Finance and Financial Management Commons^™

Changing Careers -- Six Options For Becoming A Cpa, Elizabeth V, Grace, T. G. Black

Faculty Publications

No abstract provided.

Analysis Of The Relation Of Corn And Soybeans Futures And Etf Prices., Stoyu Ivanov

Faculty Publications

In this study I examine the relation between corn and soybeans exchange traded funds and their respective futures contracts. Considering that the exchange traded funds for these commodities track an index based on a basket of the futures instruments a natural link exists between exchange traded funds and futures contracts. This is the first study, to the best of my knowledge, to examine this relation by using cointegration methodology and provide a Vector Error Correction Model of the relation between these two prices.

The Regulation Of Consumer Financial Products: An Introductory Essay With Four Case Studies, John Y. Campbell, Howell E. Jackson, Brigitte C. Madrian, Peter Tufano

Faculty Publications

The recent financial crisis has led many to question how well businesses deliver consumer financial services and how well regulatory institutions address problems in consumer financial markets. In response, the Obama administration proposed a new agency to oversee consumer financial services, and the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act embraced the Administration’s proposal by creating the Bureau of Consumer Financial Protection. Other regulatory reforms have been advanced, and in some cases adopted, in recent years, at both the federal and state level. In this paper, we provide an overview of consumer financial markets, detailing the purposes …

Discretionary Deletions From The S&P 500 Index: Evidence On Forecasted And Realized Earnings., Stoyu Ivanov

Faculty Publications

The literature in the area of index changes finds evidence that index changes are information free events. However, Denis, McConnell, Ovtchinnikov and Yu (2003) find evidence contrary to this theory. This study extends the work of Denis, McConnell, Ovtchinnikov and Yu (2003) in an attempt to complete the assessment of the information hypothesis of index changes. Denis, McConnell, Ovtchinnikov and Yu (2003) address only index additions and do not examine index deletions in their study. Our contribution is in filling this void in the literature by examining forecasted and realized earnings of firms discretionary deleted from the S&P 500 index …

Esops And Corporate Officers' Compensation., Stoyu Ivanov

Faculty Publications

In the literature two major hypotheses have been developed for Employee Stock Ownership Plans used as a takeover defense, the management entrenchment and shareholder interest hypotheses, with the existing research not finding conclusive evidence for either one. In this paper we provide evidence that the entrenchmenthypothesis is not supported by finding that Employee Stock Ownership Plan firms pay less to their managers than non-Employee Stock Ownership Plan firms. If managers were truly entrenched they would have been able to expropriate wealth from the existing shareholders, which appears not to be the case for Employee Stock Ownership Plan firms.

Public Policy And Saving For Retirement: The “Autosave” Features Of The Pension Protection Act Of 2006, John Beshears, James Choi, David Laibson, Brigitte C. Madrian, Brian Weller

Faculty Publications

On August 17, 2006, President Bush signed the Pension Protection Act of 2006 (PPA) into law, following its passage by both houses of Congress in a strong showing of bipartisan support.1 This law, heralded by some as the most sweeping piece of pension reform legislation since the Employee Retirement Income and Security Act of 1974 (ERISA), contains many different pension reform provisions.2 In this paper, we focus on a subset of measures within the PPA adopted specifically to promote better savings outcomes in defined contribution savings plans.

Dual-Track Versus Single-Track Sell-Outs: An Empirical Analysis Of Competing Harvest Strategies, James C. Brau, Ninon K. Sutton, Nile W. Hatch

Faculty Publications

We investigate two non-traditional harvest strategies for selling a privately-held company. Dual-track private firms file for an IPO while also courting acquirers. These firms withdraw the IPO to be taken over. Dual-track public firms complete an IPO and are taken over shortly thereafter. Examining 679 takeovers from 1995–2004, we find private dual-track sell-outs earn a 22–26% higher premium and dual-track public sell-outs earn an 18–21% higher premium than single-track sell-outs. Larger, VC-backed, prestigious underwritten, and bubble-year firms have a higher propensity to take the dual-track path. The implication is that entrepreneurs may increase their harvest value by using a dual-track …

Regulatory Reform And Convergence In Banking: The Case Of China, James C. Brau, Drew Dahl, Hongjing Zhang, Mingming Zhou

Faculty Publications

We examine the effect of regulatory reform on the asset allocation and capitalization of Chinese banks, 2002 to 2007, a period following China’s entry into the World Trade Organization (WTO). Our empirical evidence rejects the hypothesis that banks in the Big Four, majority state, majority private, and majority foreign categories have common targeted levels of loans and capital in relation to assets. With respect to rates of adjustment towards those targets, our evidence is mixed. Domestic banks exhibit convergence in behavior toward each other but remain distinct from majority foreign banks. Overall, our findings provide evidence that, while the structure …

The Impact Of Employer Matching On Savings Plan Participation Under Automatic Enrollment, John Beshears, James J. Choi, David Laibson, Brigitte C. Madrian

Faculty Publications

Companies have used a variety of approaches to encourage participation in employer- sponsored savings plans. The most common approach, the provision of an employer matching contribution, is now offered by the vast majority of large fi rms (Profi t Sharing Council of America 2006). Even with a match, however, savings plan participation rates are often surprisingly low (Choi, Laibson, and Madrian 2005), and empirical studies of matching contributions’ effect on plan participation have uniformly found relatively small effects (Andrews 1992; Papke and Poterba 1995; Papke 1995; Bassett, Fleming, and Rodrigues 1998; Kusko, Poterba, and Wilcox 1998; Choi et al. 2002; …

The Regulation Of Consumer Financial Products: An Introductory Essay With A Case Study On Payday Lending, John Y. Campbell, Howell E. Jackson, Brigitte C. Madrian, Peter Tufano

Faculty Publications

The recent financial crisis has led many to question how well businesses deliver consumer financial services and how well regulatory institutions address problems in consumer financial markets. In response, the Obama administration has proposed creating a new Consumer Financial Protection Agency. Other regulatory reforms have been advanced, and in some cases adopted, in recent years, at both the federal and state level. In this paper, we provide an overview of consumer financial markets, detailing the purposes they serve, the extent to which they suffer from market failures or other deficiencies, and how they are currently regulated. To illustrate our analytical …

Why Do Firms Go Public?, James C. Brau

Faculty Publications

Why entrepreneurs choose to conduct an IPO has received relatively little attention when compared to other IPO topics such as initial underpricing and the long-run performance of IPOs. In this chapter, I summarize, analyze, and expand the current discussion on why firms go public. I begin by discussing the theoretical underpinnings and testable hypotheses offered thus far in the academic literature. I then discuss the empirical evidence for (and against) each of these potential explanations after presenting the intuition behind them. I focus on two types of empirical research: a) large-sample publicly-available financial and stock data and b) proprietary surveydata. …

Micro-Ipos: An Analysis Of The Small Corporate Offering Registration (Scor) Procedure With National Data, James C. Brau, Gardner Gee

Faculty Publications

In this study we examine every Small Corporate Offering Registration available from the United States. Using 339 micro-IPOs from 33 states, we find support for the relevance of (1) offering marketing mechanisms and expenses; (2) geographic characteristics; (3) offering characteristics; (4) ownership and governance characteristics; (5) business characteristics; (6) firm marketing mechanisms; and (7) signaling factors.

The Impact Of 401(K) Loans On Saving, John Beshears, James J. Choi, David Laibson, Brigitte C. Madrian

Faculty Publications

Although the popular press and politicians often describe 401(k) loans as a problem, classical economic theory has a more benign view. Loans from a 401(k) can relax liquidity constraints and increase household utility. Moreover, loan provisions may have the subtle effect of raising net asset accumulation by making 401(k) participation more appealing: employees who can access their 401(k) assets if they need them may be willing to put more money into an otherwise illiquid 401(k) account. Our research suggests that 401(k) loans are neither a blessing nor a bogeyman. Conditional on borrowing to finance consumption, we show that a 401(k) …

A Stakeholder Identity Orientation Approach To Corporate Social Performance In Family Firms, John B. Bingham, W. Gibb Dyer Jr., Isaac Smith, Gregory L. Adams

Faculty Publications

Extending the dialogue on corporate social performance (CSP) as descriptive stakeholder management (Clarkson, Acad Manage Rev 20:92, 1995), we examine differences in CSP activity between family and nonfamily firms. We argue that CSP activity can be explained by the firm’s identity orientation toward stakeholders (Brickson, Admin Sci Quart 50:576, 2005; Acad Manage Rev 32:864, 2007). Specifically, individualistic, relational, or collectivistic identity orientations can describe a firm’s level of CSP activity toward certain stakeholders. Family firms, we suggest, adopt a more relational orientation toward their stakeholders than nonfamily firms, and thus engage in higher levels of CSP. Further, we invoke collectivistic …

Using Peer Grading And Proofreading To Ratchet Student Expectations In Preparing Accounting Cases, Laura R. Ingraham, B. A. Chaney

Faculty Publications

Accounting educators struggle with ways to incorporate the development of critical thinking and communication skills into the curriculum. Case analysis is one tool for developing these skills. We examine whether students’ case analysis scores improve as a result of participation in peer grading and peer review. We find that students improve their ability to perform case analyses after both evaluating and being evaluated by student peers. Students initially experience an Expectation Ratcheting learning effect after evaluating the case of a peer. Subsequently, students experience an Enhanced Feedback learning effect from the comments and suggestions made by the peers who evaluated …

Reinforcement Learning And Savings Behavior, James J. Choi, David Laibson, Brigitte C. Madrian, Andrew Metrick

Faculty Publications

We show that individual investors over-extrapolate from their personal experience when making savings decisions. Investors who experience particularly rewarding outcomes from 401(k) saving—a high average and/or low variance return—increase their 401(k) savings rate more than investors who have less rewarding experiences. This finding is not driven by aggregate time-series shocks, income effects, rational learning about investing skill, investor fixed effects, or time-varying investor-level heterogeneity that is correlated with portfolio allocations to stock, bond, and cash asset classes. We discuss implications for the equity premium puzzle and interventions aimed at improving household financial outcomes.

Reducing The Complexity Costs Of 401(K) Participation Through Quick Enrollment, James J. Choi, David Laibson, Brigitte C. Madrian

Faculty Publications

Previous research has shown that 401(k) participation increases dramatically when companies switch from an opt-in to an opt-out (or automatic) enrollment regime (Madrian and Shea 2001; Choi et al. 2004; Choi et al. 2006). Although automatic enrollment has been widely touted as an effective tool for encouraging saving, it has its detractors. Some libertarians dislike automatic enrollment because they view it as coercing individuals into the company-chosen default contribution rate and asset allocation. Indeed, the vast majority of automatically enrolled employees passively accept all of the defaults in the short run, and many remain at those defaults for years (Choi …

Lockups Revisited, James C. Brau, Val E. Lambson, Grant Mcqueen

Faculty Publications

Lockups are agreements made by insiders of stock-issuing firms to abstain from selling shares for a specified period of time after the issue. Brav and Gompers (2003) suggest that lockups are a bonding solution to a moral hazard problem and not a signaling solution to an adverse selection problem. We challenge this conclusion theoretically and empirically. In our model, insiders of good firms signal by putting and keeping (locking up) their money where their mouths are. Our model yields two comparative statics: lockups should be shorter when a firm is i) more transparent and/or ii) more risky. Using a sample …

An Empirical Analysis Of Mexican And Us Closed-End Mutual Fund Ipos, James C. Brau, Javier Rodriguez

Faculty Publications

We examine 135 Mexican closed-end fund IPOs and 370 Mexican non-fund IPOs that issued between 1994 and 2003 along with 217 contemporaneous US fund IPOs and document three primary results. First, we find that Mexican IPOs in the aggregate experience no significant underpricing, unlike their US IPO counterparts. Both Mexican and US IPOs experience significantly negative long-run performance. Second, Mexican closed-end fund IPOs experience positive long-run performance, significantly better than Mexican non-fund IPOs which experience negative long-run performance. Unlike Mexican fund IPOs, US fund IPOs experience negative long-run performance. Third, we find that both Mexican and US debt-backed closed-end fund …

Evaluating Impacts Of Microfinance Institutions Using Guatemalan Data, James C. Brau, Shon Hiatt, Warner Woodworth

Faculty Publications

Purpose – The purpose of this paper is to investigate microlending outcomes among Latin American non-governmental organizations (NGOs), specifically microfinance institutions (MFIs). While there is a growing movement of non-profit ventures channeling small loans to the poor worldwide, assessments of their impacts are lacking. Thus, field interviews with clients who had various degrees of involvement in the process of receiving microloans from MFIs were conducted over a summer in Guatemala.

Design/methodology/approach – Using a dataset of 393 clients from Guatemalan MFIs, microfinance impacts from two dimensions are examined and impacts measured along financial and social dimensions by surveying new clients, …

Expected Idiosyncratic Skewness, Brian H. Boyer, Todd Mitton, Keith Vorkink

Faculty Publications

We test the prediction of recent theories that stocks with high idiosyncratic skewness should have low expected returns. Because lagged skewness alone does not adequately forecast skewness, we estimate a cross-sectional model of expected skewness that uses additional predictive variables. Consistent with recent theories, we find that expected idiosyncratic skewness and returns are negatively correlated. Specifically, the Fama-French alpha of a low-expected-skewness quintile exceeds the alpha of a high-expected-skewness quintile by 1.00% per month. Furthermore, the coefficients on expected skewness in Fama-MacBeth cross-sectional regressions are negative and significant. In addition, we find that expected skewness helps explain the phenomenon that …

Determinants Of Vertical Integration: Financial Development And Contracting Costs, Daron Acemoglu, Simon Johnson, Todd Mitton

Faculty Publications

We study the determinants of vertical integration in a new data set of over 750,000 firms from 93 countries. We present a number of theoretical predictions on the interactions between financial development, contracting costs, and the extent of vertical integration. Consistent with these predictions, contracting costs and financial development by themselves appear to have no effect on vertical integration. However, we find greater vertical integration in countries that have both greater contracting costs and greater financial development.We also show that countries with greater contracting costs are more vertically integrated in more capital-intensive industries.

Learning By Trading, Amit Seru, Tyler Shumway, Noah Stoffman

Faculty Publications

Using a large sample of individual investor records over a nine-year period, we analyze survival rates, the disposition effect and trading performance at the individual level to determine whether and how investors learn from their trading experience. We find evidence of two types of learning: some investors become better at trading with experience, while others stop trading after realizing that their ability is poor. A substantial part of overall learning by trading is explained by the second type. By ignoring investor attrition, the existing literature significantly overestimates how quickly investors become better at trading.

Mental Accounting In Portfolio Choice: Evidence From A Flypaper Effect, James J. Choi, David Laibson, Brigitte C. Madrian

Faculty Publications

Consistent with mental accounting, we document that investors sometimes choose the asset allocation for one account without considering the asset allocation of their other accounts. The setting is a firm that changed its 401(k) matching rules. Initially, 401(k) enrollees chose the allocation of their own contributions, but the firm chose the match allocation. These enrollees ignored the match allocation when choosing their own-contribution allocation. In the second regime, enrollees simultaneously selected both accounts’ allocations, leading them to mentally integrate the two. Own-contribution allocations before the rule change equal the combined own- and match-contribution allocations afterwards, whereas combined allocations differ sharply …

Optimal Defaults And Active Decisions, Gabriel D. Carroll, James J. Choi, David Laibson, Brigitte C. Madrian, Andrew Metrick

Faculty Publications

Defaults often have a large influence on consumer decisions. We identify an overlooked but practical alternative to defaults: requiring individuals to make an explicit choice for themselves. We study such “active decisions” in the context of 401(k) saving. We and that compelling new hires to make active decisions about 401(k) enrollment raises the initial fraction that enroll by 28 percentage points relative to a standard opt-in enrollment procedure, producing a savings distribution three months after hire that would take 30 months to achieve under standard enrollment. We also present a model of 401(k) enrollment and derive conditions under which the …

Earnings Management In Ipos: Post-Engagement Third-Party Mitigation Or Issuer Signaling?, James C. Brau, Peter M. Johnson

Faculty Publications

Initial public offering (IPO) firms typically hire auditors, underwriters, and attorneys to assist in the IPO process. Many firms that take the IPO route are also backed by venture capitalists. In the extant literature, these four specialists (auditors, underwriters, attorneys, and venture capitalists) are termed third-party certifiers. In this study, we examine 3900 IPOs from 1985 to 2005 and document a significant negative and robust correlation between IPO firm earnings management and the presence of prestigious third-party certifiers. Next, we test if this correlation is driven by (1) IPO firms attempting to signal firm quality or (2) third-party certifiers mitigating …

Investor Flows And Stock Market Returns, Brian H. Boyer, Lu Zheng

Faculty Publications

This study simultaneously analyzes the relation between aggregate stock market returns and cash flows (net purchases of equity) from a broad array of investor groups in the United States over a long period of time from 1952 to 2004.We find strong evidence that quarterly flows are autocorrelated for each of the different investor groups.We further document a significant and positive contemporaneous relation between stock market returns and flows of Mutual Funds and Foreign Investors.

Hdtv Division Of Global Electronics, Inc., Alan J. Kirkpatrick, Leonard K. Gashugi

Faculty Publications

CASE DESCRIPTION: The primary objective of this case is to describe realistic capital budgeting issues within a large organization. The case illustrates ways that staff inside a corporate finance department (and in related departments) position themselves in the capital planning process. The case also stresses steps that a large firm can take to leverage its size to gain the maximum benefit of investment projects. Further,, the case demonstrates sensitivity analyses in the capital budgeting process, and the resulting internal rates of return. We suggest the case be used to follow the related case “HDTV Systems”, which shows the firm as …

Earnings Quality And Corporate Governance In Ipo Firms, Mary F. Calegari, M. A. Harjoto

Faculty Publications

No abstract provided.

Why Do Firms With Diversification Discounts Have Higher Expected Returns?, Todd Mitton, Keith Vorkink

Faculty Publications

A diversified firm can trade at a discount to a matched portfolio of single-segment firms if the diversified firm has either lower expected cash flows or higher expected returns than the single-segment firms. We study whether firms with diversification discounts have higher expected returns in order to compensate investors for offering less upside potential (or skewness exposure) than focused firms. Our empirical tests support this hypothesis. First, we find that focused firms offer greater skewness exposure than diversified firms. Second, we find that diversified firms have significantly larger discounts when the diversified firm offers less skewness relative to matched single-segment …