Non-Diversifiable Volatility Risk and Risk Premiums at Earnings Announcements

This study seeks to determine whether earnings announcements pose non-diversifiable volatility risk that commands a risk premium. We find that investors anticipate some earnings announcements to convey news that increases market return volatility and pay a premium to hedge this non-diversifiable risk. In particular, we find evidence of risk premiums embedded in prices of firms' traded options that are significantly positively associated with the extent to which the firms' earnings announcements pose non-diversifiable volatility risk. In addition, we find that volatility risk premiums are concentrated among bellwether firms and result in predictable variation in option straddle returns around earnings announcements. Taken together, our findings show that some earnings announcements pose non-diversifiable volatility risk that commands a risk premium

Management Forecast Credibility and Underreaction to News

In this paper, we first document evidence of underreaction to management forecast news. We then hypothesize that the credibility of the forecast influences the magnitude of this underreaction. Relying on evidence that more credible forecasts are associated with a larger reaction in the short window around the management forecasts and a smaller post-management forecast drift in returns, we show that the magnitude of the underreaction is smaller for firms that provide more credible forecasts. Our paper contributes to the literature by providing out-of-sample evidence of the drift in returns documented in the post-earnings-announcement drift literature, with the credibility of the news being one explanation for the phenomenon.Sloan School of ManagementWharton SchoolDeloitte Foundatio

Do board secretaries influence management earnings forecasts?

The role of board secretaries is a unique institutional feature in China. Individuals in this senior executive role are responsible for coordinating information disclosure. We study the impact of board secretaries on management earnings forecasts and find that their legal expertise, accounting expertise and foreign experience help improve management earnings forecast quality. The quality of forecasts, as indicated by their occurrence, frequency, precision and accuracy, is also positively associated with the role duality (e.g. board director, CFO or other senior executive role) and equity holdings of board secretaries and negatively associated with their political connection. The quality of forecasts is found to increase the compensation of board secretaries. Finally, we show that the equity holding of board secretaries reduces litigation risks and increases corporate philanthropic giving

Is all growth created equal? The predictive value of growth strategy.

Firms have two main strategies at their disposal to expand operations: organic growth or merger and acquisition. This paper investigates the predictable properties of these growth strategies for forecasts of future growth in net operating assets and the implications for future profitability and market returns. I expect firms that achieve their growth organically to be very different from firms that achieve their growth via merger and acquisition. While mean reversion predicts that the higher historical rate of acquirers will revert to a central tendency in the future, I find that this effect is so strong that the future rate of growth of organic firms exceeds the future growth rate for acquirers. This higher future rate of growth also has implications for future profitability (Fairfield et al., 2003a). I find that conditioning on the strategy used to achieve past growth provides information about future profitability beyond the level and change of contemporaneous growth in net operating assets. Organic firms have a constant approximate two percent lower one-year-ahead return on net operating assets yet experience greater future abnormal stock returns. This difference in growth patterns remains robust in additional analysis controlling for industry effects, abnormal growth, positive vs. negative growth cycles, and year effects. Additionally, consistent with Fairfield et al. (2003a) and Richardson, Sloan, Soliman, and Tuna (2006), the market appears to misprice growth in net operating assets for both organic and acquiring firms, but in opposite directions. I find organic (acquirer) firms have positive (negative) future excess returns. My contributions to the literature are several. This study empirically documents that the growth strategy used is informative for forecasts of future growth in net operating assets and profitability. I also contribute to the literature examining growth in net operating assets. While there are numerous studies examining the post-acquisition underperformance of acquiring firms, none of these studies compares the growth in net operating assets of acquirers to firms that have never completed an acquisition. Finally, I document that the future underperformance is directly related to how the firm achieved its growth and show how this information can be implemented in a trading strategy.Ph.D.AccountingSocial SciencesUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/125950/2/3224809.pd