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We examine how the trade shock from China influences the behavior and investment performance of overconfident CEOs in U.S. firms. We show that the rise of Chinese import competition curbs investments and improves investment value and acquisition performance for firms with overconfident CEOs. Intensified Chinese product competition also reduces the incentives for these firms to expand assets, invest out of cash flows, pursue aggressive financial policies, and increase risk exposure, and enhances their incentives to buy back shares. Overall, the evidence suggests that product market competition is an effective external governance mechanism for curbing the adverse effects of managerial overconfidence.

We examine whether a firm’s voluntary disclosures, proxied by management earnings forecasts, affect its innovation activity. A firm making more disclosures generates fewer patents and lower-quantity patents. Enactment of SOX is applied as a natural experiment for an exogenous shock to voluntary disclosure. Corporate innovation is reduced for accelerated filers, especially after SOX becomes effective. Nondedicated institutional ownership, R&D spillover, and rival firms’ innovation are higher for accelerated filers after SOX. There is more of a negative effect of voluntary disclosure on innovation activity when product markets are highly competitive, industry information diffusion is speedy, and disclosures are more informative.

Using hand-collected governance data and a two-stage least squares approach to control for the endogeneity of firm governance structure, this paper shows that private investments in public equity (PIPE) issuers with higher board independence grant investors lower price discounts and experience improved announcement effects, improved long-run operating and stock performance, and increased investment. Board independence also encourages issuers to place more shares with venture capital investors, and fewer shares with managerial investors. These findings suggest that strong independent governance can mitigate the agency costs inherent in PIPEs.

We investigate how a shock to corporate demand for experienced directors (i.e., U.S. Congress’ grant of Permanent Normal Trade Relations status to China in 2000) affects U.S. firms’ board structure and board advisory role. We find that firms appoint more outside directors with China-related experience after the grant. Firms with such directors realize higher returns around announcements of investments involving Chinese firms and better post-deal operating performance, particularly when these directors reside in the U.S. The appointment of directors with China experience is also greeted more positively by the stock market and they gain more board seats after the grant. We are especially grateful to the referee, Michael Weisbach, for his valuable advice. We also thank Alexander Ljungqvist, Jerry Parwada, John Wei, William Schwert (editor), and seminar participants at Nanyang Technological University, National Central University, National Chiao Tung University, National Tsing Hua University, and Yuan Ze University for their useful comments. We are also grateful to participants at the 2018 Doctoral Symposium of National Taiwan University. Sheng-Syan Chen, Yan-Shing Chen, and Shu-Cing Peng gratefully acknowledge financial support from E.SUN Commercial Bank and the Ministry of Science and Technology in Taiwan (MOST 106–2917-I-002–021), respectively. All errors are our own.

SYNOPSIS We investigate whether the quality of internal control over financial reporting (ICOFR) has implications for the quality of internal control over fixed assets by examining the relation between material weaknesses (MWs) and investment efficiency. After excluding restating firms and controlling for externally reported earnings quality and the potential endogeneity of material weakness disclosure, we find that managers in firms with weak ICOFR are more likely to make inefficient investments. This relation is stronger when investment-specific MWs are related to capital expenditure and property, plant, and equipment. We further show a significantly negative relation between future cash flows and investments made by firms with weak ICOFR. Overall, our findings are distinct from prior studies in that they are independent of financial reporting quality and suggest that weak ICOFR implies that internal controls over fixed assets failed as well. Data Availability: Data are available from public sources identified in the paper.

We examine the effects of a temporary suspension of short-sale price tests on the options market. Consistent with the notion that put option trading substitutes for short selling, we find a significant reduction in put option volume. In addition, pressure on put option prices significantly declines, violations of the put-call parity become significantly less frequent, and option volume becomes less informed. Our findings add clarity to a long-standing debate on whether investors use options to circumvent equity short-selling restrictions.

We show that socially responsible firms use cash as a commitment device to honor implicit commitments to stakeholders. Firms with better social performance hold higher cash balances, especially for firms with social performance related to stakeholders or requiring cash spending. This relation is also stronger for firms that benefit more from social performance, e.g., firms that face more competition in product and labor markets. Social performance related to stakeholders or requiring cash spending increases the marginal value of cash.

Motivated by a growing trend where the increasing number of conventional mutual fund families have begun to offer exchange-traded funds (ETFs), we study the effects of ETFs on the actively managed mutual funds (active funds) in the same mutual fund family. Our difference-in-difference investigations and placebo test reveal a significant reduction in the performance of the affiliated active funds after a fund family begins to offer ETFs. To explain this finding, we propose the brand name hypothesis, which posits that issuing ETFs and the accompanying increase in advertising enhance the brand name of a fund family and its affiliated mutual funds. As investors value brand names in addition to the performance of mutual funds, enhancing the brands would lower the fund flow-performance sensitivity. Hence, the incentive and effort to actively manage funds would also decrease. Indeed, the evidence supports this hypothesis. We also find an increase in the expense ratio, fund inflows, and assets under management. Overall, the revenue of active funds increases despite their deteriorating performance. The added revenue also helps to explain why traditional active mutual fund families have begun to offer popular ETFs under the same umbrella of the family’s brand name.

Relative to analysts without school ties, analysts with ties make more accurate forecasts and more profitable recommendations on non-tied firms in the same industry, suggesting that analysts acquire industry information through school ties. We conduct various tests to assess the relative importance of firm-specific vs. industry information reflected in connected analysts’ forecasts and recommendations. After Regulation Fair Disclosure, firm managers shift from privately disclosing firm-specific information to industry information, which is responsible for connected analysts’ continued (albeit smaller) information advantage. These results suggest selective disclosure of industry information is a legal gray area that deserves further regulatory attention.

We examine how the quality of government institutions affects the likelihood of sovereign default. We find both economically and statistically significant adverse effects of country governance indicators on sovereign credit default swap spreads. The evidence suggests that better-quality governance enhances a country’s willingness to repay debt, and hence reduces the probability of sovereign default. The results still hold after we account for potential endogeneity and conduct a number of robustness tests.

This paper examines the impact of managerial ability on the profitability of mergers and acquisitions. We find that acquisitions by firms with high managerial ability generate better announcement abnormal returns as well as better post-announcement abnormal returns than deals by firms with low managerial ability. We also find deals with high managerial ability pay significantly lower premiums than deals without. Further, we find that managers with high managerial ability perform better in scenarios with high environmental uncertainty, which suggests that high environmental uncertainty is an important scenario that should be incorporated into studies of the influence of managerial ability.

We examine the role of CEO optimism in explaining firm performance associated with new product introductions. New product introducing firms with high levels of CEO optimism experience better announcement-period abnormal returns and long-term stock performance than introducers with moderate or low levels of CEO optimism. Changes in abnormal operating performance following new product announcements are also more favorable for firms with high-optimism CEOs than for firms with moderate-optimism or low-optimism CEOs. The results hold after controlling for other potential explanatory factors and accounting for endogeneity. The evidence highlights the importance of CEO optimism in assessing the valuation effect of corporate product strategies.

Acquirers facing strong union power tend to acquire target firms with cash rather than equity or a mix of cash and equity. A one standard deviation increase in the union power faced by the acquirer increases the odds of choosing cash payment by a factor ranging from 1.26 to 1.57. The effect is stronger when: the acquiring firm is located in states without the right-to-work laws; the interests of managers are more aligned with shareholders in acquiring firms; and acquiring firms’ asset specificity is high. When union power is strong, acquirers making cash payment are associated with a significantly positive announcement return. In addition, they are less likely to experience labor strikes or declines in operating performance, and more likely to obtain wage concessions in collective bargaining in the post-acquisition period than acquirers using other methods of payment. These findings suggest that cash payment allows acquirers to reduce excess liquidity and strengthen their bargaining power with unions.

Firms added to the S&P 500 Index gain a competitive advantage over their non‐S&P 500 industry competitors. They experience positive stock valuation effects at the expense of competitors. The inclusion is associated with both reductions in financial constraints and the cost of equity and increases in capital investment for the newly added firms. When the increase in capital investment is greater, they gain more market share and enjoy better valuation effects. Rivals’ share price responses are negatively related to the announcement effect of the newly added firm. Deletions from the index, however, do not have symmetric effects.

Many corporate assets are bought and sold each year in the U.S. and most scholars believe these transactions improve economic efficiency. But given the reality that the interests of corporate managers may diverge from those of their shareholders and reflect empire-building or other managerial entrenchment strategies—and that such agency problems tend to be worse in highly diversified, multi-divisional companies—the authors tested the proposition that diversified corporate asset buyers with more effective governance structures can be expected to allocate capital more efficiently, as reflected in higher rates of return on operating capital and more favorable market reactions to the announcements of their purchases. Using a sample of diversified U.S. companies that announced large asset purchases between 1988 and 2006, the authors report finding that the investment allocation process following such asset purchases was more consistent with value creation in the case of diversified buyers with more effective governance structures, which were identified by their greater board independence, higher-quality audit committees, and higher levels of stock ownership by institutional ownership, directors, and CEOs.

We examine how direct tax incentives affect firm innovation performance using a new U.S. R&D tax credit regime enacted in 2007, the Alternative Simplified Credit (ASC). A difference-in- differences analysis indicates that innovation performance is poorer for ASC users than for firms using the original R&D tax credit method following the ASC enactment. The results are stronger for firms with poorer governance and greater innovation diversity. ASC users suffer from poorer profitability and lower valuations. The findings remain robust to self-selection bias and various robustness checks. Our evidence favors a dark-side view of R&D tax credit effects under the ASC.

This study investigates the relations between corporate governance structures, level of diversification, and excess value of the U.S. banks for 2003–2008. Our analysis produces several major findings. First, diversified banks are different from specialized banks in their board structure, monitoring function of audit committee, and the level of antitakeover provisions. Second, governance mechanisms are associated with bank diversification: as the level of diversification increases, board independence, institutional ownership, and managerial entrenchment decrease whereas the ratio of certified inside board directors significantly increases. Our results show that governance structure—particularly the leadership structure, the ratio of certified inside directors on the board, and the level of managerial entrenchment—plays an important role in determining the excess value of diversified banks. The findings provide some insights for bank policymakers, including the proper design or regulation of bank governance structures, which is critical to bank performance because regulation is no longer a substitute for bank governance.

We examine how learning from observing the acquisition outcomes of innovation leaders affects the acquisition decisions and performance of followers in an industry. Followers tend to increase the probability of acquisition and the size of an acquisition when innovation leader acquisitions produce more favorable outcomes, and reduce both when innovation leader acquisitions suffer more unfavorable outcomes. Industry competition, environmental uncertainty, prior acquisition experience, geographic proximity, and managerial incentives are important mechanisms affecting observational learning in acquisitions. Follower acquisitions perform better when innovation leaders’ acquisition outcomes convey more favorable signals, and more poorly when they convey more unfavorable signals.

This research examines how a sovereign rating revision of one country influences the economic growth rates of other countries. Rating revisions have significant output spillover effects: A one-notch upgrade (downgrade) prompts on average a significant downward revision of about 0.03% (0.07%) in the consensus forecast of annual economic growth rates of other countries in the two-month period after the event. The spillovers are transmitted through direct and indirect trade and financial linkages between event and non-event countries. The evidence indicates that a predominance of differential (common) spillovers leads upgrades (downgrades) to produce adverse output effects for other countries.

A country’s economic growth exhibits a significant response to sovereign rating changes: a one-notch upgrade (downgrade) causes an increase (decline) of about 0.6% (0.3%) in re-rated countries’ five-year average annual growth rates. The results hold after accounting for other determinants of economic growth and potential endogeneity problems, and are robust to the use of quarterly data. Changes in country rating affect economic growth via the interest-rate and capital-flow channels: narrower sovereign bond yield spreads and increased capital inflows are associated with upgrades, which stimulate re-rated countries’ economic performance, and the converse holds for downgrades.

Firms can effectively stave off outside takeover bids using private investments in public equity (PIPEs) when they face strong takeover pressure. Greater takeover pressure makes PIPE issuers more likely to grant investors large blocks of shares, price discounts, generous dividends, and board seats. Takeover pressure also encourages issuers to place more shares with friendly investors such as managerial investors and strategic alliance investors. The evidence is consistent with the regular methods of the white squire defense. PIPEs can be a preferred method in the choice of a white squire defense when poorly performing and highly overleveraged firms face severe takeover pressure. There is a negative relation between takeover probability and post-issue performance of issuers, which supports the managerial entrenchment hypothesis over the shareholder interest hypothesis. Therefore PIPEs can increase, not mitigate, agency problems.

We investigate how a shock to corporate demand for experienced directors (i.e., U.S. Congress’ grant of Permanent Normal Trade Relations status to China in 2000) affects U.S. firms’ board structure and board advisory role. We find that firms appoint more outside directors with China-related experience after the grant. Firms with such directors realize higher returns around announcements of investments involving Chinese firms and better post-deal operating performance, particularly when these directors reside in the U.S. The appointment of directors with China experience is also greeted more positively by the stock market and they gain more board seats after the grant.

This research examines the impact of labor power on the firm's repurchase decisions. Firms facing stronger labor power repurchase fewer shares, suggesting that, on average, repurchases are against the interests of labor. However, the negative effect of labor power on repurchases is significantly reduced when repurchases benefit employees by fending off an unwanted takeover or countering the dilution effects of employee stock options. We also examine the ex post consequences of share repurchases. Repurchases are positively related to the probability of a strike. Repurchase announcement returns and the operating performance of repurchasing firms are negatively related to labor power.

We examine how a firm's research and development (R&D) increases affect its intra-industry competitors in the long run. Consistent with the R&D spillover hypothesis, when a firm unexpectedly increases its R&D spending, its intra-industry competitors experience improvements in operating performance and analyst forecast revisions and earn positive abnormal stock returns in the long run. The industry concentration, which is related to the firm's strategic reaction, is crucial in determining the magnitude of the R&D spillover effect.

This paper examines the long-term stock performance of asset purchasers and the determinants of cross-sectional differences in performance. Our findings show that buyers� stocks, on average, underperform following purchases. Buy-and-hold abnormal returns of buyers acquiring related assets are significantly higher than those acquiring unrelated assets, consistent with the focus hypothesis. Asset buyers with superior prior stock performance experience poorer long-run performance than buyers with inferior prior stock performance, consistent with the prior performance hypothesis. Asset buyers that manage earnings upward, experience poorer long-term abnormal stock performance than acquirers with downward earnings management, consistent with the earnings management hypothesis. The long-term return evidence is to some degree consistent with the governance hypothesis but we find little support for the free cash flow hypothesis.

This paper examines the profits of revenue, earnings, and price momentum strategies in an attempt to understand investor reactions when facing multiple information of firm performance in various scenarios. We first offer evidence that there is no dominating momentum strategy among the revenue, earnings, and price momentums, suggesting that revenue surprises, earnings surprises, and prior returns each carry some exclusive unpriced information content. We next show that the profits of momentum driven by firm fundamental performance information (revenue or earnings) depend upon the accompanying firm market performance information (price), and vice versa. The robust monotonicity in multivariate momentum returns is consistent with the argument that the market does not only underestimate the individual information but also the joint implications of multiple information on firm performance, particularly when they point in the same direction. A three-way combined momentum strategy may offer monthly return as high as 1.44%. The information conveyed by revenue surprises and earnings surprises combined account for about 19% of price momentum effects, which finding adds to the large literature on tracing the sources of price momentum.

The long-run performance of equity securities subsequent to announcements of open market repurchases (OMR) remains a contentious topic. In this paper we propose the �dichotomous expectations hypothesis� which posits that insider trading following share repurchase announcements reveals private information concerning the future operating performance of announcing firms. In particular, insider abnormal purchases (abnormal sales) should predict an improvement (decline) in operating performance that leads to higher (lower) long-run stock returns. Our hypothesis offers a credible economic link between insider trading and subsequent long-run stock performance through the intervening variable of operating performance. The empirical results show consistency with this linkage.

Sovereign credit rating changes have an influence on real private investment of re-rated countries. We find significant increases in private investment growth following upgrades in sovereign ratings. These increases, however, are transitory. We also find significant, temporary declines in private investment growth following sovereign rating downgrades. The results hold after accounting for re-rated countries’ growth opportunities, endogeneity, and other factors that could affect private investment. The irreversible nature of investment may be the explanation for the temporary changes in the growth rates of physical capital investment associated with revisions in sovereign credit ratings.

We examine how the Sarbanes-Oxley Act (SOX) affects pre-repurchase earnings management and its association with post-repurchase firm performance. Unlike prior pre-SOX studies, our post-SOX results indicate that open-market repurchasers do not engage in pre-buyback downward accrual-based earnings management. Audit committee independence, reforms in corporate governance structures, and changes in executives’ equity holdings prompted by SOX may explain the findings. Post-SOX, the significant negative association between pre-repurchase abnormal accruals and post-repurchase performance disappears, the market reaction to repurchase announcements becomes significantly less favorable, and there is no evidence of any shift away from accrual-based to real earnings management.

We examine how information uncertainty surrounding IPO (initial public offering) firms influences earnings management and long-run stock performance. For low-information-uncertainty issuers, at-issue earnings’ management is positively related to subsequent unmanaged earnings and has no relationship to market reaction to earnings announcement and long-run stock performance following the offering. For high-information-uncertainty issuers, however, at-issue earnings’ management is unrelated to subsequent unmanaged earnings and negatively related to market reaction to earnings announcement and long-run stock performance following the offer. The evidence suggests that, on average, managers in low-information-uncertainty firms tend to engage in earnings’ management for informative purposes, while managers in high-information-uncertainty firms engage in earnings’ management for opportunistic purposes.

We examine how research and development (R&D) incoming spillovers affect long-run firm performance following firms’ R&D increases. We use a stochastic frontier production method to capture R&D incoming spillover effects. Firms reaping more benefits from R&D investment made by other firms experience more improvement in profitability and more favorable long-run stock performance in the post-R&D-increase period. Firms with higher levels of R&D incoming spillovers recruit more key employees from other firms, suggesting that obtaining know-how through hiring is an important source of incoming spillovers. The evidence also shows that firms experiencing more R&D outgoing spillover effects tend to underinvest in R&D.

We examine the relation between Chief Executive Officer (CEO) overconfidence and significant increases in research and development (R&D) expenditures. Although prior studies reveal a significantly positive market reaction to increases in R&D expenditures in both the long and short run, we find that long-run stock performance is positive only for firms whose CEOs are not overconfident. Our findings, which may be attributable to overinvestment and the overestimation of future cash flows, imply that R&D resulting from overconfident behavior does not provide any value to firms.

We set out to determine whether the over-optimism of analysts has negative impacts on the subsequent long-run performance of firms following private placements of equity (PIPEs). Our results indicate that analysts do tend to make over-optimistic forecasts at the time of PIPEs, and that such over-optimistic forecasts can lead to investors erroneously overstating the value of placement firms, resulting in subsequent revisions of their valuations over time. We further infer that when firms announce their PIPEs, over-optimistic forecasts tend to lead to overstated valuations. The evidence shows that the long-run performance of PIPEs has a negative correlation with over-optimistic forecasts.

The capital asset pricing models (CAPM) has been the benchmark of asset pricing models and has been used to calculate asset returns and the cost of capital for more than four decades. Many researchers have tried to relax the original assumptions and generalize the static CAPM. We survey the important alternative theoretical models of capital asset pricing and provide a complete review of the evolution of asset pricing models. We also discuss the interrelationships among these models and suggest several possible directions for future research. Our results might be used as a guideline for future theoretical and empirical research in capital asset pricing.

We examine the motives behind the share repurchase decisions of initial public offering (IPO) firms by studying the stock and operating performance after the IPO date. We find that IPO firms that announce repurchases within 3 years of IPO dates exhibit poorer long-run abnormal operating performance than other IPO firms. These IPO firms also experience poorer stock return performance and downward analyst forecast revisions. Moreover, these firms show intensive insider selling transactions after the IPO date. These results for IPO announcing repurchase firms are consistent with the misleading hypothesis, which suggests that these IPO firms mislead investors by announcing repurchases as false signals.

Empirical findings on the economic benefits of public research and development (R&D) spending are mixed. We adopt an alternative approach by examining the effect of public R&D spending on stock returns. We find that firms located in states with a greater amount of public R&D spending earn higher abnormal stock returns. The effect persists after accounting for conventional pricing factors and state-level variables, and becomes stronger for firms with greater absorptive capabilities. The abnormal stock returns are not only related to the positive effects of public R&D on firm productivity and incoming spillovers, but are also related to the increased cash flow risk. Policymakers should consider both risk and return effects when making any changes in public R&D investment.