Corporate Finance Commons^™

Bringing Freud To Fraud: Understanding The State-Of-Mind Of The C-Level Suite/White Collar Offender Through “A-B-C” Analysis, Sridhar Ramamoorti, Daven Morrison, Joseph W. Koletar

Accounting Faculty Publications

In this paper we use a primarily “behavioral lens” (cf. Ramamoorti, 2008; Ramamoorti & Olsen, 2007) to try to understand the state-of-mind and motivations of the C-level suite/white collar offender before, during, and after the perpetration of management fraud. We offer a useful conceptual approach called “A-B-C Analysis” to understand the incidence of fraud from individual and group perspectives, as well as more macro-oriented, cultural/contextual levels. It is our hypothesis that fraud occurs either because of an individual criminal’s calculated/intentional betrayal of trust, a duo or team of “bad boys” who push ethical envelopes, and/or an organizational/social/national culture of passivity, …

Tunneling Through Intercorporate Loans: The China Experience, Guohua Jiang, Charles M. C. Lee, Heng Yue

Research Collection School of Accountancy

This study investigates a particularly brazen form of corporate abuse, in which controlling shareholders use intercorporate loans to siphon billions of RMB from hundreds of Chinese listed companies during the 1996 to 2006 period. We document the nature and extent of these transactions, evaluate their economic consequences, examine factors that affect their cross-sectional severity, and report on the mitigating roles of auditors, institutional investors, and regulators. Collectively, our findings shed light on the severity of the minority shareholder expropriation problem in China, as well as the relative efficacy of various legal and extra-legal governance mechanisms in that country.

Customer Satisfaction And Stock Returns Risk, Kapil R. Tuli, Sundar G. Bharadwaj

Research Collection Lee Kong Chian School Of Business

Over the past decade, several studies have argued that customer satisfaction has high relevance for financial markets because it has a significant impact on stock returns. However, little attention has been given to understanding the impact of customer satisfaction on the risk of stock returns. The finance literature suggests that investors that judge performance only in terms of returns place more resources than warranted in risky opportunities, forgo profitable opportunities, and apply misguided performance evaluations. Accordingly, this study develops, tests, and finds empirical support for the hypotheses that positive changes (i.e., improvement) in customer satisfaction result in negative changes (i.e., …

At A Crossroads: The Impact Of International Financial Reporting Standards In The U.S., Cindy K. Harris

Business and Economics Faculty Publications

Public companies in the United States face a new challenge. As set forth in its roadmap for implementation, the Securities and Exchange Commission (“SEC”) is considering the potential use of financial statements prepared in accordance with international financial reporting standards (“IFRS”.) The chief goal of these global standards is to establish a uniform system to improve comparability of companies’ financial positions. For decades, Generally Accepted Accounting Principles (“GAAP”) have been the framework of financial statement preparation for public companies in the U.S. The movement to IFRS represents an unprecedented change in the basis of financial reporting, since IFRS would supersede …

Regulation Of The Otc Derivatives Market: A Regulatory Proposal Of Cds, Erik Welin

WCBT Undergraduate Publications

According to many commentators the credit derivatives and especially CDS have been a leading cause to the development of the current financial crisis. During the last year, policy makers, regulators, and other commentators around the world have therefore focused their attention on how to regulate OTC derivatives and especially CDS.

The purpose of this paper is to analyze some of the proposed regulatory responses to OTC derivatives and especially CDS from an economic point of view. The paper proposes a twofold regulatory response. First it proposes that we return to the old common law rule of "rule against difference contracts". …

Collaborative Standards, Voluntary Codes And Industry Self-Regulation, Lawrence J. Lad, Craig B. Caldwell

Scholarship and Professional Work - Business

In a complex, global economy, firms seek a range of mechanisms for addressing regulatory and social movement pressures. This requires an evolution beyond our current models of response to regulation and control. This paper offers ideas on collaborative control and industry self-regulation as alternative mechanisms for addressing regulatory complexity. It explores a range of self-regulatory practices worldwide, proposes a framework for examining its use, potential and limits, and discusses the critical role of third-party organisations in the process.

Finance Flies High: How Unilever Redesigned The Finance Function To Build Brand Value And Drive Growth, Barbara M. Tarasovich, Bridget Lyons

WCBT Faculty Publications

Unilever's finance team played a key role in the success of their brands. The company achieved its fourth consecutive year of accelerating organic sales growth from less than 0.5% in 2004 to more than 7% in 2008, according to Jim Lawrence, Unilever's CFO. Its strategy is to focus on volume growth and strengthening the competitive position of the company's brands. In this article, the authors examine how the finance function at Unilever was redesigned to deliver the firm's strategic goals, including an emphasis on volume growth and competitive position of its brands. Beginning in 2005, the finance team at Unilever …

Conflicts Of Interest And Stock Recommendations: The Effects Of The Global Settlement And Related Regulations, Ohad Kadan, Leonardo Madureria, Rong Wang, Tzachi Zach

Research Collection Lee Kong Chian School Of Business

We study the effect of the Global Analyst Research Settlement and related regulations on sell-side research. These regulations attempted to mitigate the interdependence between research and investment banking. We document that following the regulations many brokerage houses have migrated from the traditional five-tier rating system to a three-tier system. Optimistic recommendations have become less frequent and more informative, whereas neutral and pessimistic recommendations have become more frequent and less informative. Importantly, the overall informativeness of recommendations has declined. The likelihood of issuing optimistic recommendations no longer depends on affiliation with the covered firm, although affiliated analysts are still reluctant to …

Leverage Change, Debt Overhang, And Stock Prices, Jie Cai, Zhe Zhang

Research Collection Lee Kong Chian School Of Business

We document a significant and negative effect of the change in a firm’s leverage ratio on its stock prices. We find that the negative effect is stronger for firms with a greater likelihood of debt overhang. Moreover, firms with an increase in leverage ratio tend to have less future investment. These findings are consistent with Myers' (1977) debt overhang theory that an increase in leverage may lead to future underinvestment, thus reducing a firm's value.

The Impact Of Earnings On The Pricing Of Credit Default Swaps, Dan Segal, Jeffrey L. Callen, Joshua Livnat

Research Collection School Of Accountancy

This study evaluates the impact of earnings on credit risk in the Credit Default Swap (CDS) market using levels, changes, and event study analyses. We find that earnings (cash flows, accruals) of reference firms are negatively and significantly correlated with the level of CDS premia, consistent with earnings (cash flows, accruals) conveying information about default risk. Based on the changes analysis, a 1 percent increase in ROA decreases CDS rates significantly by about 5 percent. We also find that (1) CDS premia are more highly correlated with below-median earnings than with above-median earnings and (2) CDS premia are more highly …

Institutional Investors And The Informational Efficiency Of Prices, Ekkehart Boehmer, Eric K. Kelley

Research Collection Lee Kong Chian School Of Business

Using a broad panel of NYSE-listed stocks between 1983 and 2004, we study the relation between institutional shareholdings and the relative informational efficiency of prices, measured as deviations from a random walk. Stocks with greater institutional ownership are priced more efficiently, and we show that variation in liquidity does not drive this result. One mechanism through which prices become more efficient is institutional trading activity, even when institutions trade passively. But efficiency is also directly related to institutional holdings, even after controlling for institutional trading, analyst coverage, short selling, variation in liquidity, and firm characteristics.

2009 Private Capital Markets Report, John K. Paglia

Pepperdine Private Capital Markets Report

The Pepperdine private cost of capital survey was originally launched in 2007 and is the first comprehensive and simultaneous investigation of the major private capital market segments. This year’s survey specifically examined the behavior of senior lenders, asset‐based lenders, mezzanine funds, private equity groups, venture capital firms, angel investors, privately‐held businesses, investment bankers, business brokers, limited partners, and business appraisers. The Pepperdine survey investigated, for each private capital market segment, the important benchmarks that must be met in order to qualify for capital, how much capital is typically accessible, what the required returns are for extending capital in today’s economic …

Pcaob Inspections: Perceptions Of Triennial Firms With No-Deficiency Inspections, Bernard H. Newman, Mary Ellen Oliverio

Faculty Working Papers and Articles

The drive to enhance audit quality after the cascade of audit failures in the final decades of the last century and first two years of the new century resulted in a new structure for the oversight of public accounting firms. The Public Company Accounting Oversight Board (PCAOB) was established with the passage of the Sarbanes-Oxley Act of 2002. This Board was given the authority to inspect all public accounting firms who provide audits to publicly-owned companies reporting to the Securities and Exchange Commission. Such public accounting firms were required to register with the PCAOB. Accounting firms who audit more than …

From Crisis To Opportunity: Environmental Jolt, Corporate Acquisitions, And Firm Performance, William P. Wan, Daphne W. Yiu

Research Collection Lee Kong Chian School Of Business

This study incorporates the external environmental context into the study of corporate acquisitions by examining the performance implications of corporate acquisitions during an environmental jolt that alters the levels of environmental munificence. We posit that compared to the periods before and after an environmental jolt, corporate acquisitions during a jolt would be positively related to firm performance. Furthermore, we suggest that organizational slack would improve firm performance and accentuate the positive relationship between corporate acquisitions and firm performance during an environmental jolt; however, it would have negative impact on firm performance and make the acquisition-performance relationship more negative before and …

The Predictive Content Of Aggregate Analyst Recommendations, John S. Howe, Emre Unlu, Xuemin (Sterling) Yan

Department of Finance: Faculty Publications

Using more than 350,000 sell-side analyst recommendations from January 1994 to August 2006, this paper examines the predictive content of aggregate analyst recommendations. We find that changes in aggregate analyst recommendations forecast future market excess returns after controlling for macroeconomic variables that have been shown to influence market returns. Similarly, changes in industry-aggregated analyst recommendations predict future industry returns. Changes in aggregate analyst recommendations also predict one-quarter-ahead aggregate earnings growth. Overall, our results suggest that analyst recommendations contain market- and industry-level information about future returns and earnings.

The Long-Term Effects Of Cross-Listing, Investor Recognition, And Ownership Structure On Valuation, Michael R. King, Dan Segal

Research Collection School Of Accountancy

We show that investor recognition and bonding associated with a U.S. cross-listing are distinct effects using a sample of Canadian firms. In contrast to the post-listing decline documented in the literature, we find that cross-listed firms with a single class of shares enjoy a permanent increase in valuation if they attract and maintain investor recognition over time. Valuations of firms that fail to widen their U.S. shareholder base return to pre-listing levels within two years. Cross-listed firms with dual-class shares exhibit a permanent increase in valuation regardless of the level of U.S. investor holdings, consistent with firm-level bonding.

Audit Committees, Boards Of Directors, And Remediation Of Material Weaknesses In Internal Control, Beng Wee Goh

Research Collection School Of Accountancy

The Sarbanes-Oxley Act (SOX) was passed in 2002 in response to a series ofaccounting improprieties at well-known companies such as Enron and WorldCom.One important aspect of SOX is the internal control requirements. SOX section302 requires that management evaluate the effectiveness of disclosure and controlprocedures, report results of the evaluation, and indicate any “significant changes”in internal controls since the last 10-K or 10-Q report (Securities and ExchangeCommission [SEC] 2002). In addition, SOX section 404 requires that manage-ment’s assessment of the effectiveness of internal control over financial reportingand auditors’ attestation on management’s assessment be included in firms’ 10-Kreports (SEC 2003a). The heightened …

Market-Based Capabilities And Financial Performance Of Firms: Insights Into Marketing's Contribution To Firm Value, Sridhar N. Ramaswami, Rajendra K. Srivastava, Mukesh Bhargava

Research Collection Lee Kong Chian School Of Business

While there is recognition that market-based capabilities contribute to a firm’s financial performance, the exposition is largely conceptual (Srivastava et al. Journal of Marketing 62:2–18, 1998; Journal of Marketing 63:168–179, 1999). Using a resource based view of the firm, the present study proposes that (1) market-based assets and capabilities of a firm impacts (2) performance in three market-facing business processes (new product development, supply-chain and customer management), which in turn, influence (3) the firm’s financial performance. It develops related hypotheses and tests the framework empirically. The study also examines for the first time the interrelationship among the three business processes …

Is Something Missing From Your Company's Satisfaction Package?, Deborah S. Archambeault, Richard Burgess, Stan Davis

Accounting Faculty Publications

Conventional wisdom suggests that salary, benefits, and other monetary factors are important aspects of keeping employees satisfied. But which factors have the biggest impact on overall satisfaction? While companies focus on the monetary factors, there are other components of the overall “satisfaction package,” that are just as important, yet often overlooked.

It comes as no surprise that satisfied employees are important to the success of any organization. In short, higher satisfaction increases productivity, improves service levels, and positively impacts a company’s bottom line. While keeping employees satisfied should be an important goal for any organization, a recent job satisfaction survey …

Swaps, Michael Rizzolo

Renée Crown University Honors Thesis Projects - All

Swaps are versatile financial derivatives that create contracts to exchange future cash flows. Throughout the last several decades the uses and importance of swaps have grown substantially. This document examines swaps from a historical perspective and includes a discussion on issues such as economic justification, industry standardization, market participation, and day-count conventions. Four main classifications of swaps are discussed: interest rate swaps, currency swaps, equity swaps, and commodity swaps. Interest rate swaps are by far the most common; however, each classification offers unique traits that demonstrate the versatility and efficacy of swaps as an asset class. Each class of swap …

Financial Planning For High School Students, Evan Weissman

Renée Crown University Honors Thesis Projects - All

The global financial crisis of the early 21^st century has taught us many things about human nature, our societal goals and the finance industry overall. Perhaps the most surprising finding, however, has been the observance of financial illiteracy among the general public. The combination of greed and ignorance towards financial responsibility has played an important role in the collapse of our financial system.

The financial illiteracy of our society has been an epidemic in our country for some time. Financial planning is a topic that has been rarely taught in high schools. This has lead to an influx of …

Safe & Cheap, Moon Li, Brian Burrow

Renée Crown University Honors Thesis Projects - All

Summary

Our project bundles investment research reports spanning the authors’ time in the Orange Value Fund (OVF), a student run hedge fund in the Whitman School of Management. Each report exemplifies the fund’s unique, bottoms-up investment style. In contrast to traditional valuation methods that focus exclusively on projecting company earnings, the OVF adopts a micro-level approach to analyzing investment opportunities. Analysts study company documents such as annual reports, credit agreements, and proxy statements to identify safe and cheap opportunities.

Safe

A safe company has access to capital markets, a super-strong financial position, honest and competent management, and an understandable business. …

Paul M. Klekner (B), Roger R. Schnorbus

Robins School of Business White Paper Series, 1980-2022

This is a fictitious case study, including the name of the restaurant and the people involved.

Paul Klekner graduated first in his class from the Culinary Institute of America (CIA) in 1998; his fellow students named him the chef most likely to succeed in the future. After graduation, he and his wife, Sarah, moved back to his home in Richmond, Virginia where he was employed as a chef at several restaurants including Bottega and Old Original Bookbinders. In 2003, he decided to open his own restaurant, Rogerios, in the Tobacco Row section of Richmond. With an inheritance of $300,000 he …

Disclosure Of Management Guidance In Conference Calls: Materiality, Determinants And Consequences, Benjamin Lansford, Jimmy Kiat Bee Lee, Jennifer W. Tucker

Research Collection School Of Accountancy

The SEC advises firms to release all material information in their earnings announcement press release before their corresponding conference call. Until May 2009, the NYSE went further by explicitly prohibiting the disclosure of new material information in a conference call. However, we document that the S&P 500 firms, including those that are NYSE-listed, disclose a non-trivial amount of management guidance exclusively in their conference calls. Firms in challenging forecasting environments rely more on the conference call, probably because the call enables managers to “flesh out” the guidance. In contrast, firms with relatively low investor visibility and high litigation risk rely …

Pfizer, Inc., Nadezhda Smirnova

Honors College Theses

This paper addresses a few major problems that the pharmaceutical company Pfizer Inc. has recently been facing. The paper also provides promising solutions to these major problems, which without action can lead to the demise of the pharmaceutical giant. The implementation of the proposed solutions would allow Pfizer Inc. to improve its position and inevitably save it from possible demise.

Do Direct Cash Flow Disclosures Help Predict Future Operating Cash Flows And Earnings?, Steven F. Orpurt, Yoonseok Zang

Research Collection School Of Accountancy

Motivated by recent FASB, IASB, and CFA Institute comments, we explore the predictive value of direct method cash flow disclosures. A primary stated purpose of the direct method is to better forecast future performance. To examine this purpose, we first document that direct method line items, such as cash received from customers, are not reliably estimable using income statements and either balance sheets or indirect method statements of cash flows. When these estimation (articulation) errors are included in cash flows and earnings forecasting models, forecasting performance significantly improves. In addition, employing a future ERC (FERC) methodology, we find evidence suggesting …

Ceo Compensation And Us High-Tech And Low-Tech Firms' Corporate Performance, Eunsup Daniel Shim, Jooh Lee, In Ki Joo

WCBT Faculty Publications

Many factors contribute to the determination of top executive compensation. This paper explores and examines the systematic difference of high-tech and low-tech CEO pays. It examines the relationship between top executive compensation and an Organizational factor, a Market factor and an Accounting factor. It tests CEO’s salary, bonus, and long-term compensation with respect to corporate reputation, ROE, Tobin’s Q, CEO shareholding and firm size.

The results show that CEOs’ Salaries at high-tech firms shows a significantly positive relationship with ROE, Tobin’s Q, and corporate reputation, while only corporate reputation shows a significant relationship with CEOs’ salaries at low-tech firms. In …

Cue Usage In Financial Statement Fraud Risk Assessments: Effects Of Technical Knowledge And Decision Aid Use, Jean Lin Seow

Research Collection School Of Accountancy

This paper investigates the effects of technical knowledge and decision aid use on financial statement fraud risk assessments made by directors and students. More extreme fraud risk assessments are made when participants identify and process larger (smaller) numbers of diagnostic (non-diagnostic) factors, with technical knowledge driving diagnostic factor identification. Significant decision aid-technical knowledge effects are also found; decision aid use has a detrimental effect on high-knowledge directors while improving performance in inexperienced, low-knowledge students. These results suggest that although decision aids can afford gains in performance in inexperienced users, they can have unintended and/or paradoxical behavioural effects on experienced users.

The Association Between Institutional Ownership And Audit Properties, Soongsoo Han, Tony Kang, Lynn Reesc

Research Collection School Of Accountancy

In this study, we examine how institutional ownership affects the quality and riskiness of the financial statement audit. We hypothesize that institutional investors can influence corporate policy to employ governance mechanisms that reduce their monitoring costs. Our evidence shows that firms are more likely to hire a Big 4 auditor (our proxy for audit quality) when long-term institutional ownership is high, suggesting that long-term institutional investors view high quality audits as a viable means of improving corporate governance while reducing their direct monitoring costs. We find no association between auditor choice and short-term institutional ownership. Next, we find that auditors …

Futility Of Stimulus Funds In The Middle Of Huge Trade Deficits, Narendra C. Bhandari

Faculty Working Papers and Articles

The U. S. is facing an unprecedented environment of increasing unemployment, declining income, disappearing middleclass, and mounting trade deficit (about $731 billion in 2007). The government is providing stimulus funds to a selected number of organizations to help solve these problems. However, as long as the country continues to have huge trade deficits, these stimulus efforts may not help much, if at all. They may even worsen the economic situation. This could happen if the banking, insurance, construction, transportation, and other companies—receiving the stimulus funds—would offshore part of their production activities. Several American firms send certain number of jobs abroad …