Shiva Sivaramakrishnan

On the Association Between Corporate Governance and Earnings Quality

This study investigates whether accrual quality, earnings persistence and earnings predictive ability are affected by the adequacy rather than the strength of corporate governance. Under the premise that firms that have consistently outperformed their industry counterparts in the past have less residual agency problem, we use past industry-adjusted performance as a measure of the adequacy of corporate governance in place. We use Gompers’ index as a measure of the strength of corporate governance. We find that reporting/earnings quality - accrual quality, earnings persistence, and earnings predictability - is higher for firms that have consistently outperformed their industry counterparts in the past regardless of whether the corporate governance levels were strong or weak. We also find that reporting/earnings quality is higher for such firms after controlling for the strength of corporate governance.

Dividend Changes, Cash Flow Predictability, and Signaling of Future Cash Flows

We present fresh evidence on the validity of the dividend signaling hypothesis (DSH), by using a new testing approach. Using a simple dividend signaling model, we derive three empirically identifiable drivers of the marginal net benefit of signaling: cash flow predictability, market-to-book ratio, and past equity returns. Our empirical tests support the DSH. There is a significantly greater association between current dividend changes and future earnings performance for firms with low cash flow predictability, low market-to-book ratio, and low past equity returns. We also present evidence that the marginal signaling benefits at the firm-level are time-varying, increasing (decreasing) in booms (recessions) and in periods of high (low) aggregate stock market performance.

Does Mandatory Audit Firm Rotation Improve or Impair Corporate Investment Efficiency

We develop a framework with which to analyze the interactions among auditor attestation strategy, corporate investment decision, and capital market valuation. We use this framework to examine mandatory audit firm rotation (Section 207 of the Sarbanes-Oxley Act) and identify its three potential effects: the real (cash flow) effect; the attestation effect; the price effect. In particular, we show that mandatory audit firm rotation impairs corporate investment efficiency for firms with rosy prospects but improves corporate investment efficiency for firms with gloomy prospects.

On the Value of Public Predecision Information in Principal-Agent Models

We examine the principals preference for a public predecision information system that produces a signal about a parameter of the firms production function. We show that the discreteness of action space plays a crucial role in establishing the principals preference for suppressing the release of public information. Without this discreteness, the principal strictly prefers to install the information system provided that the second best action policy is always interior. We use a numerical example to demonstrate that the negative result can obtain even with continuous action choice so long as the action choice is not interior for at least one of the information signals.

Strategic Director Appointments and Board Voting Patterns

In this paper we present a systematic equilibrium analysis of board voting patterns. Contrary to conventional wisdom, we find that even when a board consists entirely of well-intentioned independent directors, rubberstamping and abstaining can arise as equilibrium behaviors. We also find that when we allow shareholders and managers the discretion to appoint directors to their boards, shareholders may not always prefer the strongest boards, and managers with divergent incentives may not always prefer the weakest boards. Finally, we also offer insight into the relation between board size and its efficacy.

The Certification Role of Insider Participation in PIPEs

In this paper we provide new insights into the motives underlying insider participation in Private Investments in Public Equity (PIPEs) by considering the association among insider participation, pricing and contractual terms. We find that board seats and weak pre-PIPE performance are important determinants of insider participation. We also find evidence supporting the certification motive for insider participation, which manifests itself in lower discounts to PIPE investors and improved future firm operating performance only when insiders participate. Announcement wealth effects are significantly higher when insiders participate than when they are absent both for single and repeated PIPE transactions.

Do Conflict-of-Interest Regulations Help or Hinder the Information Provision Role of Financial Analysts?

In 2002, a number of regulatory actions were introduced to alleviate the conflicts of interest faced by research analysts with investment banking affiliations. While the regulations have been beneficial to the extent that they eliminated these conflicts, they also gave rise to unintended consequences due to financial and informational restrictions imposed by severing the link between research and investment banking functions. While prior research has provided evidence of reduced conflicts of interest as well as unintended consequences, the overall impact of the regulations on the information provision role of financial analysts has remained unclear. In this paper, in order to investigate whether the regulations had an overall positive or negative effect in terms of analysts’ information dissemination, we examine the pre- to post-regulation differences in liquidity changes that surround coverage initiations. We document that, on average, coverage initiations in the post-regulation period evoke greater liquidity improvements than the pre-regulation period. This beneficial impact is stronger for high growth firms and firms with high pre-existing analyst coverage. Supplemental tests on the market reactions to earnings news contained in coverage initiations further corroborate these findings. It appears that the overall informational impact of the regulations has been positive.

Main Street versus Wall Street: Efficiency and Wealth Redistribution Effects of Insider Trading

By addressing the interaction between security market microstructure and the generalized agency conflict between managers and shareholders, we study the effects of informed insider trading on productive efficiency, price discovery, and wealth redistribution. Insider trading can lead simultaneously to production distortions and higher ex ante shareholder value because there is a redistribution of wealth from uninformed liquidity traders to uninformed outside shareholders through the optimal design of managerial compensation contracts; this is in contrast to the literature that considers insider trading to either unambiguously worsen the managerial agency problem or improve managerial incentives. Security market characteristics, such as the trading noise in the firms stock, affect productive efficiency by influencing the managers equity-based compensation and, in turn, equilibrium market liquidity is influenced by firm-specific characteristics. Insider trading can therefore have conflicting effects on productive efficiency and the informational efficiency of stock prices; it also generates wealth redistribution not only between uninformed and informed traders but between uninformed traders and uninformed shareholders as well. We identify the firm and market characteristics that determine the net welfare impact of insider trading.