Headline salience, managerial opportunism, and over-and underreactions to earnings
| Authors | Huang, Nekrasov, Teoh |
| Journal | The Accounting Review |
| Year | 2018 |
| Type | Published Paper |
| Abstract | Limited attention theory predicts that higher salience of earnings news implies a stronger immediate market reaction to earnings news and a weaker post-earnings announcement drift (PEAD) or reversal (PEAR). Using a new measure, SALIENCE, defined as the number of quantitative items in an earnings press release headline, we find strong evidence consistent with salience effects. Higher SALIENCE is associated with stronger announcement reaction and subsequent PEAR. Managers are more likely to choose higher SALIENCE before selling shares in the post-announcement period and when earnings are high, but less persistent, and to choose lower SALIENCE before stock option grants. The results are robust to using residual salience and an extended set of control variables. The findings are consistent with managers opportunistically headlining positive financial information in the earnings press release to incite over-optimism in investors with limited attention. |
| URL | https://doi.org/10.2308/accr-52010 |
| Tags | Archival Empirical | Manager / Firm Behavior | Media and Textual Analysis |
The geography of financial misconduct
| Authors | Parsons, Sulaeman, Titman |
| Journal | Journal of Finance |
| Year | 2018 |
| Type | Published Paper |
| Abstract | Financial misconduct (FM) rates differ widely between major U.S. cities, up to a factor of 3. Although spatial differences in enforcement and firm characteristics do not account for these patterns, city-level norms appear to be very important. For example, FM rates are strongly related to other unethical behavior, involving politicians, doctors, and (potentially unfaithful) spouses, in the city. |
| Keywords | Corporate corruption, financial misconduct, peer effects, political fraud, white collar misconduct |
| URL | https://doi.org/10.1111/jofi.12704 |
| Tags | Archival Empirical | Manager / Firm Behavior | Theory |
CEO tournaments: A cross-country analysis of causes, cultural influences, and consequences
| Authors | Burns, Minnick, Starks |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2017 |
| Type | Published Paper |
| Abstract | Using a cross-country sample, we examine the chief executive officer (CEO) tournament structure (measured alternatively as the ratio and the difference of pay between the CEO and other top executives within a firm). We find the tournament structure to vary systematically with firm and country cultural characteristics. In particular, firm size and the cultural values of power distance, fair income differences, and competition are significantly associated with variations in tournament structures. We also establish support for the primary implication of tournament theory in that tournament structure tends to be positively related to firm value, even after controlling for endogeneity. |
| Keywords | CEO tournament structure, cultural values, firm decisions, firm values |
| URL | https://doi.org/10.1017/S0022109017000163 |
| Tags | Archival Empirical | Manager / Firm Behavior |
From financial history to history & finance
| Authors | D'Acunto |
| Year | 2017 |
| Type | Working Paper | Literature Review Paper |
| Abstract | Financial history studies facts and institutions of the past. Such facts and institutions are interesting subjects in themselves, or they can help us interpret the present through analogy. History & Finance reverses the role of history in finance research: it exploits natural experiments of the past as a means to directly explaining current financial outcomes through the long-run persistence of economic and social phenomena. I first define the History & Finance approach and its relationship to Economic and Financial history. Then, I survey the work based on History & Finance across the subfields of finance. I discuss the challenges raised by History & Finance, and how researchers have thus far tackled them. Finally, I comment on the avenues for future research that History & Finance opens to finance scholars and economic historians alike. |
| Keywords | Historical facts, institutional backgrounds, natural experiments, history & finance |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3216109 |
| Tags | Asset Pricing, Trading Volume and Market Efficiency | Evolutionary Finance | Financing- and Investment Decisions (Individual) | Manager / Firm Behavior |
Innovating to invest: The role of basic education
| Authors | D'Acunto |
| Year | 2017 |
| Type | Working Paper |
| Abstract | Despite the focus of entrepreneurial finance research on high-tech innovation, more than 75% of innovations are new processes and products in traditional manufacturing. I show that basic education is a key determinant of innovation in traditional industries. I document that manufacturers in European regions with 10% more high school graduates file 15% more patents, and invest 4% more in capital expenditures. To absorb spatially correlated unobservables, I construct Virtual Regions that only exploit the variation in basic education across nearby locations. To address the possibility of reverse causality, I establish that regional basic education persists for decades, and I use the quasi-exogenous diffusion of the printing press after 1450 to instrument for historical basic education. The results offer a human capital channel for innovation that feeds into the innovation-to-investment literature in finance. |
| Keywords | Enterprise innovation, human capital investment, historical shocks, literacy distribution |
| URL | https://www.eief.it/files/2015/01/02-jmp-eief_dacunto.pdf |
| Tags | Archival Empirical | Evolutionary Finance | Experimental / Survey-Based Empirical | Manager / Firm Behavior | Productivity Spillovers |
Corporate environmental policy and shareholder value: Following the smart money
| Authors | Fernando, Sharfman and Uysal |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2017 |
| Type | Published Paper |
| Abstract | We examine the value consequences of corporate social responsibility through the lens of institutional shareholders. We find a sharp asymmetry between corporate policies that mitigate the firm's exposure to environmental risk and those that enhance its perceived environmental friendliness ("greenness"). Institutional investors shun stocks with high environmental risk exposure, which we show have lower valuations, as predicted by risk management theory. These findings suggest that corporate environmental policies that mitigate environmental risk exposure create shareholder value. In contrast, firms that increase greenness do not create shareholder value and are also shunned by institutional investors. |
| Keywords | Corporate environmental policy, CSR, shareholder value, institutional investors, firm value |
| URL | https://doi.org/10.1017/S0022109017000680 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Investment Decisions (Institutional) | Manager / Firm Behavior |
Tweeting as a marketing tool: A field experiment in the TV industry
| Authors | Gong, Zhang, Zhao, Jiang |
| Journal | Journal of Marketing Research |
| Year | 2017 |
| Type | Published Paper |
| Abstract | Many businesses today have adopted tweeting as a new form of product marketing. However, whether and how tweeting affects product demand remains inconclusive. The authors explore this question using a randomized field experiment on Sina Weibo, the top tweeting website in China. The authors collaborate with a major global media company and examine how the viewing of its TV shows is affected by (1) the media company's tweets about its shows, and (2) recruited Weibo influentials' retweets of the company tweets. The authors find that both company tweets and influential retweets increase show viewing, but in different ways. Company tweets directly boost viewing, whereas influential retweets increase viewing if the show tweet is informative. Meanwhile, influential retweets are more effective than company tweets in bringing new Weibo followers to the company, which indirectly increases viewing. The authors discuss recommendations on how to manage tweeting as a marketing tool. |
| Keywords | Tweet, social media marketing, social media return on investment, field experiment, television |
| URL | https://doi.org/10.1509/jmr.14.0348 |
| Tags | Archival Empirical | Consumer Decisions | Manager / Firm Behavior | Media and Textual Analysis |
Social capital and debt contracting: Evidence from bank loans and public bonds
| Authors | Hasan, Hoi, Wu and Zhang |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2017 |
| Type | Published Paper |
| Abstract | We find that firms headquartered in U.S. counties with higher levels of social capital incur lower bank loan spreads. This finding is robust to using organ donation as an alternative social capital measure and incremental to the effects of religiosity, corporate social responsibility, and tax avoidance. We identify the causal relation using companies with a social-capital-changing headquarters relocation. We also find that high-social-capital firms face loosened nonprice loan terms, incur lower at-issue bond spreads, and prefer public bonds over bank loans. We conclude that debt holders perceive social capital as providing environmental pressure that constrains opportunistic firm behaviors in debt contracting. |
| Keywords | Social capital, bank loan cost, firm's financing decisions, debt contracting, investors' decisions |
| URL | https://doi.org/10.1017/S0022109017000205 |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) | Manager / Firm Behavior |
Social capital and debt contracting: evidence from bank loans and public bonds
| Authors | Hasan, Hoi, Wu, Zhang |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2017 |
| Type | Published Paper |
| Abstract | We find that firms headquartered in U.S. counties with higher levels of social capital incur lower bank loan spreads. This finding is robust to using organ donation as an alternative social capital measure and incremental to the effects of religiosity, corporate social responsibility, and tax avoidance. We identify the causal relation using companies with a social-capital-changing headquarters relocation. We also find that high-social-capital firms face loosened nonprice loan terms, incur lower at-issue bond spreads, and prefer public bonds over bank loans. We conclude that debt holders perceive social capital as providing environmental pressure that constrains opportunistic firm behaviors in debt contracting. |
| URL | https://doi.org/10.1017/S0022109017000205 |
| Tags | Archival Empirical | Investment Decisions (Institutional) | Manager / Firm Behavior |
Corporate risk culture
| Authors | Pan, Siegel, Wang |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2017 |
| Type | Published Paper |
| Abstract | We examine the formation and evolution of corporate risk culture, that is, the preferences toward risk and uncertainty shared by a firm's leaders, as well as its effect on corporate policies. We document persistent commonality in risk attitudes inside firms, which arises through the selection of leaders with similar preferences and is rooted in the founders' risk attitudes. Changes in corporate risk culture over time affect corporate investment policies, whereas cross-sectional differences in founders' risk attitudes, that is, firms' initial risk culture, contribute to differences across firms in persistent firm policies, such as research and development intensity. |
| Keywords | Risk preferences, risk attitudes, firm's leader, corporate policies, corporate culture |
| URL | https://doi.org/10.1017/S0022109017000771 |
| Tags | Archival Empirical | Evolutionary Finance | Manager / Firm Behavior |
Corporate finance policies and social networks
| Authors | Fracassi |
| Journal | Management Science |
| Year | 2016 |
| Type | Published Paper |
| Abstract | This paper shows that managers are influenced by their social peers when making corporate policy decisions. Using biographical information about executives and directors of U.S. public companies, we define social ties from current and past employment, education, and other activities. We find that more connections two companies share with each other, more similar their capital investments are. To address endogeneity concerns, we find that companies invest less similarly when an individual connecting them dies. The results extend to other corporate finance policies. Furthermore, central companies in the social network invest in a less idiosyncratic way and exhibit better economic performance. |
| Keywords | Corporate finance, policy decisions, social networks, capital investments |
| URL | https://doi.org/10.1287/mnsc.2016.2433 |
| Tags | Archival Empirical | Manager / Firm Behavior |
The value of crowdsourced earnings forecasts
| Authors | Jame, Johnston, Markov, Wolfe |
| Journal | Journal of Accounting Research |
| Year | 2016 |
| Type | Published Paper |
| Abstract | Crowdsourcing-when a task normally performed by employees is out-sourced to a large network of people via an open call-is making inroads into the investment research industry. We shed light on this new phenomenon by examining the value of crowdsourced earnings forecasts. Our sample includes 51,012 forecasts provided by Estimize, an open platform that solicits and reports forecasts from over 3,000 contributors. We find that Estimize forecasts are incrementally useful in forecasting earnings and measuring the market's expectations of earnings. Our results are stronger when the number of Estimize contributors is larger, consistent with the benefits of crowdsourcing increasing with the size of the crowd. Finally, Estimize consensus revisions generate significant two-day size-adjusted returns. The combined evidence suggests that crowdsourced forecasts are a useful supplementary source of information in capital markets. |
| Keywords | Analyst, forecast, earnings response coefficients, crowdsourcing |
| URL | https://onlinelibrary.wiley.com/doi/abs/10.1111/1475-679X.12121 |
| Tags | Archival Empirical | Manager / Firm Behavior |
Religion and stock price crash risk
| Authors | Callen, Fang |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2015 |
| Type | Published Paper |
| Abstract | This study examines whether religiosity at the county level is associated with future stock price crash risk. We find robust evidence that firms headquartered in counties with higher levels of religiosity exhibit lower levels of future stock price crash risk. This finding is consistent with the view that religion,as a set of social norms, helps to curb bad-news-hoarding activities by managers. Our evidence further shows that the negative relation between religiosity and future crash risk is stronger for riskier firms and for firms with weaker governance mechanisms measured by shareholder takeover rights and dedicated institutional ownership. |
| Keywords | Religion, social norms, stock crash, corporate governance |
| URL | https://doi.org/10.1017/S0022109015000046 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Manager / Firm Behavior |
Suspense and surprise
| Authors | Ely, Frankel, Kamenica |
| Journal | Journal of Political Economy |
| Year | 2015 |
| Type | Published Paper |
| Abstract | We model demand for noninstrumental information, drawing on the idea that people derive entertainment utility from suspense and surprise. A period has more suspense if the variance of the next period's beliefs is greater. A period has more surprise if the current belief is further from the last period's belief. Under these definitions, we analyze the optimal way to reveal information over time so as to maximize expected suspense or surprise experienced by a Bayesian audience. We apply our results to the design of mystery novels, political primaries, casinos, game shows, auctions, and sports. |
| URL | https://www.journals.uchicago.edu/doi/full/10.1086/677350 |
| Tags | Consumer Decisions | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) | Manager / Firm Behavior | Social Transmission Biases | Theory |
Do better-connected CEOs innovate more?
| Authors | Faleye, Kovacs and Venkateswaran |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2015 |
| Type | Published Paper |
| Abstract | We present evidence suggesting that chief executive officer (CEO) connections facilitate investments in corporate innovation. We find that firms with better-connected CEOs invest more in research and development and receive more and higher quality patents. Further tests suggest that this effect stems from two characteristics of personal networks that alleviate CEO risk aversion in investment decisions. First, personal connections increase the CEO's access to relevant network information, which encourages innovation by helping to identify, evaluate, and exploit innovative ideas. Second, personal connections provide the CEO with labor market insurance that facilitates investments in risky innovation by mitigating the career concerns inherent in such investments. |
| Keywords | CEO, corporate innovation, risk attitudes, social networks, investment decisions |
| URL | https://doi.org/10.1017/S0022109014000714 |
| Tags | Archival Empirical | Manager / Firm Behavior | Social Network Structure |
Corporate policies of republican managers
| Authors | Hutton, Jiang and Kumar |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2015 |
| Type | Published Paper |
| Abstract | We demonstrate that personal political preferences of corporate managers influence corporate policies. Specifically, Republican managers who are likely to have conservative personal ideologies adopt and maintain more conservative corporate policies. Those firms have lower levels of corporate debt, lower capital and research and development (R&D) expenditures, less risky investments, but higher profitability. Using the 9/11 terrorist attacks and Sept. 2008 Lehman Brothers bankruptcy as natural experiments, we demonstrate that investment policies of Republican managers became more conservative following these exogenous uncertainty-increasing events. Furthermore, around chief executive officer (CEO) turnovers, including CEO deaths, firm leverage policy becomes more conservative when managerial conservatism increases. |
| Keywords | Political ideology, manager's behaviors, corporate policy |
| URL | https://doi.org/10.1017/S0022109014000702 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Experimental / Survey-Based Empirical | Manager / Firm Behavior |
Deviations from norms and informed trading
| Authors | Kumar, Page |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2014 |
| Type | Published Paper |
| Abstract | Investment managers are subject to personal and institutional norms that can constrain their investment choices. We conjecture that norm-constrained investors deviate from such norms only when they have compelling information, and we predict that deviating investments earn relatively high abnormal returns ex post. Consistent with our conjecture, we find that institutions averse to holding lottery-like stocks or sin stocks earn relatively high abnormal returns when they choose to hold such stocks. We find similar but weaker results for deviations from broader style categories. Overall, our evidence indicates that deviations from established institutional or social norms signal informed investing. |
| Keywords | Investment manager behavior, social norms, informed investing, portfolio performance |
| URL | https://doi.org/10.1017/S0022109014000519 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Investment Decisions (Institutional) | Manager / Firm Behavior |
The price of a CEO's rolodex
| Authors | Engelberg, Gao, Parsons |
| Journal | Review of Financial Studies |
| Year | 2013 |
| Type | Published Paper |
| Abstract | CEOs with large networks earn more than those with small networks. An additional connection to an executive or director outside the firm increases compensation by about $17,000 on average, more so for "important" members, such as CEOs of big firms. Pay-for-connectivity is unrelated to several measures of corporate governance, evidence in favor of an efficient contracting explanation for CEO pay. |
| Keywords | CEO compensation, social networks, information value, corporate governance |
| URL | https://doi.org/10.1093/rfs/hhs114 |
| Tags | Archival Empirical | Manager / Firm Behavior | Social Network Structure | Theory |
With a little help from my (random) friends: Success and failure in post-business school entrepreneurship
| Authors | Lerner, Malmendier |
| Journal | Review of Financial Studies |
| Year | 2013 |
| Type | Published Paper |
| Abstract | How do individuals decide to become entrepreneurs and learn to make optimal entrepreneurial decisions? The concentration of entrepreneurs in regions such as Silicon Valley has stimulated research and policy interest into the influence of peers, but the causal effect is hard to identify empirically. We exploit the exogenous assignment of students into business-school sections to identify the causal effect of entrepreneurial peers. We show that, in contrast to prior findings, a higher share of entrepreneurial peers decreases, rather than increases, entrepreneurship. The decrease is driven by a reduction in unsuccessful entrepreneurial ventures; the effect on successful ventures is significantly more positive. |
| URL | https://doi.org/10.1093/rfs/hht024 |
| Tags | Archival Empirical | Manager / Firm Behavior |
Executive networks and firm policies: Evidence from the random assignment of MBA peers
| Authors | Shue |
| Journal | Review of Financial Studies |
| Year | 2013 |
| Type | Published Paper |
| Abstract | Using the historical random assignment of MBA students to sections at Harvard Business School (HBS), I explore how executive peer networks can affect managerial decision making. Within an HBS class, firm outcomes are significantly more similar among graduates from the same section than among graduates from different sections, with the strongest effects in executive compensation and acquisitions strategy. I demonstrate the role of ongoing social interactions by showing that peer effects are more than twice as strong in the year following staggered alumni reunions. Supplementary tests suggest that peer influence can operate in ways that do not contribute to firm productivity. |
| URL | https://doi.org/10.1093/rfs/hht019 |
| Tags | Archival Empirical | Manager / Firm Behavior |