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Abstract:
This paper examines whether managers signal firms' future performance by managing earnings to exceed thresholds. Because managers' reporting discretion is bounded by the accounting regulations, managing earnings to exceed the current period's thresholds reduces future earnings, making future earnings thresholds more difficult to attain. As a result, only firms with sufficient future earnings growth can benefit from doing so. I test the signaling hypothesis in three steps. I first hypothesize that firms with a higher degree of information asymmetry between the management and investors are more likely to signal performance using earnings thresholds. Consistent with the hypothesis, I find that the discontinuities in earnings distributions around thresholds are significantly more salient for more information-strained firms. In the second step, I examine the credibility of the signal and document that firms that marginally exceed the earnings thresholds demonstrate superior future accounting performance compared with firms just missing the thresholds, and this difference in future performance increases with the degree of information asymmetry. The third step of my analysis studies the market's reaction to firms' beating or missing the thresholds. My empirical results suggest that the capital market recognizes the information content of the earnings management activities and rationally incorporates it in setting prices.

Abstract:
Firms obtain new technology either through internal R&D or through acquisitions. These two approaches are usually labeled as "make" and "buy" strategies. In this paper, I examine the relation between a firm's choice of "make" or "buy" and the performance measures used in the firm's CEO compensation contract. I focus on the two major differences between the "make" and "buy" strategies: risk levels and accounting treatment. I hypothesize that the high risk level and unfavorable accounting treatment associated with "make" strategy relative to "buy" strategy lead risk-averse managers to favor "buy" over "make," should they be compensated heavily using accounting-based performance measures. Stock-based compensation, especially stock options, on the other hand, should encourage managers to innovate more through "make" strategies instead of "buying" them from the outside. Using data from US high tech industries, I find evidence consistent with the above hypotheses.

R&D, Acquisition, Compensation, Technology

Abstract:
In this study, we examine how analysts are affected by the public actions of investors and other analysts by closely examining how analysts revise their earnings forecasts after an earnings announcement. In particular, we hypothesize that analysts observe the actions of investors and other analysts in order to more accurately forecast earnings and have the expertise to determine when these actions are most informative about future earnings. Consistent with our hypotheses, we find that analysts revise their earnings forecasts more strongly in response to returns and other analysts' revisions when these signals are more informative about future earnings changes. We also find that, consistent with analysts being conservative while facing uncertain information, underreactions are strongest (not weakest) when analysts are responding most strongly to these signals (i.e., when the signals are most informative). Lastly, we find that analysts who are most sensitive to the informativeness of others' actions are relatively more accurate in forecasting earnings, suggesting that the ability to extract information from the actions of others serves as a source of expertise for at least some analysts.

Financial analysts, earnings forecasts, market efficiency, learning

Abstract:
Previous research documents that financial ratios (fundamental signals) derived from publicly available financial statements can predict future abnormal stock returns. This paper examines whether institutional investors trade on these fundamental signals and the implications of institutional investors' trading for stock valuation. We provide evidence that transient institutional investors (institutions who actively trade securities for short-term returns) trade on fundamental signals. We also show that the abnormal returns associated with fundamental signals increase with transaction costs and arbitrage risk, indicating the existence of the limits to arbitrage for this investment strategy. We further document that transient institutions trade less aggressively to exploit the fundamental-signal-based trading strategy in firms with higher transaction costs and arbitrage risk, and their arbitrage trades help reduce the returns related to fundamental signals. This paper provides evidence helping to explain the abnormal returns associated with fundamental signals and contributes to our understanding of institutional investors' role in enhancing market efficiency.

Fundamental analysis, stock valuation, institutional investment

Abstract:
We investigate the monitoring role performed by institutional investors in corporate restructurings. We hypothesize that institutional monitoring will (1) influence a firm's decision to restructure and (2) encourage restructurings that stop poor performance before it becomes too severe (i.e. pre-emptive restructurings) and that fix performance problems more completely (i.e. thorough restructurings). Consistent with these hypotheses, we document that the level of institutional ownership (changes in transient institutional holdings) is (are) increasing (decreasing) in the probability that a firm restructures. This result holds after controlling for other determinants of the restructuring choice, including existing internal corporate governance mechanisms. The association between institutional ownership and restructuring decisions is also robust after controlling for the possible endogeniety problem using a simultaneous equations approach.

Among firms that restructure, we find the level of institutional ownership increases the probability that the firm's restructuring is pre-emptive (proxied by positive or negative prior growth in ROE). We also find that institutional holdings increase the probability that a firm undergoes a restructuring that is thorough (proxied by above or below the median value of scaled restructuring charges). As a whole, the results suggest that institutional investors play an important monitoring role in encouraging managers to make value maximizing restructuring decisions.

Institutional investors, Corporate restructuring

Abstract:
Mandated compensation disclosures provide important information for investors and may play a governance role in reducing excessive compensation and disciplining management. We utilize SEC evaluations of compensation disclosures mandated by rules adopted in 2006 to investigate whether noncompliance with the new regulations is associated with excessive CEO compensation, previous media attention, or proprietary costs. We also test whether subsequent CEO compensation is associated with the level of noncompliance identified by these publicized SEC reviews. We construct several measures of defective disclosures from SEC comment letters and find that disclosure defects are positively associated with excess CEO compensation and media criticism of CEO compensation during the previous year. We find no evidence supporting the contention that compensation disclosure defects are associated with proprietary costs. Furthermore, we present some evidence that the level of defects in pay-for-performance disclosures identified by the SEC is associated with a reduction in excess CEO compensation in the subsequent year.

executive compensation, mandatory disclosures, noncompliance

Abstract:
Mandated compensation disclosures provide important information for investors and may play a governance role in reducing excessive compensation and disciplining management. We utilize SEC evaluations of compensation disclosures mandated by rules adopted in 2006 to investigate whether noncompliance with the new regulations is associated with excessive CEO compensation, previous media attention, or proprietary costs. We also test whether subsequent CEO compensation is associated with the level of noncompliance identified by these publicized SEC reviews. We construct several measures of defective disclosures from SEC comment letters and find that disclosure defects are positively associated with excess CEO compensation and media criticism of CEO compensation during the previous year. We find no evidence supporting the contention that compensation disclosure defects are associated with proprietary costs. Furthermore, we present some evidence that the level of defects in pay-for-performance disclosures identified by the SEC is associated with a reduction in excess CEO compensation in the subsequent year.

Executive compensation, mandatory disclosures, noncompliance