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Published papers Payoff
Complementarities and Financial Fragility: Evidence from Mutual Fund Outflows
(with Itay Goldstein and Wei Jiang, Journal
of Financial Economics forthcoming) Abstract: The paper provides an empirical investigation of directors' ownership in the mutual fund industry. Our results show that, contrary to anecdotal evidence, a significant portion of directors hold shares in the funds they oversee. Moreover, ownership patterns are broadly consistent with the optimal-contracting hypothesis. That is, ownership is positively and significantly correlated with most variables that are predicted to indicate greater value from monitoring or indicate lack of other governance mechanisms. We find some evidence that directors exhibit performance chasing in their ownership choice. On the Relation Between Conservatism in Accounting Standards and Incentives for Earnings Management (with Thomas Hemmer and Yun Zhang, Journal of Accounting Research, Vol. 45, No. 3, pp. 541-566, June 2007) Abstract: This paper studies the role of conservative accounting standards in alleviating rational yet dysfunctional unobservable earnings manipulation. We show that when accounting numbers serve both the valuation role (in which potential investors use accounting reports to assess a firm's expected future payoff) and the stewardship role (in which current shareholders rely on the same reports to monitor their risk-averse manager), current firm owners have incentives to engage in earnings management. Such manipulation is socially inefficient, as it reduces accounting numbers' stewardship value and leads to inferior risk-sharing. We then show that risk-sharing can be improved, hence social efficiency can be higher under a conservative accounting standard (where absent earnings management, accounting earnings represent true economic earnings with a downward bias) than under an unbiased standard (where absent earnings management, accounting earnings represent true economic earnings without bias). Price Informativeness and Investment Sensitivity to Stock Price (with Itay Goldstein and Wei Jiang, Review of Financial Studies, Vol. 20, No. 3, May, 2007, page 619-650) Abstract: The paper shows that two measures of the amount of private information in stock price -- price non-synchronicity and PIN -- have a strong positive effect on the sensitivity of corporate investment to stock price. Moreover, the effect is robust to the inclusion of controls for managerial information, and for other information-related variables. The results suggest that firm managers learn from the private information in stock price about their own firms' fundamentals and incorporate this information in the corporate investment decisions. We relate our findings to an alternative explanation for the investment-to-price sensitivity, namely that it is generated by capital constraints, and show that both the learning channel and the alternative channel contribute to this sensitivity. Analysts' Weighting of Private and Public Information (with Wei Jiang, Review of Financial Studies, Vol. 19, No. 1, Spring, 2006) Abstract: Using both a linear regression method and a
probability-based method, we find that on average analysts place larger than
efficient weights on (i.e., they over-weight) their private information when
they forecast corporate earnings. We also find that analysts over-weight more
when issuing forecasts more favorable than the consensus, and over-weight
less, and may even Investor Learning About Analyst Predictive Ability (with Jennifer Francis and Wei Jiang) (Journal of Accounting and Economics, Vol. 39, No. 1, 2005) Abstract: Bayesian learning implies decreasing weights on prior beliefs and increasing weights on the accuracy of the analyst’s past forecast record, as the number of forecast errors comprising her forecast record (its length) increases. Consistent with this model of investor learning, empirical tests show that investors’ reactions to forecast news are increasing in the product of the accuracy and length of analysts’ forecast records. Moreover, the Bayesian learning predicted by our model is more descriptive of investor reactions than is a static model which predicts that investors’ responses condition only on the prior accuracy of the analyst. Financial Accounting Information, Organization Complexity and Corporate Governance (with Robert Bushman, Ellen Engel, and Abbie Smith) (Journal of Accounting and Economics, Vol. 37, No. 2, March 2004 ) Abstract: We investigate whether firms exhibit relatively more costly, delegated monitoring when corporate transparency is relatively low. We study how board structure, directors’ equity incentives, ownership concentration and executive compensation vary with two aspects of corporate transparency: firms’ financial accounting systems and organizational complexity. We proxy for accounting‘s governance usefulness with earnings timeliness, the extent to which current earnings incorporate current value-relevant information, and for organization complexity with industry and geographic diversification. We predict that firms substitute costly governance mechanisms to compensate for low earnings timeliness and high levels of organizational complexity. We document evidence generally consistent with these hypotheses. Cooperation In the Budgeting Process (Journal
of Accounting Research, Vol. 41, No. 5, December 2003) Abstract: Differing views exist among practitioners and academic researchers on the desirability of cooperative behaviors in budgeting processes. While managerial accountants stress the value of cooperation between division managers, academic research shows that collusion between agents imposes costs for the principal to collect information (Tirole (1986)). This paper analyzes the role of cooperation between firm divisions in the budgeting process and identifies a setting in which cooperation is a necessary condition for division managers to communicate their private information between themselves, which, in turn, benefits the principal. The results in this paper have implications for some common budgeting processes observed in practice, including bundling budgeting and bottom-up budgeting.
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Working papers
Please email me at qc2@duke.edu for the most recent version of the papers. The Applicability of Fraud on the Market to Analysts' Forecasts (with Jennifer Francis and Katherine Schipper) Abstract: The application of the fraud on the market presumption to security analysts’ forecasts requires that those forecasts materially influence share prices in an efficient market. We provide evidence on the pervasiveness of reliably (i.e., statistically significant at conventional levels) unusual (larger than movements that occur on non-event days) price responses to analysts’ forecasts. Relative to the average price movement on non-event days, we find that the mean price response to analysts’ forecasts is reliably unusual, and the median response is not (in fact, the median indicates smaller price movements on forecast days than on the average of non-event days). In contrast, price responses to earnings announcements and to management forecasts exhibit much more pervasive reliably unusual price responses. Regardless of how we partition forecasts (firm-year, analyst-firm, analyst-year, or analyst-firm-year), we find that the majority of price responses are not reliably larger than those observed on average non-event days, and for the sample with fewest confounding events, the incidence of insignificant price responses is between 86% and 99%. Overall, we interpret these results as providing evidence against extending the fraud on the market presumption to analysts’ forecasts. Career Concerns and the Optimal Pay-for-Performance Sensitivity (with Shane Dikoli and Wei Jiang) Abstract: We analyze the relation between the optimal pay-for-performance sensitivity in explicit contracts and the strength of agents' career concerns when agents are concerned about both the level and variability of their perceived ability. We show that the interaction between level and variability generates two predictions not suggested by existing models on career concerns and explicit contracts. In particular, we find that the implicit incentives from career concerns may substitute for, as well as be accompanied by, higher pay-for-performance sensitivity in explicit contracts, and that the optimal pay-for-performance sensitivity can be increasing in the underlying risk measure. We test these predictions using a large sample of Chief Executive Officers' compensations over 1993-2001; results are consistent with both predictions. The Role of Forecast Patterns in Conveying Analysts' Predictive Ability (with Jennifer Francis and Wei Jiang) Abstract: We investigate whether and how forecasting patterns convey information about an analyst's predictive ability. Analytically, we establish an equilibrium strategy where the analyst issues a forecast only if the realized value of his private signal exceeds a threshold. In this equilibrium, higher-ability analysts choose higher thresholds than lower-ability analysts, and investors interpret all forecasts correctly. A testable implication of this equilibrium is that because higher-ability analysts choose higher thresholds, they issue fewer forecasts than lower-ability analysts. Using a large sample of analysts' forecasts and controlling for other factors known to affect forecast frequency, we find empirical evidence consistent with this prediction. Last updated: October 2007 |
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