Under New Management: Equity Issues and the Attribution of Past Returns

There is a strong link between measures of stock market performance, such as changes in Tobin's Q or past stock returns, and equity issues. Typically, this performance is thought to be a characteristic of the firm, not the CEO who happens to run the firm. In contrast to this conventional wisdom, we find that equity issues depend on changes in Q and returns to a greater extent if the current CEO was at the helm when those past returns were realized. What we label the CEO-specific Q and past return explains equity issuance, but it does not explain debt issuance, investment, or profitability. Two discontinuity analyses show that the specific share price that the current CEO inherited is an important reference point, while salient share prices prior to turnover are not. A corollary is that a firm with poor stock market performance cannot, or will not, raise new capital unless the current CEO is replaced

Maximal Domain Independent Representations Improve Transfer Learning

Domain adaptation (DA) adapts a training dataset from a source domain for use in a learning task in a target domain in combination with data available at the target. One popular approach for DA is to create a domain-independent representation (DIRep) learned by a generator from all input samples and then train a classifier on top of it using all labeled samples. A domain discriminator is added to train the generator adversarially to exclude domain specific features from the DIRep. However, this approach tends to generate insufficient information for accurate classification learning. In this paper, we present a novel approach that integrates the adversarial model with a variational autoencoder. In addition to the DIRep, we introduce a domain-dependent representation (DDRep) such that information from both DIRep and DDRep is sufficient to reconstruct samples from both domains. We further penalize the size of the DDRep to drive as much information as possible to the DIRep, which maximizes the accuracy of the classifier in labeling samples in both domains. We empirically evaluate our model using synthetic datasets and demonstrate that spurious class-related features introduced in the source domain are successfully absorbed by the DDRep. This leaves a rich and clean DIRep for accurate transfer learning in the target domain. We further demonstrate its superior performance against other algorithms for a number of common image datasets. We also show we can take advantage of pretrained models

FINANCE RESEARCH SEMINAR SUPPORTED BY UNIGESTION "The Contract Year Phenomenon in the Corner Office: An Analysis of Firm Behavior During CEO Contract Renewals" The Contract Year Phenomenon in the Corner Office: An Analysis of Firm Behavior During CEO Cont

Abstract This paper investigates how executive employment contracts influence corporate financial policies during the final year of the contract term, using a new, handcollected data set of CEO employment agreements. On the one hand, the impending expiration of fixed-term employment contracts creates incentives for CEOs to engage in strategic window-dressing activities. We find that, compared to normal periods, CEOs manage earnings more aggressively when they are in the process of contract renegotiations. Correspondingly, during CEO contract renewal times, firms are more likely to report earnings that meet or narrowly beat analyst consensus forecasts. Moreover, CEOs also reduce the amount of negative firm news released during their contract negotiation years. On the other hand, we find that merger and acquisition deals announced during the contract renegotiation year yield higher announcement returns than deals announced during other periods, suggesting that the upcoming contract expiration and renewal can also have disciplinary effects on potential valuedestroying behaviors of CEOs. In addition, we show that firms whose CEOs are not subject to contract renewal pressure do not experience such corporate policy changes and that CEOs who engage in manipulation during contract renewal obtain better employment terms in their new contracts, in terms of contract length, severance payment, and salary and bonus. Overall, our results indicate that job uncertainty created by expiring employment contracts induces changes in managerial behaviors that have significant impacts on firm financial activities and outcomes. Tuesday Abstract This paper investigates how executive employment contracts influence corporate financial policies during the final year of the contract term, using a new, hand-collected data set of CEO employment agreements. On the one hand, the impending expiration of fixed-term employment contracts creates incentives for CEOs to engage in strategic window-dressing activities. We find that, compared to normal periods, CEOs manage earnings more aggressively when they are in the process of contract renegotiations. Correspondingly, during CEO contract renewal times, firms are more likely to report earnings that meet or narrowly beat analyst consensus forecasts. Moreover, CEOs also reduce the amount of negative firm news released during their contract negotiation years. On the other hand, we find that merger and acquisition deals announced during the contract renegotiation year yield higher announcement returns than deals announced during other periods, suggesting that the upcoming contract expiration and renewal can also have disciplinary effects on potential value-destroying behaviors of CEOs. In addition, we show that firms whose CEOs are not subject to contract renewal pressure do not experience such corporate policy changes and that CEOs who engage in manipulation during contract renewal obtain better employment terms in their new contracts, in terms of contract length, severance payment, and salary and bonus. Overall, our results indicate that job uncertainty created by expiring employment contracts induces changes in managerial behaviors that have significant impacts on firm financial activities and outcomes

Empire-Building or Bridge-Building? Evidence from New CEOs' Internal Capital Allocation Decisions

This article investigates how the job histories of CEOs influence their capital allocation decisions when they preside over multidivisional firms. I find that, after CEO turnover, divisions not previously affiliated with the new CEO receive significantly more capital expenditures than divisions through which the new CEO has advanced. The pattern of reverse-favoritism in capital allocation is more pronounced if the new CEO has less authority or if the unaffiliated divisions have more bargaining power. I find evidence that having a specialist CEO negatively affects segment investment efficiency. The results suggest that new specialist CEOs use the capital budget as a bridge-building tool to elicit cooperation from powerful divisional managers in previously unaffiliated divisions. The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: [email protected]., Oxford University Press.

The client is king : do mutual fund relationships bias analyst recommendations?

This paper investigates whether the business relations between mutual funds and brokerage firms influence sell-side analyst recommendations. Using a unique data set that discloses brokerage firms’ commission income derived from each mutual fund client as well as the share holdings of these mutual funds, we find that an analyst\u27s recommendation on a stock relative to consensus is significantly higher if the stock is held by the mutual fund clients of the analyst\u27s brokerage firm. The optimism in analyst recommendations increases with the weight of the stock in a mutual fund client\u27s portfolio and the commission revenue generated from the mutual fund client. However, this favorable recommendation bias toward a client\u27s existing portfolio stocks is mitigated if the stock in question is highly visible to other mutual fund investors. Abnormal stock returns are significantly greater both for the announcement period and, in the long run, for favorable stock recommendations from analysts not subject to client pressure than for equally favorable recommendations from business-related analysts. In addition, we find that, subsequent to announcements of bad news from the covered firms, analysts are significantly less likely to downgrade a stock held by client mutual funds. Mutual funds increase their holdings in a stock that receives a favorable recommendation but this impact is significantly reduced if the recommendation comes from analysts subject to client pressure

Ownership structure and the cost of corporate borrowing

This article identifies an important channel through which excess control rights affect firm value. Using a new, hand-collected data set on corporate ownership and control of 3,468 firms in 22 countries during the 1996-2008 period, we find that the cost of debt financing is significantly higher for companies with a wider divergence between the largest ultimate owner's control rights and cash-flow rights and investigate factors that affect this relation. Our results suggest that potential tunneling and other moral hazard activities by large shareholders are facilitated by their excess control rights. These activities increase the monitoring costs and the credit risk faced by banks and, in turn, raise the cost of debt for the borrower.Ownership structure Excess control rights Control-ownership wedge Cost of debt Bank loans