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Prior research documents that analyst revisions are important information events and that some investors trade ahead of them. However, prior studies have been unable to show which investors trade ahead of analyst revisions, the aggregate benefits to trading ahead, and the costs borne by various investors from trading against investors that anticipate revisions. To address these questions, we exploit high-frequency trading information from the Korea Exchange (KRX) that characterizes all purchase and sale transactions of twenty different investor groups. We first validate that analyst revisions contain valuable private information: upgrades increase prices by 2.5% and downgrades decrease prices by 2.9%. We next document that asset managers who are geographically and socially close to analysts anticipate recommendations up to two days before they are released, while other institutions do not. Lastly, we show that this ability to anticipate analyst revisions enables these investors to trade profitably against domestic retail investors and foreign professional investors. Local hedge funds earn $2.5 million more than normal when trading against foreign professionals ahead of analyst revisions, which is more than all other investor groups combined. Notably, local asset managers typically lose money when trading against foreign professionals, who seem to earn profits by engaging in high-frequency market making. In sum, asset managers in Korea appear to receive tips from brokerages about upcoming revisions, which shifts the competitive balance between domestic institutions and skilled foreign market makers, and aggregate profits around revisions depend on investor sophistication, geographic proximity, and cultural affinity.

SUMMARY Previous studies document that lenders lack incentives to monitor borrowing firms or to make concessions during bankruptcy if these lenders insure against corporate default with credit default swaps (CDS). This article investigates whether external auditors increase their audit fees for those client firms that have their debt referenced by CDS. In a comprehensive sample of U.S. companies from 2001–2015, we find that CDS-referenced companies incur larger audit fees compared to companies without CDS. The economic magnitude of the audit fee increase ranges from 5.4 percent to 11 percent, depending on the econometric specification employed. Deteriorating corporate conditions or other observable characteristics do not explain the positive association between CDS trading and audit fees, or the increase in audit fees following CDS initiations. The findings suggest that auditors increase their professional skepticism and monitoring efforts of CDS-referenced clients; they might also expect higher liability losses. JEL Classifications: G10; G30; G33; G34.

We provide evidence that sophisticated investors like short sellers, option traders, and financial institutions are more informed when trading stocks of companies with more connected board members. For firms with large director networks, the annualized return difference between the highest and lowest quintile of informed trading ranges from 4% to 7.2% compared to the same return difference in firms with less connected directors. Sophisticated investors better predict outcomes of upcoming earnings surprises and firm-specific news sentiment for companies with more connected directors. Changes in board connectedness are positively associated with changes in measures of adverse selection.

This study examines how increased regulatory attention to portfolio pumping affects the trading behavior of U.S. mutual funds. Attention by regulators should increase the likelihood of fines and reputational damage, raising the cost of such last-minute price manipulation. Consistent with this assertion, we find that last-minute price spikes in aggregate fund indices, in fund holdings and in institutional trading around quarter-ends declined, the declines are largest around year-ends, for small-cap and better-performing funds, and occurred faster for funds headquartered near SEC regional offices. These findings suggest that increased regulatory attention reduced portfolio pumping by U.S. mutual funds.

Prior research shows that family control affects firm value through capital investment, debt financing, M&A activities, and governance structure. This study investigates the role of corporate culture in family firms and its implications for firm value. We use more than 100,000 surveys collected by Glassdoor between 2008 and 2012 that capture how employees perceive their company's culture. We find that employees who work for firms with active founders rate their companies higher than employees in nonfamily firms, especially if the founder runs the company. In contrast, employee satisfaction in scion firms does not differ from nonfamily firms, and when scions run the company, employees are less satisfied. Scion firms also exhibit significant lower employee satisfaction during the recent financial crisis. Furthermore, employee assessments predict subsequent firm performance measured by Tobin's q and return on assets (ROA). Our findings provide evidence that family firms exhibit a human-capital-enhancing culture that improves firm performance.

Agency conflicts between mutual fund investors and fund sponsors have recently received close attention from regulators and legislators. In response to improprieties regarding pricing calculations and trading deadlines, the Securities and Exchange Commission has adopted a controversial new rule requiring fund boards to have at least 75% independent directors and an independent chair person. This study examines to what extend board independence and director incentives in the mutual fund industry are systematically related to fund expenses, performance, and compliance. It is based on a novel panel dataset that covers about 60% of assets listed in the CRSP mutual fund database over the period from 1995 through 2004. The study finds that funds overseen by an independent chair charge lower fees, while the relation between fund fees and the fraction of independent directors varies through time. Both measures of board independence do not affect fund performance in an economically significant way. Funds with higher director ownership and lower unexplained compensation charge lower fees and deliver higher returns. These empirical findings are consistent with both the watchdog hypothesis, stating that greater independence and better incentive alignment causes boards to bargain harder with fund advisors, which results in lower fees, and the clientele hypothesis, suggesting that some sponsors strive to attract assets from relatively sophisticated investors who are concerned about conflicts of interest and sensitive to expenses. When attempting to empirically distinguish between these competing hypotheses, I find that boards with an independent chair negotiate lower total expenses, but approve higher management fees and that they do not have a lower probability of being subject to litigation by regulators and shareholders. In light of these results, this study finds only limited empirical support for recent initiatives to regulate mutual fund board structure.

NOTICE: This is the author’s version of a work that was accepted for publication in Journal of Banking & Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Banking & Finance, Vol. 34, Issue 6, June 2010. DOI:10.1016/j.jbankfin.2009.11.027

We provide evidence that sophisticated investors like short sellers, option traders, and financial institutions are more informed when trading stocks of companies with more connected board members. For firms with large director networks, the annualized return difference between the highest and lowest quintile of informed trading ranges from 4% to 7.2% compared to the same return difference in firms with less connected directors. Sophisticated investors better predict outcomes of upcoming earnings surprises and firm-specific news sentiment for companies with more connected directors. Changes in board connectedness are positively associated with changes in measures of adverse selection.

This paper presents a parsimonious, structural model that captures primary economic determinants of the relation between firm value and managerial ownership. Supposing that observed firm size and managerial pay-performance sensitivity (PPS) maximize value, we invert our model to panel data on size and PPS to obtain estimates of the productivity of physical assets and managerial input. Variation of these productivity parameters, optimizing firm size and compensation contract, and the way the parameters and choices interact in the model, all combine to deliver the well-known hump-shaped relation between Tobin’s Q and managerial ownership (e.g., McConnell and Servaes (1990)). Our structural approach illustrates how a quantitative model of the firm can isolate important aspects of organization structure, quantify the economic significance of incentive mechanisms, and minimize the endogeneity and causation problems that so commonly plague empirical corporate finance. Doing so appears to be essential because, by simulating panel data from the model and applying standard statistical tools, we confirm that the customary econometric remedies for endogeneity and causation can be ineffective in application.

The frequency and magnitude of employee downsizing has outpaced scholarly research on this important management phenomenon. Extant research has examined the effects of downsizing from either an ind...