Research sponsored by the CFO Forum in 2004

Jefferson Duarte, “The Impact of Corporate Bond Issuance on the Treasury Bond Market”

The impact of corporate bond issuance on the Treasury Bond market is unknown. The issuance of corporate bonds by an individual company does not reveal any information about general economic prospects, so corporate bond issuance should not affect Treasury bond prices. On the other hand, corporate bond issuers and investors hedge their interest rate risk with swaps and Treasury bonds and hence they generate flows in the Treasury bond market that could affect Treasury bond prices. This project measures the effect of corporate bond issuance on the yields of Treasury bonds.

Jarrad Harford, “Corporate Governance and Firm Cash Holdings”

This project focuses on the relation between the management of cash holdings and a corporate governance index that includes various antitakeover provisions. Our hypothesis is that stronger corporate governance (more power to shareholders) will lead to smaller cash reserves. International evidence in prior studies is consistent with this hypothesis. However, our preliminary empirical work for U.S. firms finds exactly the opposite: firms with worse governance (more entrenched managers) hold lower cash reserves. We will explore two possible explanations: first, shareholders allow better-governed firms to hold high cash reserves; second, poorly governed firms spend the cash rather than hold it.

Avi Kamara, “Production Flexibility and the Interaction of Real and Financial Options”

Real options are pervasive in corporate decisions. Examples include options to scale projects (expand, contract, and abandon), options to defer investments, and options to proceed to the next stage. The ex post exercising of real options generates additional ex ante uncertainty regarding the firm’s production decisions. This paper studies the interaction of real and financial options. We study the production and hedging decisions of a firm facing output price uncertainty. We also examine hedging behavior, and derive the optimal set of customized derivatives.

Jonathan Karpoff, “The Evolution and Life-Cycle of Corporate Boards: An Empirical Analysis”

We intend to examine the evolution of the corporate board of directors from the initial public offering until 10 years after the IPO. Preliminary analysis indicates that we do not see a quick transformation of the average newly-public board toward that of more established and seasoned corporations. We propose to investigate the forces that drive changes in the boards of young firms. To structure our analysis, we will focus on three hypotheses that have been proposed by previous researchers: 1.) firm size and age drive board size and composition, 2.) board structure reflects the outcome of a negotiation between managers and outside board members, and 3.) board size and composition reflect the specific monitoring requirements of the firm’s business activity.

Jennifer Koski, “Reverse Stock Splits and NASDAQ Delisting”

After the stock market bubble reversed in early 2000, many formerly highly-valued stocks saw their stock prices plummet to extremely low levels. When a company’s stock price trades below $1 per share for more than a month, it receives notification from NASDAQ regarding possible delisting. In response to these letters, many companies announce reverse stock splits to avoid delisting, a strategy encouraged by NASDAQ. This paper will explore the effectiveness of this strategy by analyzing the following research questions. To what extent do NASDAQ companies execute reverse stock splits to avoid delisting? Do reverse stock splits effectively allow firms to avoid or delay delisting? Are investors better off as a result?

Shiva Rajgopal, “The Economic Implications of Corporate Financial Reporting”

In this paper, we conduct a comprehensive survey that asks CFOs to describe their choices related to voluntary disclosures and reported accounting numbers. We investigate the following questions. What factors motivate some firms to voluntarily disclose information or exercise greater discretion in reported earnings numbers, while other firms do not? What is the relative importance of various theories proposed by academic research to explain voluntary disclosure and earnings management? Do managers care about earnings benchmarks or earnings trends, and if so, which benchmarks are relatively more important?

Kevin Steensma, “Window Dressing or Substantative Document? The Influence of Ethics Codes on the Decision Making Process of Financial Executives”

With the recent spate of scandals resulting from the questionable behavior of corporate leaders, there have been calls for various governance mechanisms including ethics codes to guide executive decision-making. However, the extent to which ethics codes are actually used by executives when making strategic choices as opposed to being merely symbolic is unknown. We examine the use of ethics codes by senior financial executives. We find that financial executives are more likely to integrate their company’s ethics codes into their strategic decision processes if (a) they perceive pressure from market stakeholders to do so; (b) they believe the use of ethics codes creates an internal ethical culture and promotes a positive external image for their firms; and (c) the code is integrated into daily activities through training programs.

Doctoral Student Fellowship:

Darren Kisgen, “Credit Ratings and Capital Structure”