Finance and Financial Management Commons^™

The Relationship Between Corportate Social Responsibility And Shareholder Value: An Empirical Test Of The Risk Management Hypothesis, Paul C. Godfrey, Craig B. Merrill, Jared M. Hansen

Faculty Publications

Do shareholders gain when managers disperse corporate resources through activities classified as corporate social responsibility (CSR)? Strategy scholars have recently developed a theoretical model that links such activities to shareholder value when a firm suffers a negative event; we test key portions of this theory of the ‘insurance-like’ property of CSR activity. We posit that such activity leads to positive attributions from stakeholders, who then temper their negative judgments and sanctions toward firms because of this goodwill. We extend the risk management model by theorizing that some types of CSR activities will be more likely to create goodwill and offer …

How Are Preferences Revealed?, John Beshears, James J. Choi, David Laibson, Brigitte C. Madrian

Faculty Publications

Revealed preferences are tastes that rationalize an economic agent's observed actions. Normative preferences represent the agent's actual interests. It sometimes makes sense to assume that revealed preferences are identical to normative preferences. But there are many cases where this assumption is violated. We identify five factors that increase the likelihood of a disparity between revealed preferences and normative preferences: passive choice, complexity, limited personal experience, third-party marketing, and intertemporal choice. We then discuss six approaches that jointly contribute to the identification of normative preferences: structural estimation, active decisions, asymptotic choice, aggregated revealed preferences, reported preferences, and informed preferences. Each …

The Importance Of Default Options For Retirement Savings Outcomes: Evidence From The United States, John Beshears, James J. Choi, David Laibson, Brigitte C. Madrian

Faculty Publications

This paper summarizes the empirical evidence on how defaults impact retirement savings outcomes. After outlining the salient features of the various sources of retirement income in the U.S., the paper presents the empirical evidence on how defaults impact retirement savings outcomes at all stages of the savings lifecycle, including savings plan participation, savings rates, asset allocation, and post-retirement savings distributions. The paper then discusses why defaults have such a tremendous impact on savings outcomes. The paper concludes with a discussion of the role of public policy towards retirement saving when defaults matter.

Short-Sale Strategies And Return Predictability, Karl B. Diether, Kuan-Hui Lee, Ingrid M. Werner

Faculty Publications

We examine short selling in US stocks based on new SEC-mandated data for 2005. There is a tremendous amount of short selling in our sample: short sales represent 24% of NYSE and 31% of Nasdaq share volume. Short sellers increase their trading following positive returns and they correctly predict future negative abnormal returns. These patterns are robust to controlling for voluntary liquidity provision and for opportunistic risk-bearing by short sellers. The results are consistent with short sellers trading on short-term overreaction of stock prices. A trading strategy based on daily short-selling activity generates significant positive returns during the sample period.

Investability And Firm Value, Todd Mitton, Thomas O’Connor

Faculty Publications

We study how investability, or openness to foreign equity investors, affects firm value in a sample of over 1,400 firms from 26 emerging markets. We find that, on average, investability is associated with a 9% valuation premium (as measured by Tobin’s q). However, in firm-fixed effects regressions this valuation premium disappears, suggesting that investability does not have a causal effect on firm value. Analysis of the components of Tobin’s q shows that firms that become investable experience significant increases in both market values and physical investment. These effects are strongest for firms that face country-level or firm-level financial constraints prior …

The Importance Of Default Options For Retirement Saving Outcomes: Evidence From The United States, John Beshears, James J. Choi, David Laibson, Brigitte C. Madrian

Faculty Publications

If transaction costs are small, standard economic theory would suggest that defaults should have little impact on economic outcomes. Agents with well-defined preferences will opt out of any default that does not maximize their utility, regardless of the nature of the default. In practice, however, defaults can have quite sizeable effects on economic outcomes. Recent research has highlighted the important role that defaults play in a wide range of settings: organ donation decisions (Johnson and Goldstein 2003; Abadie and Gay 2004), car insurance plan choices (Johnson et al. 1993), car option purchases (Park, Jun, and McInnis 2000), and consent to …

Spirituality And Organizational Culture: Cultivating The Abcs Of An Inspiring Workplace, Stanley E. Fawcett, James C. Brau, Gary K. Rhoads, David Whitlark, Amydee M. Fawcett

Faculty Publications

Perhaps the greatest source of unique advantage is an organization’s workforce. Unfortunately, while many managers talk about the importance or their people, they often fail to cultivate a organizational spirit that leverages their people’s creativity, insight and passion. A senior executive at a Fortune 500 company commented on this reality, saying, “People are either the bridge or the barrier.” One of today’s primary leadership challenges is to overcome practices that limit workers’ involvement. The goal is to create a workplace that inspires creativity and contribution. The question becomes, “What practices cultivate a culture that can transform an organization’s workforce into …

Forecasting Default With The Merton Distance To Default Model, Sreedhar T. Bharath, Tyler Shumway

Faculty Publications

We examine the accuracy and contribution of the Merton distance to default (DD) model, which is based on Merton's (1974) bond pricing model. We compare the model to a "nai:ve" alternative, which uses the functional form suggested by the Merton model but does not solve the model for an implied probability of default. We find that the nai:ve predictor performs slightly better in hazard models and in out-of-sample forecasts than both the Merton DD model and a reduced-form model that uses the same inputs. Several other forecasting variables are also important predictors, and fitted values from an expanded hazard model …

Was The Accounting Profession Really That Bad?, Elizabeth K. Jenkins, W. Donnelly, T. Black

Faculty Publications

To gain insight into the extent of malpractice in the State of California prior to the Passage of Sarbanes-Oxley, we examined the nature and magnitude of complains filed with the California Board of Accountancy (CBA) against both licensed and unlicensed accountants during the fiscal years 2000, 2001, and 2002. The CBA currently licenses and regulates over 73,000 licenses, with 1,431 complaints filed during the period reviewed. Disciplinary actions were taken against 283 different licensees for the three fiscal years reviewed. SEC issues were involved in 19 cases, theft or embezzlement 46 cases, public accounting malpractice 146 cases, improper retention of …

Do Bulls And Bears Listen To Whispers?, Janis K. Zaima, M. A. Harjoto

Faculty Publications

A post-earnings announcement drift associated with the market reaction to analyst forecasts errors remains a puzzle. This study suggests that whispers help to explain part of the puzzle. The study examines the market reaction to whispers and analysts in bull and bear markets, and finds that investors listen to whispers in the bull market and whispers help explain the post-announcement drift. In a bear market, reaction to whispers is significantly positive prior to announcement despite a down market, indicating optimism by investors who follow whispers. However, in the bear market, both whispers and analysts contribute to the post-announcement drift.

It’S Sho Time! Short-Sale Price-Tests And Market Quality, Karl B. Diether, Kuan-Hui Lee, Ingrid M. Werner

Faculty Publications

We examine the effects of the SEC mandated temporary suspension of short-sale price-tests for a set of Pilot securities. While short-selling activity increased both for NYSE and NASDAQ-listed Pilot stocks, returns and volatility at the daily level are unaffected. NYSE-listed Pilot stocks experience more symmetric trading patterns and a slight increase in spreads and intraday volatility after the suspension while there is a smaller effect on market quality for NASDAQlisted Pilot stocks. The results suggest that the effect of the price-tests on market quality can largely be attributed to the distortions in order flow created by the price-tests in the …

The U.S. Health Care System And Labor Markets, Brigitte C. Madrian

Faculty Publications

There is no universal provider of health insurance or health care in the United States. Rather, a patchwork system of institutions exists, each covering different subgroups of the population. Certain types of health insurance are provided as a condition of employment, while other types of health insurance are more readily available when individuals are not employed or not fully employed, and still others are available regardless of employment status. The two most significant sources of health insurance coverage in the United States are employers, who collectively insure 63 percent of the non-elderly (below age 65) population, and governments, who collectively …

Reit Stock Repurchases: Completion Rates, Long-Run Returns, And The Straddle Hypothesis, Gregory L. Adams, James C. Brau, Andrew Holmes

Faculty Publications

This study of real estate investment trusts (REITs) analyzes three possible explanations for the stock price reaction to a repurchase announcement and the subsequent repurchase behavior of managers under each hypothesis. Two of the hypotheses, the signaling hypothesis and the exchange option hypothesis, are established in the existing literature; the third hypothesis is a modification of the exchange option hypothesis. The exchange option hypothesis is extended to allow for additional flexibility in management decisions. This extended exchange option hypothesis is termed the ‘‘straddle’’ hypothesis because it provides management with both a call and put option. The empirical analyses show the …

Investing Your Lump Sum At Retirement, David F. Babbel, Craig B. Merrill

Faculty Publications

Imagine sitting down on the day of your retirement to plan your financial future. You know what your annual expenses have been and you want to maintain your current standard of living. So, you consult a recent mortality table and find that if you’ve made it to your 65th birthday, you can expect to live to 85 years old. You perform a little calculation and find that, together with your Social Security monthly payments, you have just enough savings to maintain your current standard of living and spend all of your savings and future expected earnings by the time you …

Do Secondary Shares In The Ipo Process Have A Negative Effect On Aftermarket Performance?, James C. Brau, Mingsheng Li, Jing Shi

Faculty Publications

We revisit and extend the topic of secondary share sales and revisions in IPOs. First we test to determine if secondary share sales constitute a negative signal that is captured in aftermarket performance. We find secondary share sales in general are not correlated with poorer initial or long-run performance, but selling by officers and directors is associated with poorer long-run returns. Second, we examine if secondary share revisions (1) reflect selling shareholders’ attempts to conceal private information or (2) are contingent upon whether a firm can reach its goal of raising sufficient capital. We find empirical support for a capital …

An Empirical Analysis Of The Financial Impact Of Supply Chain Management On Small Firms, James C. Brau, Stanley E. Fawcett, Ladd Morgan

Faculty Publications

In this article we test the value proposition hypothesis of supply chain management (SCM) by examining survey results of 570 US managers. First, we find that large firms use SCM initiatives significantly more than small firms. Second, in univariate and multivariate tests, we find that SCM leads to significant improvements in asset utilization, revenue generation, and competitive performance, regardless of firm size. These two major findings suggest that managers at small firms that are not actively engaged in SCM should reevaluate their opportunity to capture the competitive benefits of SCM that many large firms currently enjoy.

The U.S. Treasury Buyback Auctions: The Cost Of Retiring Illiquid Bonds, Bing Han, Francis A. Longstaff, Craig B. Merrill

Faculty Publications

We study an important recent series of buyback auctions conducted by the U.S. Treasury in retiring $67.5 billion of its illiquid off-the-run debt. The Treasury was successful in buying back large amounts of illiquid debt while suffering only a small market-impact cost. The Treasury included the most-illiquid bonds more frequently in the auctions, but tended to buy back the least-illiquid of these bonds. Although the Treasury had the option to cherry pick from among the bonds offered, we find that the Treasury was actually penalized for being spread too thinly in the buybacks.

Information Sharing And Supply Chain Performance: The Role Of Connectivity And Willingness, Stanley E. Fawcett, Paul Osterhaus, Gregory M. Magnan, James C. Brau, Matthew W. Mccarter

Faculty Publications

Purpose – The purpose of this paper is to understand how information technology (IT) is used to enhance supply chain performance.

Design/methodology/approach – A large-scale survey and semi-structured interviews were used to collect industry data.

Findings – Two distinct dimensions to information sharing – connectivity and willingness – are identified and analyzed. Both dimensions are found to impact operational performance and to be critical to the development of a real information sharing capability. However, many companies are found to have placed most of their emphasis on connectivity, often overlooking the willingness construct. As a result, information sharing seldom delivers on …

The Macroeconomic News Cycle And Uncertainty Resolution, Arjun Chatrath, Rohan Christie-David, William T. Moore

Faculty Publications

We examine the behavior of return volatility and trading at 5-minute intervals in the treasury bond futures market in the context of the monthly macroeconomic news cycle. We advance and confirm the hypothesis that volatility and trading activity are higher in the first half of the month. The data indicate that these patterns arise from at least two sources: (1) a higher level of uncertainty regarding the value of news in announcements in the first half of the month, and (2) improvement in efficiency of macroeconomic forecasts from the first to the second half of the month.

Institutions And Concentration, Todd Mitton

Faculty Publications

In a new dataset of 1.3 million firms in 155 countries, I establish a number of regularities in cross-country differences in economic concentration. Concentration of sales and employment is substantially higher in smaller countries and in less-developed countries; these two factors alone explain roughly half the cross-country variation in concentration. Nevertheless, a number of institutional factors offer additional explanatory power for concentration. Concentration is higher in countries with higher entry costs for new firms, in countries with weaker antitrust policy, in countries with less control of corruption, in countries with weaker rule of law, and in countries with more burdensome …

Horizontal Inequity In The Property Taxation Of Apartment, Industrial , Office, And Retail Properties, Gary C. Cornia, Barrett A. Slade

Faculty Publications

Researchers have carefully examined assessment unifor- mity in ad valorem taxation for single-family residential properties and they have frequently reported nonuniform outcomes in the appraisal of these properties. This study analyzes the uniformity of assessed valuations across apartment, industrial, office, and retail properties in Maricopa County (Metropolitan Phoenix), Arizona. Specifically, we investigate horizontal equity, which results when the assessment ratio (assessed value/sales price) is uniform across properties with similar market values. We examine horizontal equity over a five-and-one-half-year period (January 1998-June 2003). After applying both parametric and nonparametric tests, we find statistically significant evidence of horizontal inequity. We find that …

How Do Crises Spread? Evidence From Accessible And Inaccessible Stock Indices, Brian H. Boyer, Tomomi Kumagai, Kathy Yuan

Faculty Publications

We provide empirical evidence that stock market crises are spread globally through asset holdings of international investors. By separating emerging market stocks into two categories, namely, those that are eligible for purchase by foreigners (accessible) and those that are not (inaccessible), we estimate and compare the degree to which accessible and inaccessible stock index returns co-move with crisis country index returns. Our results show greater co-movement during high volatility periods, especially for accessible stock index returns, suggesting that crises spread through the asset holdings of international investors rather than through changes in fundamentals.

Evidence On What Cfos Think About The Ipo Process: Practice, Theory, And Managerial Implications, James C. Brau, Stanley E. Fawcett

Faculty Publications

Many privately held companies aspire to go public through an initial public offering. But the IPO process is time-consuming, expensive, and fraught with uncertainty. With the aim of shedding light on the process and reducing at least some of the uncertainty, the authors asked several hundred CFOs to share their experiences and perceptions with regard to six specific aspects of the IPO process: (1) motives for going public; (2) the timing of IPOs; (3) criteria for choosing an underwriter; (4) cause of IPO underpricing; (5) IPO signaling; and (6) reasons to stay private.

Why Have Debt Ratios Increased For Firms In Emerging Markets?, Todd Mitton

Faculty Publications

I study trends in capital structure between 1980 and 2004 in a sample of over 11,000 firms from 34 emerging markets. The average firm's book-value debt ratio rose by 10 percentage points over this quarter century; market-value debt ratios rose by 15 percentage points. I study how this rise in leverage was influenced by the firm-level demand for and the country-level supply of debt financing. The central finding is that the increase in debt ratios can largely be attributed to changes in the characteristics of emerging market firms over this period. For the average firm, the most prominent determinants of …

Supply And Demand Shifts In The Shorting Market, Lauren Cohen, Karl B. Diether, Christopher J. Malloy

Faculty Publications

Using proprietary data on stock loan fees and quantities from a large institutional investor, we examine the link between the shorting market and stock prices. Employing a unique identification strategy, we isolate shifts in the supply and demand for shorting. We find that shorting demand is an important predictor of future stock returns: An increase in shorting demand leads to negative abnormal returns of 2.98% in the following month. Second, we show that our results are stronger in environments with less public information flow, suggesting that the shorting market is an important mechanism for private information revelation.

Saving For Retirement On The Path Of Least Resistance, James J. Choi, David Laibson, Brigitte C. Madrian, Andrew Metrick

Faculty Publications

We assess the impact on savings behavior of several different 401(k) plan features, including automatic enrollment, automatic cash distributions, employer matching provisions, eligibility requirements, investment options, and financial education. We also present new survey evidence on individual savings adequacy. Many of our conclusions are based on an analysis of micro-level administrative data on the 401(k) savings behavior of employees in several large corporations that implemented changes in their 401(k) plan design. Our analysis identifies a key behavioral principle that should partially guide the design of 401(k) plans: employees often follow “the path of least resistance.” For better or for worse, …

Constructing Commercial Indices: A Semiparametric Adaptive Estimator Approach, Douglas J. Hodgson, Barrett A. Slade, Keith Vorkink

Faculty Publications

Constant-quality commercial indices generated by ordinary least squares may suffer an efficiency loss due to leptokurtosis caused by outliers in transactions data. When the subsequent nonnormality occurs, substantial improvement in index precision is obtained by estimating the hedonic model using a semiparametric adaptive estimator technique. When this method was applied to 1,846 office transactions that occurred in the Phoenix metropolitan area from January 1997 through June 2004, a substantial standard error reduction of approximately 9% was realized relative to ordinary least squares estimates. The difference in average returns between the semiparametric method and ordinary least squares was about 0.25% in …

Initial Public Offerings: Cfo Perceptions, James C. Brau, Patricia A. Ryan, Irv Degraw

Faculty Publications

We examine four issues pertaining to initial public offerings (IPOs) using a survey of 438 chief financial officers (CFOs). First, why do firms go public? Second, is CFO sentiment stationary across bear and bull markets? Third, what concerns CFOs about going public? Fourth, do CFO perceptions correlate with returns? Results support funding for growth and liquidity as the primary reasons for IPOs. CFO sentiment is generally stationary in pre- and post-bubble years. Managers are concerned with the direct costs of going public, such as underwriting fees, as well as indirect costs.We find a negative relation between a focus on immediate …

Why Do Reits Repurchase Stock? Extricating The Effect Of Managerial Signaling In Open Market Share Repurchase Announcements, James C. Brau, Andrew Holmes

Faculty Publications

This paper explores the effect of stock repurchase announcements on equity returns for publicly traded real estate investment trusts (REITs). In addition to providing analysis of the corporate decision to repurchase shares, the study of share repurchases in the context of REITs provides a novel opportunity to disentangle the impact of competing theories for the abnormal returns observed around repurchase announcements. Prior literature advances six hypotheses to explain the stock price reaction associated with repurchases. Given that the theories all predict the same stock price reaction, existing studies are unable to disentangle the competing hypotheses. The intent of this research …

Tax Complexity And Small Business: A Comparison Of The Perceptions Of Tax Agents In The United States And Australia, Laura R. Ingraham, S. Karlinsky, M. Mckerchar

Faculty Publications

There is ongoing pressure in both the United States and Australia to simplify their respective tax systems, particularly in regard to small business taxpayers. In the case of both regimes, if substantial progress is to be made towards simplification, the areas of greatest need and the necessary reforms will require careful evaluation. The views of tax agents (practitioners) are highly relevant to the implementation of successful reform in that both regimes rely on self-assessment. It was considered that by undertaking a cross-jurisdictional comparison a greater understanding of complexity, from the perspective of tax agents, could be gained and that, the …