REVISION: Firm Specific Information and the Cost of Equity Capital
Date Posted: Sep 18, 2012
We develop a comprehensive and large-sample measure of a firm's information quality. The measure is the ratio of firm-specific return variation to firm-specific cash-flow variation. Empirical evidence supports the validity of our measure. Using this measure, we find that cost of equity capital decreases by about 0.4% on an annual basis if a firm's information quality increases by one standard deviation. This is consistent with the joint hypotheses that (1) firm-specific stock returns contain eco
REVISION: Discretionary Disclosure in Financial Reporting: An Examination Comparing Internal Firm Data to Exte
Date Posted: Nov 18, 2009
We use confidential, U.S. Census Bureau, plant-level data to investigate aggregation in external reporting. We compare firms’ plant-level data to their published segment reports, conducting our tests by grouping a firm’s plants that share the same four-digit SIC code into a “pseudo-segment.” We then determine whether that pseudo-segment is disclosed as an external segment, or whether it is subsumed into a different business unit for external reporting purposes. We find pseudo-segments are more l
REVISION: Segment Profitability and the Proprietary and Agency Costs of Disclosure
Date Posted: Jan 29, 2007
We exploit the change in U.S. segment reporting rules (from SFAS 14 to SFAS 131) to examine two motives for managers to conceal segment profits: proprietary costs and agency costs. Managers face proprietary costs of segment disclosure if the revelation of a segment that earns high abnormal profits attracts more competition and hence reduces the abnormal profits. Managers face agency costs of segment disclosure if the revelation of a segment that earns low abnormal profits reveals unresolved ag
REVISION: Segment Profitability and the Proprietary and Agency Costs of Disclosure
Date Posted: Jan 03, 2007
We exploit the change in U.S. segment reporting rules (from SFAS 14 to SFAS 131) to examine two motives for managers to conceal segment profits: proprietary costs and agency costs. Managers face proprietary costs of segment disclosure if the revelation of a segment that earns high abnormal profits attracts more competition and hence reduces the abnormal profits. Managers face agency costs of segment disclosure if the revelation of a segment that earns low abnormal profits reveals unresolved ag
REVISION: The Impact of SFAS No. 131 on Information and Monitoring
Date Posted: Dec 11, 2006
We investigate the effect of the FASB's new segment reporting standard on the information and monitoring environment. We compare hand-collected, restated SFAS 131 segment data for the final SFAS 14 fiscal year to the historical Statement 14 data. We find that Statement 131 increased the number of reported segments and provided more disaggregated information. Analysts and the market had access to a portion of the new segment information before it was made public, but analyst and market expecta
Segment Disclosures, Proprietary Costs, and the Market for Corporate Control
Date Posted: Feb 23, 2003
Recent studies provide evidence that the new segment reporting rule, SFAS 131, induced companies to provide more disaggregated segment information. We use adoption of the new standard to identify firms that aggregated segment information under the old standard, SFAS 14, and examine two motives for managers to aggregate segment information. First, withholding proprietary information and, second, avoiding external scrutiny from the market for corporate control. We find firms that increased their s
Discussion of 'Anomalous Stock Returns Around Internet Firms' Earnings Announcements'
Date Posted: Feb 05, 2003
Trueman, Wong, and Zhang (TWZ) investigate an apparent anomaly in the pricing of internet firms around their earnings announcements, which they attribute to price pressure. The discussion addresses three concerns. The paper is unusual in choosing an event (earnings announcements) that does not appear to have an obvious non-information-related reason for triggering unjustified changes in demand for the firm's shares. Relatedly, there are limitations to the tests made of the price pressure hypothe
The Effect of Extreme Accounting Events on Analyst Following and Forecast Accuracy
Date Posted: May 01, 2000
This paper uses a simultaneous equations system to examine the effect of extreme accounting events in the previous fiscal year on analyst following and forecast accuracy. We measure extreme accounting events by the magnitude of a company's restructuring charges and by an information signal based on the fundamental variables in Lev and Thiagarajan (1993). Our results indicate that the existence of an extreme accounting event impairs analysts' ability to predict future earnings. These results are
The Role of Taxes, Financial Reporting, and Other Market Imperfections in Structuring Divisive Reorg...
Date Posted: Apr 26, 2000
We examine the relative importance of taxes and nontax factors in explaining companies' decision to divest using a sale to a third party versus a spinoff to existing shareholders. We find that taxes outweigh financial reporting motives for unaggressive financial reporters, but that the two factors are weighted equally by aggressive reporters. This finding adds to the literature on firms' willingness to forsake tax benefits in order to increase reported income. Additional results indicate that fu
Investor Valuation of the Abandonment Option
Date Posted: Apr 25, 2000
We investigate whether investors use balance sheet information to value their option to abandon the continuing business in exchange for the assets' exit value. As opposed to papers that examine the potential for balance sheet disclosures to provide incremental information about the expected level of future going-concern cash flows, our study assesses the extent to which balance sheet information affects firm value given the level of expected going-concern cash flows. Theory prices the abandonmen
A Simultaneous Equations Analysis of Forecast Accuracy, Analyst Following, and Trading Volume
Date Posted: Nov 23, 1999
We use a simultaneous equations model to study forecast accuracy, analyst following, and trading volume. Forecast accuracy and analyst following are determined simultaneously, with greater accuracy associated with higher following. This result supports the idea that an analyst?s private information complements, rather than substitutes for, factors that increase certainty about the firm?s prospects. Stocks generating more trading volume (and thus greater brokerage commissions) have higher analyst
Causes and Effects of Corporate Refocusing Programs
Date Posted: Dec 08, 1998
Despite the weakening disciplinary role of the takeover market, there has been a rash of divestiture and split-up announcements recently by such prominent firms as AT&T, ITT, W.R. Grace, and many others. In this paper we examine refocusing decisions by diversified firms that have not been taken over, with the goal of closing some of the gaps in our understanding of the workings of different sources of management discipline. We study the effect on refocusing likelihood of four factors: The divers
Causes and Effects of Corporate Refocusing
Date Posted: Dec 08, 1998
We study the precursors and outcomes of refocusing episodes by 107 diversified firms that were not taken over between 1984 and 1993. These firms had more value-reducing diversification policies than diversified firms that did not refocus. However, major disciplinary or incentive-altering events (including management turnover, outside shareholder pressure, changes in management compensation, and financial distress) usually occurred before refocusing took place. The cumulative abnormal returns ove
Bustup Takeovers of Value-Destroying Diversified Firms
Date Posted: Feb 05, 1998
We examine whether the value loss from diversification affects takeover and break-up probabilities. We estimate diversification's value effect by imputing stand-alone values for individual business segments and find that firms with greater value losses are more likely to be taken over. Moreover, those acquired firms whose losses are greatest are most likely to be bought by LBO associations, which frequently break-up their targets. For a subsample of large diversified targets: (1) higher value lo
Bustup Takeovers of Value-Destroying Diversified Firms
Date Posted: Feb 05, 1998
We estimate the effect that value-destroying diversification has on the probabilities of takeover and break-up. Recent papers show that unrelated diversification decreased firm value, that the value loss is reversible, that bidder gains from takeovers are higher when their targets' managers have destroyed more value, and that break-ups and selloffs are a common result of takeovers. Considering these findings together leads us to hypothesize that as the amount of value destroyed by a firm's diver
Managerial Entrenchment and Capital Structure Decisions
Date Posted: Dec 15, 1997
We study associations between managerial entrenchment and firms' capital structures, with results generally suggesting that entrenched CEOs seek to avoid debt. In a cross- sectional analysis, we find that leverage levels are lower when CEOs do not face pressure from either ownership and compensation incentives or active monitoring. In an analysis of leverage changes, we find that leverage increases in the aftermath of entrenchment-reducing shocks to managerial security, including unsuccessful te