwill, such as cash flows, sales, or earnings growth, the overallocation to goodwill motivated by bonus plans diminishes.

Target Firm-Specific Information and Acquisition Efficiency

This study investigates whether firm-specific information about targets improves acquisition efficiency. We define acquisition efficiency as the total surplus generated by an acquisition (Vickrey 1961; Milgrom 1989) and measure it as the difference in the value of the merged firm and the sum of the two firms operating separately. We find a positive association between target firm-specific information and acquisition efficiency that is driven mainly by diversifying acquisitions. Additional evidence suggests that both the likelihood of the withdrawal of an announced acquisition and the likelihood of a future divestiture of a target decrease with target firm-specific information. Taken together, our findings suggest that the availability of this information improves merger and acquisitions efficiency.

Factors Associated with the Year-End Decline in Working Capital

Working capital is an important indicator of firm operational efficiency. All else being equal, lower levels signal greater efficiency. Managers are thus likely to be motivated to report lower levels of working capital at times of greater external attention. We find that working capital levels decrease in the fourth fiscal quarter significantly more than expected, conditional on seasonal changes in economic activity. The decrease subsequently reverses in the following first fiscal quarter. Evidence indicates that firms manage down year-end working capital through transactions that increase year-end operating cash flow and that firms spread this activity over all working capital accounts. Finally, the temporary decrease in year-end working capital is correlated with compensation benchmarks and analysts’ annual cash flow forecasts. The temporary drop is also more pronounced for firms with industry dominance. This paper was accepted by Mary Barth, accounting.

Bond Repurchase Objectives and the Repurchase Method Choice

This study investigates how firms bond repurchase objective affects its choice of repurchase method. Unlike tender offers, open-market repurchases are not pre-announced and buyers identity is unknown to the seller. We provide evidence that firms are likely to repurchase on the open-market when bonds are mispriced and when firms seek to manage their financial reports, either to meet earnings targets or avert debt covenant violations. When firms seek to amend indenture terms, they prefer tender offers. We also find that firms information quality affects the likelihood of mispricing exploitation behavior and that insiders buy firms stocks around open-market repurchases. & 2016 Elsevier B.V. All rights reserved.

The Decision between Tender Offers and Open Market Bond Repurchase: Do Bond Issuers Time the Market?

We analyze the observed increase, at times of capital market crises, in the number of firms repurchasing their bonds in the open market, a stealthy method to repurchase bonds, in which bondholders are not aware of the buyer’s identity, and the observed decrease in the number of firms using a tender offer, a transparent method to repurchase bonds, in which issuers pre-announce their repurchase intentions, and provide evidence consistent with issuers timing the bond market. Specifically, we find that at times of heightened uncertainty, during which bond prices tend to be depressed, issuers are more likely to repurchase the bonds in the open market than via a tender offer. Analysis of both the one year-ahead returns on the repurchased bonds and the issuers accounting gains from the repurchase provides ex-post evidence that bond repurchased in the open market were executed at better term for the issuers than bonds repurchased via tender offers. Finally, we find that insider stock buys are more prevalent around times of open market repurchases.This study investigates how firm׳s bond repurchase objective affects its choice of repurchase method. Unlike tender offers, open-market repurchases are not pre-announced and buyer׳s identity is unknown to the seller. We provide evidence that firms are likely to repurchase on the open-market when bonds are mispriced and when firms seek to manage their financial reports, either to meet earnings targets or avert debt covenant violations. When firms seek to amend indenture terms, they prefer tender offers. We also find that firm׳s information quality affects the likelihood of mispricing exploitation behavior and that insiders buy firm׳s stocks around open-market repurchases.