2013 - Working Papers: Finance, Accounting and Insurance
Corporate litigation and CEO turnover, 60 pp.
J. Aharony, C. Liu and A. Yawson
(Working Paper No. 2/2013)
No. : 06300100
This paper examines executive turnover within US publicly listed companies following their encounters with a broad range of lawsuit filings. Litigation can motivate a board of directors to replace the existing CEO, either due to agency incentives to protect the company against legal liabilities or due to legitimacy incentives to restore the company’s reputation. Empirical evidence indicates that companies experience a higher CEO turnover following lawsuit filings, particularly in the wake of securities, intellectual property, and antitrust lawsuits. This increase in turnover is also significantly associated with lawsuit merits as proxied by outcomes, but not their economic magnitude. Environmental lawsuits are, however, not significantly associated with subsequent CEO turnover. The results provide new insights that firms, in the decision to initiate CEO turnover in response to litigation, are predominantly driven by agency rather than reputational concerns.
Camouflaged indicators of earnings management, 49 pp.
I. Kama and N. Melumad
(Working Paper No. 3/2013)
No. : 02030100
We argue that cash management reduces the effectiveness of the indicators commonly used to detect accrual-based earnings management. This concern is of interest because many influential papers on earnings management have utilized these indicators to reach their conclusions. Specifically, the values of indicators of accrual-based earnings management calculated in periods of increased cash management activities may not be comparable with the corresponding values calculated in other periods. Our results suggest that cash management activities have intensified following the legislation of the Sarbanes-Oxley Act, resulting in camouflaged indicators of earnings management. An immediate implication is that recent studies examining the impact of the Sarbanes-Oxley Act on earnings management might have reached erroneous conclusions. The identified decrease in the indicators of accrual-based earnings management utilized in those studies could have been the consequence of increased cash management rather than an actual decrease in accrual-based earnings management.
Do firms buy their stock at bargain prices? Evidence from actual stock repurchase disclosures, 59 pp.
A. Ben-Rephael, J. Oded and A. Wohl
(Working Paper No. 4/2013)
No. : 03200100
Using new monthly data we investigate open-market repurchase executions of US firms. We find that firms repurchase at prices which are significantly lower than average market prices. This price discount is negatively related to size and positively related to market-to-book ratio. Firms’ repurchase activity is followed by a positive and significant abnormal return. Importantly, the market response occurs when firms disclose their actual repurchase data in earnings announcements, and this positive response is followed by a one month drift. Consistent with these results, we find that insider trading is positively related to actual repurchases.
On the rationale behind the market premium (discount) for meeting or beating (missing) analysts’ earnings forecasts, 48 pp.
E. Einhorn
(Working Paper No. 5/2013)
No. : 01430100
Research on security analysts provides strong empirical evidence of a market valuation premium (discount) for firms whose earnings reports meet or beat (miss) prior analysts’ forecasts, after controlling for the earnings news. The present study suggests a theoretical foundation for this seemingly anomalous pricing pattern. The study is based on the argument that the observed pricing effect of analysts’ earnings forecasts might be the rational consequence of the practice of earnings management, rather than the cause of earnings management activities as conventionally perceived in the literature. This argument is established by demonstrating that the market premium (discount) associated with meeting or beating (missing) analysts’ earnings forecasts might be simply an adjustment that the market applies to the reported (managed) earnings in order to extract the underlying true (unmanaged) earnings measure.
A model of implied expected bond returns, 45 pp.
Z. Afik and S. Benninga
(Working Paper No. 10/2013)
Expected bond returns (EBR) are the ex-ante expectations implied by the market prices and the data set available when bond prices are quoted. Our discrete-time model can be used to estimate the rating-adjusted EBR and its risk premium components, including a certainty equivalence premium which is related to the systematic risk aversion. We apply the model to U.S. corporate bond transaction data, using rating agency transition matrices and industry specific recovery rates. We demonstrate that our model credit risk premium (CRP) is a “cleaner” measure of credit risk compared to the commonly used bond-spread. Whereas CRP versus duration term structure shows clear separation between rating groups, their parallel bond spread term structures are highly mixed, raising doubts on their informational value.
Liquidity of securities on the Tel Aviv Stock Exchange, 6 pp.
A. Wohl and M. Abudy
(Working Paper No. 12/2013)
לנזילות הגדרות רבות. הגדרה מקובלת היא "היכולת לקנות או למכור במהירות בלי להשפיע על המחיר". הגדרה נוספת מוסיפה גם את המלים "כמות גדולה", כלומר נזילות היא "היכולת לקנות או למכור כמות גדולה במהירות בלי להשפיע על המחיר". מדד עקיף לנזילות הינו נפח המסחר או
ה- turnover (נפח ביחידות חלקי מספר היחידות המופקות(, משום שבד"כ יש קשר בין נפח מסחר גבוה לבין היכולת לקנות או למכור בהשפעה קטנה על המחיר. אולם, בהחלט יתכן שההשפעה על המחיר שונה בניירות ערך בעלי נפח מסחר זהה. כיון שמדד נפח המסחר נמדד כבר כיום, התמקדנו בשני מדדים אחרים:
א) עלות ביצוע מידי - חצי המרווח (half Bid-Ask spread)
ב) עלות בצוע מידי ל- X שקלים (לפי מרווח משוקלל כמות)
סקירה על מדדי נזילות ראה ב- Harris(2003) וב- Hasbrouck(2009) שאומדים מדדי נזילות שונים בשוק האמריקאי.
