Vulture Funds and the Fresh Start Accounting Value of Firms Emerging from Bankruptcy

We study how distress-oriented hedge funds (vulture funds) play an important role in the fresh start valuation of firms emerging from Chapter 11 reorganization. We find that loanto-own vultures acquire debt positions of the distressed firm that grant dominant power in the bankruptcy negotiations, and they then use the discretion allowed by fresh start accounting to introduce valuation bias in their favor. We show that the strategic influence over fresh start values can create opportunities to increase vulture investors’ returns at the expense of other claim holders

The sound of silence: equilibrium filtering and optimalcensoring in financial markets

Following the approach of standard filtering theory, we analyse investor-valuation of firms, when these are modelled as geometric-Brownian state processes that are privately and partially observed, at random (Poisson) times, by agents. Tasked with disclosing forecast values, agents are able purposefully to withhold their observations; explicit filtering formulas are derived for downgrading the valuations in the absence of disclosures. The analysis is conducted for both a solitary firm and m co-dependent firms

Naked M&A Transactions: How the Lack of Local Expertise in Cross-Border Deals Can Negatively Affect Acquirer Performance - and How Informed Institutional Investors can Mitigate This Effect

This paper tests how informed investors with local expertise can affect cross-border deal success using a comprehensive dataset of corporate acquirers’ share registers. We posit that deals in which long-term investors have a high level of expertise in the target firm's region are more likely to perform better than if the deal is ‘naked’, i.e., when such regional expertise amongst the investors is low. We show that the strength of this effect depends upon an index of country-level M&A maturity which measures the relative divergence between acquirer and target countries. Specifically, we investigate whether acquirers investing in countries with low M&A maturity gain greater benefit from investors with regional expertise. We present evidence which confirms the hypothesis that acquirers in cross-border corporate transactions are more likely to be successful if the acquirer's investors have a higher level of expertise in the target region, and that this effect is strongest when the maturity for corporate transactions of the target country is low. This provides a specific setting which is consistent with earlier theoretical work that argues in general that information flows should not just be from firms to capital markets but also in the opposite direction, and that this flow of information is particularly important whenever information is dispersed

Thinly Traded Growth Stocks: A Joint Examination of Transparency in Communication and the Trading Platform

When thinly traded growth stocks (TTGS) listed on a secondary exchange experience difficulty in gaining investors' attention, one possible solution is to increase the intensity of disclosure. However, if the stock is traded on a quote-driven system, market makers can collude to maintain wide bid-ask spreads that discourage firms from disclosing. As a result, TTGS traded on a quote-driven system can face a liquidity trap that can prevent them from harvesting the benefits of increased disclosure activities. In this paper, we argue that the well-documented negative relation between disclosure and the bid-ask spread is likely to be moderated by the type of protocol chosen by exchanges to handle the trading of TTGS. To test our theory we use a unique setting created by the introduction of a hybrid order-driven protocol for TTGS in the UK. Following an increase in the disclosure activity by a TTGS, we find that the magnitudes of the predicted reductions in the bid-ask spreads are dependent on whether the TTGS switch their trading protocols. © 2013 © 2013 European Accounting Association

The Rise of Covenant-Lite Bond Contracting

We investigate the trading and yield effects of covenant-lite (cov-lite) high-yield bond contracts, which have a restricted (lite) set of covenants. The excluded covenants often are those that use accounting performance measures. Although much research has focused on the potential benefits of accounting as a basis for debt contracting, little is known about settings where it may be optimal to exclude accounting performance statistics from public debt contracts. We find that cov-lite high-yield bonds have a higher trading turnover and lower yield spreads. Our findings provide empirical support for theory which predicts, for optimal bond covenant design, that a trade-off between improving trading ease versus enhanced investor protection needs to be managed. These results enhance our understanding of the limits of accounting’s role in (bond) contracting design

Why managers with low forecast precision select high disclosure intensity: an equilibrium analysis

Abstract Shin (2006) has argued that in order to understand the equilibrium patterns of corporate disclosure, it is necessary for researchers to work within an asset pricing framework in which corporate disclosures are endogenously determined. Echoing this sentiment, Larcker and Rusticus (2010) have argued that earlier empirical results claiming to …nd a negative relationship between disclosure and cost of capital may su¤er fatally from endogeneity issues which, once addressed by a formal structural model, may reverse the sign of the relationship. The purpose of this paper is to introduce a general equilibrium model following the Black-Scholes paradigm with endogeneous disclosure in which …rms select uniquely determined optimal probabilities of early equity-value discovery in a noisy environment. As …rms may di¤er also in the uncertainty (precision) with which management can forecast the future, managers strategically increase the intensity of their (voluntary) disclosures to provide partial compensation for this perceived di¤erential risk. A positive relationship then results between disclosure and the cost of capital

Learning from your investors: can the geographical composition of institutional investors affect the chance of success in international M&A deals?

We produce new evidence on whether management which is keen to make foreign acquisitions can benefit from consultation with information-intensive institutional investors who have expertise in the target foreign markets. This research suggests that, in such instances, management should recognise the benefit of effective two-way communication before embarking on such costly strategies. Consistent with theoretical literature, we propose that this can be explained by the fact that complex valuation information is dispersed among many economic agents and management may only have limited access to such data. This research shows that the likelihood of both cross-border deal completion and medium-term cross-border deal success through time depends upon management learning from and getting the support of key institutional investors with regional (foreign) expertise. The theoretical information economics model presented by Dye and Sridhar in 2002 states that the information flow between management and capital markets should be viewed as two way. This study offers empirical evidence in support of their theory. This study offers insights into the positive effect of establishing a proactive investor relations programme for the recruitment of dedicated foreign institutional investors before embarking on cross-border M&A. The results indicate that management should closely monitor the share register and identify those investors who are transient and those who are, in contrast, dedicated. Attention then needs to be directed to establishing effective communication with the dedicated investors with regional expertise

Transparency, disclosure and the pricing of future earnings in the European market

Paper presented at "Accounting at a Tipping Point", the American Accounting Association (AAA) Annual Meeting held in New York City on August 1-5, 2009. Final version published in Journal of Business Finance and Accounting until title Accruals, Disclosure and the Pricing of Future Earnings in the European Market. Available online at http://onlinelibrary.wiley.com/The present study examines the role of disclosure in assisting market participants to form expectations of future earnings by observing the accrual content of reported earnings. Accounting research has been focusing on investigating the ability of accounting numbers and practices to provide relevant information to market participants. In the context of the association between market returns and accounting numbers or practices, conclusions can be only drawn on the effect of these numbers and practices at an average level of disclosure. Here it is shown that these conclusions can be significantly altered at varying levels of disclosure. Employing a sample of European firms and their Transparency and Disclosure ratings conducted by Standard and Poor’s, we show how disclosure and accruals jointly affect earnings expectations that are included in current stock returns. It is shown that both the joint effect of disclosure and accruals depends on the magnitude, sign and the nature of accruals (i.e. current and non-current accruals), and that increased disclosure appears to correct overstated expectations arising mostly from the extensive use of current accruals and negative non-current accruals

The effect of audit committee characteristics on intellectual capital disclosure

This paper, using data from 100 UK listed firms, investigates the relationship between audit committee characteristics and intellectual capital (IC) disclosure. We find that IC disclosure is positively associated with audit committee characteristics of size and frequency of meetings, and negatively associated with audit committee directors’ shareholding. We find no significant relationship between IC disclosure and audit committee independence and financial expertise. We also observe variations in the association between audit committee characteristics and IC disclosure at its component level, which suggest that the underlying factors that drive various forms of IC disclosure, i.e. human capital, structural capital and relational capital, are different. These results have important implications for policy-makers who have a responsibility to ensure that shareholders are protected by prescribing appropriate corporate governance structures and accounting regulations/guidelines