Shai Levi

Is Extended-Hours Trading Indicative of Subsequent Returns?

Trading outside the main session occurs between 4:00 p.m. and 8:00 p.m. and between 4:00 a.m. and 9:30 a.m. It is typically dominated by institutional investors. This study examines whether trading in the extended hours is predictive of future returns. The article shows that when significant new earnings information is released during the extended-hours sessions, the extended-hours returns are positively and significantly associated with the following main session returns and even with long-term drift returns. The signal based on the extended-hours return is incrementally beneficial in predicting the future returns beyond the earnings surprise signal. The evidence is consistent with an underreaction to information on earnings news days and suggests that the return reaction during extended trading hours can help predict the return drift after earnings disclosure.

Strategic Trading at the Preopening after Earnings Announcements

Prior literature finds the price adjustment after earnings announcements is not immediate. This paper provides evidence that informed investors act strategically to prevent their information from immediately affecting prices after earnings announcements. Specifically, we examine the price discovery at the preopening auction after earnings announcements. We show that traders place more orders at the end of the preopening after earnings announcements, a behavior that reduces the market’s ability to learn their information, and we find they profit from these late orders.

The Deterrent Effect of Whistleblowing on Tax Collections

Abstract Many countries use tax-related whistleblowing programs, but the evidence on these programs suggests information provided by whistleblowers yields modest tax collections. However, when every citizen could become a whistleblower, deterrence from tax evasion can by itself increase tax collections. We find that tax collections significantly increased after the introduction of the whistleblowing mechanism in Israel in February 2013, although this mechanism directly yielded little or no tax collections. In support of the hypothesis that deterrence led to the increase in tax collections, we find that collections increased in industries with high tax-evasion risk, but not in industries with low tax-evasion risk. Furthermore, the increase in tax collections occurred in corporations, where the timing and magnitude of tax payments are more discretionary, but not from employees, for whom employers directly deduct taxes. Eventually, following reports that the whistleblowing mechanism is ineffective, deterrence diminished and tax collections decreased, suggesting the deterrence effect was temporary.

Estimating the Precision of Information on Earnings and Non-earnings Announcement Days, and Its Relation with the Cost of Equity

ABSTRACT Using daily stock returns, we estimate the precision of information during earnings and non-earnings announcement days, and find that although the precision of information in daily stock returns increases during earnings announcement days, it explains less of the variation in expected returns than the precision of information on non-earnings announcement days. Our findings suggest that the precision of earnings disclosures has a small effect on the cost of equity relative to the precision of information on other days of the year.

Managerial Incentives, Options, and Cost-Structure Choices

This study explores the relationship between changes in managerial risk-taking incentives and adjustments of firms’ cost structures, particularly the operating leverage (fixed-to-variable cost ratio). We find managers reduce operating leverage by substituting fixed costs with variable costs, mainly in the selling, general, and administrative (SG&A) and research and development (R&D) cost components, in response to reductions in option-based compensation following the issuance of FAS 123R. Managers facing a decrease in risk-taking incentives adjust operating leverage downward because high operating leverage intensifies the downside potential of earnings. Overall, we present compelling evidence that managers adjust the cost structure of their firms in response to a reduction in risk-taking incentives.

Business Corruption and Economic Prosperity

Prior literature shows government corruption mostly hurts poorer economies, whereas recent events, including the 2008 US economic crisis, suggest business corruption may harm growth in wealthier economies. Using multi-national surveys in which citizens communicated their perceptions of corruption levels for both the private and the public sectors, we examine the extent of business corruption relative to government corruption in countries, and its relation to economic prosperity. We find that citizens of wealthier countries report higher business corruption than citizens of poor countries, and relatively lower government corruption. Business corruption is evidently a greater concern to citizens of wealthier countries. Furthermore, we find that an increase in perceived business corruption is associated with a decrease in income per capita mainly in wealthy countries. In wealthier economies, business trust has a larger role, and perceived business corruption has a stronger effect on growth. Finally, our evidence suggests an increase in perceived business corruption leads to increase in regulation, and the marginal effect of the regulation on growth is positive.

Loss-Aversion Discount on Earnings News

This study tests and finds that stock prices around earnings announcements reflect investor aversion to negative news. We find that when forecasts are negatively skewed, indicating considerable downside risk, earnings announcement returns are eventually more positive. Announcement returns are also positive after controlling for the effect of negative forecast skewness on earnings expectations and earnings surprise. Our results suggest the increase in the likelihood of large negative earnings news causes investors not only to lower their earnings expectations, but also to impose an additional price discount. When earnings are announced and uncertainty is resolved, the discount is removed and announcement returns are positive. By contrast, positive skewness in earnings forecasts does not affect announcement returns. Taken together, the evidence suggests investors assign higher discounts to negative uncertainty than to positive uncertainty. The results imply that to lower cost of equity, firms should be concerned more with resolving negative than positive uncertainty.