Shawn X. Huang

Does Corporate Transparency Contribute to Efficient Resource Allocation

This paper examines whether a countrys corporate transparency environment, which includes the quality of accounting information, contributes to efficient resource allocation. Based on a cross-country study of 37 manufacturing industries in 37 countries, we provide three pieces of related evidence. First, we find the contemporaneous correlations in industry growth rates across country pairs are higher when there is a greater level of corporate transparency in the country pairs, after controlling for country-level economic and financial development. Second, we find the influence of transparency on these correlations is stronger when country pairs are at similar levels of economic development (GDP). Finally, when we control for the level of transparency explained by a countrys institutions in place, we find that residual transparency (unexplained by country-level factors) is associated with industry-specific growth rates. Taken together, the results are consistent with corporate transparency facilitating the allocation of resources across industry sectors.

The Role of Similar Accounting Standards in Cross‐Border Mergers and Acquisitions

This study investigates whether differences in accounting standards across countries create information costs that inhibit firms from investing in foreign markets. Using the frequency and dollar magnitude of cross†border mergers and acquisitions (M&As) from 32 countries over the period 1998–2004, we find that the aggregate volume of M&A activity across country pairs is larger for pairs of countries with similar Generally Accepted Accounting Principles (GAAP), and that this increased volume of M&A activity is driven by target countries that also have strong enforcement. We also find that the 2005 mandatory adoption of International Financial Reporting Standard (IFRS) attracted more cross†border M&As among IFRS†adopting countries, and that this increase in M&A activity within the IFRS countries is more pronounced for country pairs with low similarity in GAAP in the pre†IFRS adoption period. Overall, our results highlight the role of accounting standards and enforcement in shaping cross†border M&A activity.

CEO Inside Debt Incentives and Corporate Tax Sheltering

This paper examines the relation between CEO inside debt holdings (pension benefits and deferred compensation) and corporate tax sheltering. Because inside debt holdings are generally unsecured and unfunded liabilities of the firm, CEOs are exposed to risk similar to that faced by outside creditors. As such, theory (Jensen and Meckling [1976]) suggests that inside debt holdings negatively impact CEO risk‐appetite. To the extent that corporate tax shelters are likely to result in high cash flow volatility in the future, we expect that inside debt holdings will curb CEOs from engaging in tax shelter transactions. Consistent with the prediction, we document a negative association between CEO inside debt holdings and tax sheltering. Additional analyses suggest that the effect of inside debt on tax sheltering is more (less) pronounced in the presence of high default risk and liquidity threats (cash‐out options in pension packages). Overall, our results highlight the importance of investigating the implication of CEO debt‐like compensation for corporate tax policies.

Analyst Coverage and the Likelihood of Meeting or Beating Analyst Earnings Forecasts

This paper examines the relation between analyst coverage and whether firms meet or beat analyst earnings forecasts. We distinguish between whether a firms reported quarterly earnings meet (i.e., equal or exceed by one cent) or beat (i.e., exceed by more than one cent) its consensus analyst earnings forecasts. We find a positive relation between analyst coverage and whether a firm meets or beats analyst forecasts. However, the more pronounced relation is that between analyst coverage and meeting analyst forecasts. Also, when we consider exogenous shocks to analyst coverage due to brokerage mergers or closures and conglomerate spinoffs, we continue to find a robust positive relation only between analyst coverage and meeting analyst forecasts. To shed light on the causal relation involved, we examine and find that greater analyst coverage is associated with a significantly larger market reaction to negative earnings surprises. We also document that firms with greater analyst coverage are more likely to guide analyst earnings forecasts downwards. Taken together, our evidence suggests that greater analyst coverage raises the pressure on managers to meet analyst earnings forecasts. This article is protected by copyright. All rights reserved.

CEO Inside Debt Incentives and Corporate Tax Policy

This paper examines the relation between CEO inside debt holdings (pension benefits and deferred compensation) and corporate tax avoidance. Because inside debt holdings are generally unsecured and unfunded liabilities of the firm, CEOs are exposed to risk similar to that faced by outside creditors. As such, theory suggests that inside debt holdings negatively impact CEO risk-appetite. To the extent that aggressive tax policies involve significant cash flow shortfalls, high cash flow volatility, and losses in firm and CEO reputation in the future, we expect that inside debt holdings will curb CEOs from engaging in risky tax strategies. Consistent with the prediction, we document a negative association between CEO inside debt holdings and tax avoidance. Overall, our results highlight the importance of investigating the implication of CEO debt-like compensation for firm tax policies.

Investor Sentiment and Stock Option Vesting Terms

Using the details of vesting terms, we document that stock options granted in high sentiment periods tend to have shorter vesting period/duration, and are more likely to vest completely or have a significantly larger fraction vested within one year of the grant date relative to low sentiment periods. Further, we show that the sentiment effect on vesting terms is more pronounced among managers whose newly granted compensation comprises primarily stock options, and less pronounced for firms with strong monitoring mechanisms (i.e., more independent boards and higher institutional ownership). In addition, we explore the cross-sectional variation in sentiment-driven mispricing, and find that greater analyst coverage attenuates the impact of investor sentiment on vesting terms. Finally, we find that firms providing short vesting schedules during high sentiment periods indeed have significantly lower stock returns in the post-vesting period. Taken together, our evidence suggests that managers recognize prevailing sentiment, and demand stock options with short vesting terms to take advantage of mispriced stock prices and reduce the exposure of their wealth to the risk imposed by sentiment-driven mispricing.