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Principal customers have strong incentives to screen and/or monitor suppliers to ensure supply-chain stability; consequently, the implicit certification from the existence of long-term relationships with principal customers has reputational consequences that potentially spill over to other markets. We argue that one such consequence is smaller loan spreads and looser loan covenants on bank loans, as firms that are able to hold on to principal customers longer are perceived as safer firms by banks. We address causality and endogeneity issues via a variety of tests and find consistent results. Our study suggests that non-financial stakeholders can have important effects on the decisions of financial stakeholders.

While a sizable literature suggests that firms benefit from vulnerability to takeovers because it reduces agency problems, the threat of takeovers can also impose ex ante costs on firms by adversely affecting relationships with important stakeholders, such as major customers. We find that when firms have corporate customers as important stakeholders, an exogenous reduction in the threat of takeovers increases their ability to attract new customers and strengthens their relationships with existing customers, resulting in improvement in operating performance. The positive effect on operating performance is greater for suppliers that are likely to offer unique and durable products to their customers. Our results suggest a beneficial aspect of protection from takeovers when stakeholder relationships are important.

Principal customers have strong incentives to screen and/or monitor suppliers to ensure supply-chain stability; consequently, the implicit certification from the existence of long-term relationships with principal customers has reputational consequences that potentially spill over to other markets. We argue that one such consequence is smaller loan spreads and looser loan covenants on bank loans, as firms that are able to hold on to principal customers longer are perceived as safer firms by banks. We address causality and endogeneity issues via a variety of tests and find consistent results. Our study suggests that non-financial stakeholders can have important effects on the decisions of financial stakeholders.

We explore the analyst earnings forecasts data to study the interactive effect between disagreement and underreaction to earnings news on asset prices. We find that (1) changes in the mean of forecasted earnings, as an underreaction measure, predict future returns positively and significantly; that (2) changes in the standard deviation of forecasted earnings, as a disagreement measure, predict future returns negatively and marginally; and more importantly, that (3) changes in the standard deviation predict future returns significantly only when changes in the mean are negative. Our results are robust both in the standard cross-sectional return setting and in the event-study setting around earnings announcements. Our evidence suggests that the return predictability of analyst forecast dispersion measure in Diether, Malloy, and Scherbina (2002) is mainly contributed by the underreaction component in the measure’s deflator rather by the disagreement component in the numerator.

Within industry, stock returns of larger firms lead those of smaller firms, suggesting an intraindustry information diffusion process. Most industry leaders, however, have business segments in other industries (henceforth, minor-segment industries), whereas most small firms are pure players operating in one industry only. If investors cannot filter out the irrelevant information from the leaders' minor segments, the pure players will be mispriced due to spurious cross-industry information diffusion (SCIID). Consistent with the SCUD hypothesis, we document both a strong contemporaneous and a lead-lag relation in stock returns between firms from industry leaders' minor-segment industries and pure players in the industry leaders' major-segment industry. Our results are not due to potential missing common factors or economic relationships between pure. players and firms in the minor-segment industries.

We test the implications of anchoring bias associated with forecast earnings per share (FEPS) for forecast errors, earnings surprises, stock returns, and stock splits. We find that analysts make optimistic (pessimistic) forecasts when a firm's FEPS is lower (higher) than the industry median. Further, firms with FEPS greater (lower) than the industry median experience abnormally high (low) future stock returns, particularly around subsequent earnings announcement dates. These firms are also more likely to engage in stock splits. Finally, split firms experience more positive forecast revisions, more negative forecast errors, and more negative earnings surprises after stock splits.

Within an industry, stock returns of larger firms lead those of smaller firms, suggesting an intraindustry information diffusion process. Most industry leaders, however, have business segments in other industries (henceforth, minor-segment industries), whereas most small firms are pure players operating in one industry only. If investors cannot filter out the irrelevant information from the leaders' minor segments, the pure players will be mispriced due to spurious cross-industry information diffusion (SCIID). Consistent with the SCIID hypothesis, we document both a strong contemporaneous and a lead–lag relation in stock returns between firms from industry leaders' minor-segment industries and pure players in the industry leaders' major-segment industry. Our results are not due to potential missing common factors or economic relationships between pure players and firms in the minor-segment industries.

We explore analysts’ earnings forecast data to improve upon one popular disagreement measure — the analyst forecast dispersion measure — proposed by Diether, Malloy, and Scherbina (2002). Our analysis suggests that changes in the standard deviations of forecasted earnings can work as a complementary disagreement measure that is comparable across stocks and immune from other return-predictive information contained in the normalization scalars of analyst forecast dispersion measures. We also document evidence that the change-based disagreement measure predicts future cross-sectional returns significantly only when changes in the mean forecasts are negative. This finding suggests that the interaction between disagreement and underreaction to earnings news affects asset prices.

Threat of hostile takeovers can impair the ability of firms to commit to long-term relationships with important stakeholders, adversely affecting performance. We use the passage of business combination (BC) laws on a state-by-state basis as a source of exogenous reduction in the threat of a hostile takeover to show that this results in a significant increase in ROA for firms that have important product market relationships in the form of largecorporate customers. We suggest that since a hostile takeover can disrupt relationships, a reduction in takeover probability allows the supplier to commit to longer term relationships with these customers. As a result, the supplier is able to get lucrative projects from the customer which it could not when its takeover probability was higher. This results in an improvement in operating performance of the supplier. We provide further support by showing that there is an increase in sales for the supplier and an increase in proportion of sales to large customers after the passage of BC law in its state. We also find that a reduction in threat of takeover leads to a strengthening of the customer-supplier relationship. This is reflected by (a) greater probability of continuation of a relationship, (b) greater sensitivity of supplier’s performance to that of the customer, and (c) greater sensitivity of the supplier’s investment to that of the customers, suggesting that the supplier undertakes more investments on behalf of the customer. While a sizeable literature suggests that shareholders would always prefer greater vulnerability to hostile takeovers as it reduces agency problems, our results imply that this may not be true for firms for which ability to commit to long-term relationship with stakeholders is important.

Essay One: What Can We Learn from IPO Cornparables Besides Valuation? IPO Shadow Stocks, Oversubscription Rates and Investor Sentiment in the Hong Kong Market IPO comparable stocks that are discussed by the local media around the IPO filing period are known in Hong Kong as IPO shadow stocks. I show that IPO shadow stocks experience significant price run-ups during the IPO filing period of the public offering tranche. The level of run-ups is positively associated with the level of media coverage of IPO stocks before the IPO filing date. Utilizing a unique dataset that provides information on IPO subscription rates, I find that higher run-ups of IPO shadow stocks are associated with higher IPO demand. The subscription rate is highly relevant in explaining IPO initial returns, and its presence overshadows most other factors commonly studied in the literature, such as prior market and industry returns. I further examine whether both the price run-up and oversubscription are due to leakage of information from institutional subscribers' demand (information diffusion hypothesis), or stimulated attention by over-optimistic investors in 'hot issue' markets (stimulated attention hypothesis). In my empirical analysis, I find significant price reversals of IPO shadow stocks after the IPO listing dates. Further, the price run-ups of IPO shadow stocks of smaller firms, non-H-share firms and those subject to more severe short sale constraints have stronger predictive power for IPO demand. These results support the stimulated attention hypothesis and are inconsistent with the information diffusion hypothesis, suggesting that investor sentiment may be the dominant determinant of IPO demand in the Hong Kong market. Essay Two: When the Tail Wags the Dog: Industry Leaders, Limited Attention and Spurious Cross-Industry Information Diffusion Hou (2007) finds that within an industry, the stock returns of larger firms lead those of smaller firms, suggesting an intra-industry information di