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Abstract:
We study the role of borrower accounting quality in debt contracting. Specifically, we examine how accounting quality affects the borrower's choice of private versus public debt market and how the design of debt contracts vary with accounting quality in the two markets. We find that accounting quality affects the choice of the market, with poorer accounting quality borrowers preferring private debt (bank loans). This is consistent with banks possessing superior information access and processing abilities which reduce adverse selection costs for borrowers. We also find that accounting quality has an economically significant but differential impact on contract design in the two markets consistent with differences in recontracting flexibility across the two markets. For private debt (which has greater recontracting flexibility), both the price (interest) and non-price (maturity and collateral) terms are significantly more stringent for poorer accounting quality borrowers, unlike public debt where only the price terms are more stringent. The impact of accounting quality on interest spreads of public debt is 2.5 times that of the private debt, since the price terms alone reflect the variation in accounting quality. Overall, the results are consistent with greater recontracting flexibility of banks enabling them to write more customized contracts relative to dispersed bondholders.

Accounting Quality, Accruals, Loans, Bonds, Spreads, Maturity, Collateral

Abstract:
In this paper we examine the impact of payout policy on cost of capital. Using forward-looking implied cost of capital as a measure of expected returns, we examine the cross-sectional relation between cost of capital and (a) the level of payout and (b) the distribution policy choice between dividends and repurchases. We initially find that the cost of capital is decreasing in the level of payout, consistent with the maturity hypothesis but once we control for direct measures of risk the result reverses. We further find that, in general, the higher the dividend intensity in the payout the lower the cost of capital despite the tax disadvantage of dividends. To counter the off-setting effects of the various alternative hypotheses in the overall sample, we conduct further analysis of the distribution policy across sub-samples based on growth, leverage, analyst coverage, size, earnings volatility, and institutional ownership. We find no support for the tax hypothesis that predicts cost of capital should be increasing in dividend intensity. We however find that firms use dividends to successfully mitigate the agency costs of free cash flows consistent with the agency hypothesis. The evidence regarding the information hypothesis, that dividends are preferred under asymmetric information, is mixed.

Payout policy, dividends, repurchases, cost of capital

Abstract:
We examine the contemporaneous relation between earnings forecast accuracy and recommendation profitability to assess the effectiveness with which analysts translate forecasts into profitable recommendations. We find that, after controlling for expertise, more accurate analysts make more profitable recommendations, albeit only for firms with value-relevant earnings. Next, we show that conflicts of interest from investment banking activities affect the relation between accuracy and profitability. In the case of buy recommendations, more accurate forecasts are associated with more profitable recommendations only for the nonconflicted analysts. For hold recommendations, higher levels of accuracy are associated with higher levels of profitability for conflicted analysts, provided these recommendations are treated as sells. Finally, we find that regulatory reforms aimed at mitigating analyst conflicts of interest appear to have improved the relation between accuracy and profitability. Specifically, the integrity of buy and hold recommendations has improved and the change is more pronounced for analysts expected to be most conflicted.

Abstract:
We examine the relation between earnings forecast accuracy and recommendation profitability to assess the effectiveness with which analysts translate forecasts into profitable recommendations. We find that after controlling for expertise, more accurate analysts make more profitable recommendations, albeit only for firms with value-relevant earnings. Next, we show that conflicts of interest from investment banking activities affect the relation between accuracy and profitability. In case of Buy recommendations, more accurate forecasts result in more profitable recommendations only for the non-conflicted analysts. For Hold recommendations, profitability is increasing in accuracy for conflicted analysts, provided these recommendations are treated as Sells. Finally, we find that regulatory reforms aimed at mitigating analyst conflicts of interest appear to have improved the relation between accuracy and profitability. Specifically, the integrity of Buy and Hold recommendations has improved and the change is more pronounced for analysts expected to be most conflicted.

Analysts, Forecast Accuracy, Recommendation Profitability

Abstract:
We examine the impact of insider selling incentives on strategic disclosure behavior by firms. Specifically, we examine management forecasts of IPO firms from the date of going public through the four quarters following the lockup expiration date. Lockup expirations represent the first time that insider shareholders can sell their stock since the IPO and are characterized by a significant increase in trading volume. Using management forecasts as a proxy for voluntary disclosures, we examine the impact of ex ante insider selling incentives on the forecasting behavior of firms. We provide evidence on the propensity to issue forecasts, the bias in these forecasts, and the market reaction to the forecasts. We find that firms delay bad news disclosures until the earnings announcement in the lockup expiration quarter. Firms also bias their forecasts more optimistically when trading incentives are present. We conjecture that the low litigation risk that persists after lockup expiration enables these strategic forecasts. The market does not appear to fully comprehend these incentives.

Earnings forecasts, earnings guidance, voluntary disclosure, IPO, lockup

Abstract:
This study examines vesting features of compensation contracts that influence the decision horizon of managers (i.e. horizon incentives) and sheds light on the role investor horizon plays in the design of these incentives. We use VCs as our proxy for short horizon controlling investors around the IPO because VCs typically exit successful investments through an IPO. We find that VCs align the CEO’s incentives with their own shorter investment horizon when the investor base is largely uninformed. But, when faced with informed investors, horizon incentives lengthen. We also document a positive relation between long-run abnormal stock returns and horizon incentives.

Executive Incentives, Venture Capital, Governance, Stock Options

Abstract:
Using a unique data set that covers the entire career path of film directors (managers) and contains project-specific measures of performance, we examine intertemporal patterns in managerial performance and turnover, and test the implications of job matching theories. We show that turnover is initially high but declines in the number of films (projects) completed. Further, we show that a performance metric constructed from the entire career history is the appropriate measure of re-hiring decisions, superior to a measure based on only the most recent performance. We estimate the marginal contribution of directors to the economic success of their films, and we find that this ability measure is increasing in the number of films made. Similarly, the budget or scale of the project is increasing in directors' experience. Overall, our evidence supports job matching based on continuously updated ability measures. Our findings also extend a larger literature on managerial turnover.

Abstract:
We study the role of past conservatism (i.e., realized conservatism) on debt contracting. We measure realized conservatism to isolate its effect from conditional conservatism which has been studied in the prior literature. Realized conservatism is the cumulative effect of past and current application of conditional conservatism and unconditional conservative accounting methods. It results in a lower bound valuation of the net assets of the borrower. We hypothesize that realized conservatism provides lenders greater confidence in the collateral value of the firm's assets and reduces the risk in the loan (Asset Value Hypothesis). Second, we hypothesize that realized conservatism constrains future conditional conservatism such that debt contracting efficiency is high only when the realized conservatism is not high (Constraint Hypothesis). Using a sample of bank loans we study interest spreads, covenant intensity and covenant slack and find results consistent with our hypotheses. Our study sheds light on the direct and indirect effects of realized conservatism in the ex ante design of loan contracts.

Abstract:
Gu and Xue (this issue) study the disciplining effect of independent analysts on the accuracy and forecast relevance of the forecasts of non-independent analysts. One of the intriguing results is that while independent analysts issue inferior forecasts, their presence appears to reduce the forecast bias, improve the forecast accuracy and increase the forecast relevance of forecasts issued by non-independent analysts. We explore alternative explanations for the Gu-Xue results. Our evidence of endogenous entry and exit of independent analysts provides a more compelling explanation for the reported results.

independent analysts, forecast accuracy, endogenous entry