Shehzad L. Mian

Evidence on Corporate Hedging Policy

This paper provides empirical evidence on the determinants of corporate hedging decisions. The paper examines the evidence in light of currently mandated financial reporting requirements and, in particular, the constraints placed on anticipatory hedging. Data on hedging are obtained from 1992 annual reports for a sample of 3,022 firms. Out of the 771 firms classified as hedgers, 543 firms disclose information in their annual reports on their hedging activities; the remaining 228 firms report use of derivatives but no information on hedging activities. Based on the evidence, I draw the following conclusions with respect to the models of hedging: evidence is inconsistent with financial distress cost models; evidence is mixed with respect to contracting cost, capital market imperfections, and tax-based models; and evidence uniformly supports the hypothesis that hedging activities exhibit economies of scale.

On the choice and replacement of chief financial officers

Abstract This paper provides empirical evidence regarding why firms replace their CFOs. Empirical tests are based on a sample of 2,227 CFO appointments over the 1984–1997 time period. Key findings reported in the paper are: (a) external CFO succession rate is markedly higher than the external CEO succession rate, (b) the incidence of retirement is less common for serving CFOs as compared to the top executive, (c) CFO turnover is preceded by negative excess returns, (d) CFO turnover is preceded by a decline in operating return on assets in the pre-period, (e) announcements of CFO turnover are associated with a significant negative stock price reaction when old CFO quits and firm replaces with an internal appointment, and (f) CFO turnover is preceded by abnormally high CEO turnover. Overall, evidence is consistent with the hypothesis that CFO turnovers are disciplinary. Evidence is also consistent with the hypothesis that rapid sales growth accompanied by weak operating performance leads firms to bring in outside talent.

Incentives for unconsolidated financial reporting

Abstract We provide a positive analysis of a firms decision to report the operations of a financial subsidiary on a consolidated versus an unconsolidated basis. Our evidence indicates that the firm is more likely to choose consolidated reporting the greater the operating, financial, and informational interdependencies between parent and subsidiary. Moreover, our evidence offers no support for the FASB hypothesis that firms use unconsolidated financial subsidiaries to understate the fixed claims on their balance sheets.

Incentives associated with changes in consolidated reporting requirements

Abstract We examine the effects of mandated changes regarding consolidation. Analysis of FAS 94 submissions indicates: firms with unconsolidated subsidiaries lobby against FAS 94; strategic lobbying; accounting-data users lobby against FAS 94; and accounting firms support the proposal more than industrials. FAS 94 adoption produced negative returns in affected firms. In response to FAS 94, firms with unconsolidated financial subsidiaries were more likely to sell, close, or reorganize the subsidiary, retire debt, or securitize corporate assets. Finally, Canadian firms switch to unconsolidated reporting after a 1978 amendment to Canadian GAAP eliminating limitations on its use. Collectively this evidence suggests FAS 94 eliminated a valuable reporting alternative.