Forthcoming Articles

Accounting Losses as a Heuristic for Managerial Failure: Evidence from CEO Turnovers

Aloke (Al) Ghosh and Jun Wang

We study the effects of accounting losses on CEO turnover. If accounting losses provide incremental information about managerial ability, boards can utilize the information in losses to assess CEO’s stewardship of assets, which is why losses may serve as a heuristic for managerial failure. We find a positive relation between losses and subsequent CEO turnover after controlling for other accounting and stock performance measures. We also find that losses are associated with an increase in board activity and that losses predict poor operating performance and future financial problems. Our results explain why CEOs manage earnings to avoid losses.

How Does Illiquidity Affect Delegated Portfolio Choice?

Min Dai, Luis Goncalves-Pinto, and Jing Xu

In response to how they are compensated, mutual fund managers who are under-performing by mid-year are likely to increase the risk of their portfolios towards the year-end. We argue that an increase in the liquidity of the stocks that managers use to shift risk can lead to an increase in the size of their risky bets. This in turn hurts fund investors by increasing the costs of misaligned incentives associated with delegated portfolio management. We provide both theoretical and empirical results that are consistent with this argument. We use decimalization as an exogenous shock to liquidity to identify causal effects.

 

Deal Initiation in Mergers and Acquisitions

Ronald W. Masulis and Serif Aziz Simsir

We investigate the effects of target initiation in mergers and acquisitions. We find target-initiated deals are common and that important motives for these deals are target economic weakness, financial constraints, and negative economy-wide shocks. We determine that average takeover premia, target abnormal returns around merger announcements, and deal value to EBITDA multiples are significantly lower in target-initiated deals. This gap is not explained by weak target financial conditions. Adjusting for self-selection, we conclude that target managers’ private information is a major driver of lower premia in target-initiated deals. This gap widens as information asymmetry between merger partners rises.

 

Price Drift before U.S. Macroeconomic News: Private Information about Public Announcements?

Alexander Kurov, Alessio Sancetta, Georg Strasser, and Marketa Halova Wolfe

We examine stock index futures and Treasury futures around the release time of 30 U.S. macroeconomic announcements. Nine of the 20 announcements that move markets show evidence of substantial informed trading before the official release time. Prices begin to move in the “correct” direction about 30 minutes before the release time. The pre-announcement price drift accounts on average for about 40% of the total price adjustment. This implies that some traders have private information about macroeconomic fundamentals. Preannouncement drift might originate from a combination of information leakage and superior forecasting that incorporates proprietary data.

Relationship Bank Behavior during Borrower Distress

Yan Li, Ruichang Lu, and Anand Srinivasan

This paper examines the time series behavior of relationship banks around and during borrower distress. Relationship and outside loans have similar interest rates during distress and even two years prior to distress. Relative to outside loans in distress, relationship loans in distress have lower maturities. The fraction of bank lending given by relationship banks falls during borrower distress. Overall, borrowers in distress do not derive benefits from relationship banks. These findings are inconsistent with models that suggest banks have an implicit commitment to help their borrowers in distress, due to reputational concerns.

 

Beta Active Hedge Fund Management

Jun Duanmu, Alexey Malakhov, and William R. McCumber

We reconsider whether hedge funds’ time-varying risk factor exposures are predictive of superior performance. We construct an overall measure, Beta Activity, of fund managers, and present evidence that top beta active managers deliver superior long-term out-of-sample performance compared to top alpha active managers. Beta Activity captures the time-varying nature of beta exposures, and can be interpreted as a common factor of both SR (Systematic Risk) and (1−R2) measures. Beta Activity also compares favorably to extant measures of market timing, capturing the explanatory power of such measures of hedge fund performance.

 

 

Industry Tournament Incentives and the Product Market Benefits of Corporate Liquidity

Jian Huang, Bharat A. Jain, and Omesh Kini

We evaluate the link between CEO industry tournament incentives (ITI) and the product market benefits of corporate liquidity. We find that ITI increase the level and marginal value of cash holdings. Furthermore, ITI strengthen the relation between excess cash and market share gains especially for firms that face significant competitive threats. Additionally, for firms with excess cash, higher ITI lead to increased R&D expenses, capital expenditures, and spending on focused acquisitions as well as reduced payouts. Overall, our findings suggest that ITI increase the value of cash by incentivizing CEOs to deploy cash strategically to capture its product market benefits.

 

 

Holdup by Junior Claimholders: Evidence from the Mortgage Market

Sumit Agarwal, Gene Amromin, Itzhak Ben-David, Souphala Chomsisengphet, and Yan Zhang

When borrowers are delinquent, senior debtholders prefer liquidation whereas junior debtholders prefer to maintain their option value by delaying resolution or modifying the loan. In the mortgage market, a conflict of interest (“holdup”) arises when servicers of securitized senior liens are also the owners of the junior liens on the same property. We show that holdup servicers are able to delay action on the first-lien mortgage. When they do act, servicers are more likely to choose resolutions that maintain their option value, favoring modification and soft foreclosures over outright foreclosures. Holdup behavior is more likely to result in borrower self-curing.

 

 

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