Security Analysis, Agency Costs, and UK Firm Characteristics

This paper assesses the monitoring power of security analysts from the manager-shareholder conflict perspective. Using a sample of UK firms tracked by security analysts, our evidence supports the view that security analysis acts as a monitoring mechanism in reducing agency costs. We also find that security analysts are more effective in reducing agency costs for smaller and more focused firms rather than larger and more diversified firms suggesting that for larger and more complex firms security analysis is less effective. The UK findings suggest that the monitoring role of security analysts is not restricted to the U.S. capital market environment.

Green Innovation and the Value of Multinationality

When do multinational corporations (MNCs) derive the most from internalizing the transfer of proprietary technological know how? We revisit this question, which lies at the core of theories on multinationality and performance, from the perspective of corporate strategy involving the mix of green versus non-green innovation effort and a foreign operations focus on countries with high-versus-low environmental standards. We find that high exposure to foreign markets with more stringent environmental regulations stimulates MNCs’ green patent applications. We further show that MNCs’ environmental competitive advantage obtained through green innovation activities, coupled with exposure to foreign countries with high environmental standards, increases firm value in the long run. However, this long-run advantage produces economic rents only when foreign countries have a common-law legal system, effective government, and high growth. Finally, the pursuit of green (or even non-green) innovation while competing in polluting industries is positively associated with market value. Overall, our study highlights that green technology development is a main source of value creation for multinationals

Shareholder Coordination and Stock Price Informativeness

We show that firm‐specific information is more likely to be incorporated into stock prices when firms have stronger shareholder coordination. The premise of our work is that geographic proximity reduces communication costs among shareholders, thereby leading to better coordination. The positive coordination‐informativeness relation is driven mainly by shareholder coordination among dedicated and independent institutions. We further show that the positive effect is more pronounced for firms with weaker governance mechanisms, suggesting that shareholder coordination could serve as a substitute conduit of price discovery. Lastly, we propose that shareholder coordination improves stock price informativeness through the channel of enhanced voluntary disclosure quality

Discounted Stocks and Excess Analyst Coverage

In this paper we examine whether the negative excess value of stocks (stock discounts in the Berger and Ofek (1995) spirit) is associated with low excess analyst coverage over the 1979-1997 period. We define excess analyst coverage as the difference between a firm’s actual analyst following and its imputed coverage. We hypothesize that firms with high excess (low) analyst coverage are exposed to less (more) information asymmetry between managers and investors, managerial misconduct and uncertainty about future earnings than do other firms. Therefore, stocks with low excess analyst coverage profile are expected to trade at low prices, as they would be more difficult for investors to value. Our findings provide evidence in support of the view that excess analyst coverage explains a significant portion of stocks’ discount, indicating that higher (lower) excess analyst coverage leads to more (less) informative stock prices and offers an information-based explanation on why stocks trade at a premium (discount) . Our empirical results are also consistent with the notion that stocks of firms with high managerial power (i.e., low investor rights/weak corporate governance) trade at a discount. Finally, our analysis indicates that the information inherent in the dispersion of analyst forecasts, a surrogate for investor uncertainty, plays an important role in the determination of asset prices

DISCOUNTED STOCKS AND EXCESS ANALYST COVERAGE

In this paper we examine whether the negative excess value of stocks (stock discounts in the Berger and Ofek (1995) spirit) is associated with low excess analyst coverage over the 1979-1997 period. We define excess analyst coverage as the difference between a firm’s actual analyst following and its imputed coverage. We hypothesize that firms with high excess (low) analyst coverage are exposed to less (more) information asymmetry between managers and investors, managerial misconduct and uncertainty about future earnings than do other firms. Therefore, stocks with low excess analyst coverage profile are expected to trade at low prices as they would be more difficult for investors to value. Our findings provide evidence in support of the view that excess analyst coverage explains a significant portion of stocks’ discount, indicating that higher (lower) excess analyst coverage leads to more (less) informative stock prices and offers an information-based explanation on why stocks trade at a premium (discount) . Our empirical results are also consistent with the notion that stocks of firms with high managerial power (i.e., low investor rights/weak corporate governance) trade at a discount. Finally, our analysis indicates that the information inherent in the dispersion of analyst forecasts, a surrogate for investor uncertainty, plays an important role in the determination of asset prices

Do Analysts Influence Corporate Financing and Investment?

We examine whether abnormal analyst coverage influences the external financing and investment decisions of the firm. Controlling for self-selection bias in analysts\u27 excessive coverage, we find that firms with high (low) analyst coverage consistently engage in higher (lower) external financing than do their industry peers of similar size. Our evidence also demonstrates that firms with excessive analyst coverage overinvest and realize lower future returns than do firms with low analyst coverage. Our findings are consistent with the hypothesis that analysts favor the coverage of firms that have the potential to engage in profitable investment-banking business

Divergent Opinions and the Performance of Value Stocks

Divergence of opinions among investors, manifested in the dispersion of analysts\u27 earnings forecasts, may play an important role in asset pricing. This article reports tests of whether disagreement can explain the cross-sectional return difference between value and growth (or glamour ) stocks in the U.S. market over the 1983-2001 period. Consistent with the theoretical proposition that stocks subject to greater investor disagreement earn higher returns, the tests found value stocks to be exposed to greater investor disagreement than growth stocks. This finding suggests that the return advantage of value strategies is a reward for the greater disagreement about their future growth in earnings. Alternative multifactor asset-pricing tests supported the proposition that investor disagreement plays an important role in explaining the superior return of value stocks

Corporate Political Strategies and Return Predictability

We assess whether observable corporate political strategies can serve as channels of value relevant political information flow into stock prices and form the basis for profitable return predictability strategies. We document that returns of politically connected firms’ stocks lead those of their non-connected peers, suggesting that information shocks associated with new policies and other political developments become evident first in the stock prices of firms that pursue political strategies and then, with delay, in those of similar non-connected firms

Policy Uncertainty and the Dual Role of Corporate Political Strategies

Firms use active political strategies not only to mitigate uncertainty emanating from legislative activity, but also to enhance their growth opportunities. We find that a firm\u27s systematic risk (beta) can be hedged away by employing various political strategies involving the presence of former politicians on corporate boards of directors, contributions to political campaigns, and corporate lobbying activities. The hedging effect is greater when firms operate in more uncertain industries. In addition, active political strategies are associated with greater firm heterogeneity and make real options more value relevant as potential drivers of competitive advantages in uncertain environments

CEO personality traits, strategic flexibility, and firm dynamics

Reexamining CEO personality traits from a real options theory perspective, we suggest that the firm's strategic flexibility can be worsened by CEO conscientiousness and neuroticism. We use a measure of strategic flexibility as the firm's ability to take advantage of heightened volatility, which then results in superior stock returns. Our results suggest that strategic adaptability is impeded by rigid planning, resistance to change (conscientiousness) and lack of emotional stability (neuroticism). For firms that experience a decrease in volatility, the opposite holds. In line with trait activation theory, our results imply that the effect of specific CEO personality traits on firm dynamics and performance is contingent and context-specific. Our findings are economically significant and have important implications concerning CEO selection and management