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Abstract:
We analyze Berkshire Hathaway's equity portfolio over the 1976 to 2006 period and explore potential explanations for its superior performance. Contrary to popular belief, we find Berkshire Hathaway invests primarily in large-cap growth rather than "value" stocks. Over the period the portfolio beat the benchmarks in 27 out of 31 years, on average exceeding the S&P 500 Index by 11.14%, the value-weighted index of all stocks by 10.92%, and a Fama and French characteristic-based portfolio by 8.56% per year. Although beating the market in all but four years can statistically happen due to chance, incorporating the magnitude by which the portfolio beats the market makes a luck explanation extremely unlikely even after taking into account ex-post selection bias. We find that Berkshire Hathaway's portfolio is concentrated in relatively few stocks with the top five holdings averaging 73% of the portfolio value. While increased volatility is normally associated with higher concentration we show the volatility of the portfolio is driven by large positive returns and not downside risk. The market appears to under-react to the news of a Berkshire Hathaway stock investment since a hypothetical portfolio that mimics the investments at the beginning of the following month after they are publicly disclosed also earns significantly positive abnormal returns of 10.75% over the S&P 500 Index. Our evidence suggests the Berkshire Hathaway triumvirates of Warren Buffett, Charles Munger, and Lou Simpson posses' investment skill unlikely to be explained by Efficient Market Theory.

Warren Buffett, Berkshire Hathaway, efficient markets, long-term performance, investment performance, abnormal returns

Abstract:
We examine the penalties imposed on all 585 firms that were targeted by SEC enforcement actions for financial misrepresentation from 1978 - 2002, which we track through November 15, 2005. The penalties imposed on firms through the legal system average only $23.5 million per firm. The penalties imposed by the market, in contrast, are huge. Our point estimate of the reputational penalty - which we define as the expected loss in the present value of future cash flows due to lower sales and higher contracting and financing costs - is over 7.5 times the sum of all penalties imposed through the legal and regulatory system. For each dollar that a firm misleadingly inflates its market value, on average, it loses this dollar when its misconduct is revealed, plus an additional $3.08. Of this additional loss, $0.36 is due to expected legal penalties and $2.71 is due to lost reputation. In firms that survive the enforcement process, lost reputation is even greater at $3.83. In the cross-section, the reputational penalty is positively related to measures of the firm's reliance on implicit contracts. This evidence belies a widespread belief that financial misrepresentation is disciplined lightly. To the contrary, reputation losses impose substantial penalties for cooking the books.

Financial reporting violations, fraud, financial disclosure, penalties, reputation

Abstract:
This paper provides the first integrated analysis of the complex mix of private and regulatory penalties for financial misrepresentation. We examine the sizes, types, and determinants of legal penalties imposed for all 697 enforcement actions initiated by the Securities and Exchange Commission for financial misrepresentation from 1978 through 2004. These penalties include private class action awards, monetary penalties imposed by the SEC and Department of Justice, and such non-monetary sanctions as censures, trading suspensions, and jail time. Contrary to many criticisms of private lawsuits and regulatory actions, we find that legal penalties are highly systematic, and in particular, are positively related to the size and severity of the harm from the misconduct. The data also indicate deep pockets effects, as both private and regulatory monetary penalties are related to defendants' abilities to pay. A recent increase in regulatory penalties has coincided with a decrease in private monetary penalties, consistent with regulatory penalties crowding out the use of private penalties.

Fraud, penalties, Securities and Exchange Commission, financial misrepresentation

Abstract:
We track the fortunes of all 2,206 individuals identified as responsible parties for all 788 SEC and Department of Justice enforcement actions for financial misrepresentation from 1978 through September 30, 2006. Fully 93% lose their jobs by the end of the regulatory enforcement period. A majority explicitly are fired. The likelihood of ouster increases with the cost of the misconduct to shareholders and the quality of the firm's governance. Culpable managers also bear substantial financial losses through restrictions on their future employment, their shareholdings in the firm, and SEC fines. A sizeable minority (28%) face criminal charges and penalties, including jail sentences that average 4.3 years. These results indicate that the individual perpetrators of financial misconduct face significant disciplinary action.

Management turnover, CEO turnover, financial misrepresentation, fraud, penalties, Securities and Exchange Commission

Abstract:
In this paper, we examine how stock option usage affects total corporate payout. Using fixed-effects panel data estimators on various samples of Execucomp firms from 1993 to 2005, we find the higher the executive stock options, the lower the total payout, ceteris paribus. We also find some evidence that firms increase payouts through repurchases in order to offset EPS dilution that occurs due to usage of executive and non-executive stock options. However, incentives from not having dividend protection for options appear to dominate that of anti-dilution, resulting in lower total payout for firms with higher options usage.

Dividends, payout, executive compensation, incentives, stock options, share repurchases, issuances, earnings dilution

Abstract:
Using data from all 868 SEC and Department of Justice enforcement actions for financial misrepresentation from 1978 through June 30, 2007, we examine firm characteristics during the periods that the firms' financial statements are misrepresented. These characteristics can inform us about managers' apparent motives to misrepresent financial reports. Preliminary test results indicate that the incidence of financial misrepresentation increases with the market-to-book ratio, recent acquisitions and the use of operating leases, the sensitivity of managers' pay to changes in the stock price, and a CEO who also is board chair. This incidence decreases with the prior year's stock performance, board independence, the fraction of shares owned by independent board members, and the fraction of shares owned by institutions. Together, these results suggest that managers are more likely to cook the company books when their pay is sensitive to the company stock price, when oversight from the firm's internal governance or institutional monitors is poor, and when the firm has complicated accounting issues involving recent acquisitions and operating leases.

Financial misrepresentation, fraud, compensation, incentives, governance, analyst forecasts, Securities and Exchange Commission