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This paper investigates the effects of financial analysts’ technical and social skills on their performance and career advancement. Using financial analysts’ LinkedIn profiles, we find that analysts with strong technical skills endorsed by LinkedIn connections generate more accurate earnings forecasts and more profitable stock recommendations. Analysts with better social skills, proxied by the number of LinkedIn connections, have better communications with corporate management during conference calls and also produce more accurate earnings forecasts. Their stock recommendations are not more profitable but receive stronger market reactions. Further, these sociable analysts are more likely to be voted as All-Star Analysts and to move to high-status brokerage firms when they change jobs. These findings provide the first large-sample evidence on the different roles of technical and social skills in the financial industry.

Using a machine learning approach to analyze 12.8 million tweets posted by S&P 1500 firms from 2012 to 2016, we find that firms time financial tweets around earnings announcements, accounting filings as well as other important corporate events, and are more likely to use media (images or video) and links in those tweets. The above pattern holds for both good and bad news. Moreover, we find that feedback from Twitter users encourages future financial tweets and use of media and links. These results collectively suggest that firms make discretionary choices in timing and presentation format when disseminating information on social media and that they incorporate instantaneous feedback from Twitter users into their dissemination strategies.

45 p. ; Includes bibliographical references (pp. 27-29). ; "January 9, 2018"; The authors "gratefully acknowledge helpful comments from workshop participants at Tsinghua University, Singapore Management University, and conference delegates at the European Accounting Association and Canadian Academic Accounting Association annual meetings. We acknowledge the financial support from the CPA/DeGroote Centre for Promotion of Accounting Education and Research at McMaster University."

We examine how gender and beauty affect the likelihood of being voted as an All-Star in the financial analyst profession in both the United States and China. We find that female analysts are more likely to be voted as All-Star analysts in the United States, but good-looking female U.S. analysts are less likely to be voted as All-Stars. The conclusion is the opposite for Chinese analysts. We find that female analysts in China are less likely to be voted as All-Stars, but the likelihood increases with their facial attractiveness. These findings implicate a beauty penalty for female analysts in the United States and gender discrimination against female analysts in China. This career path evidence from a competitive financial industry suggests that gender and beauty biases may be rooted deeply in culture and the legal environment and should not be treated homogenously.

Our study documents a “Lemons” market failure of Chinese firms listed in the US in 2011 and a subsequent rebound by 2013. Our tests reveal that there was little difference in ex ante observable characteristics of fraudulent and non-fraudulent Chinese firms listed in the US prior to 2011 while entrepreneurs appear to have known their type. We document substantial costs of dishonesty and the failure of traditional market signaling mechanisms such as auditor or underwriter quality. We also show a return of Chinese firms after US and Chinese regulatory intervention in 2013 although this intervention was insufficient to fundamentally change the character of this market. Importantly, we find that factors capturing ex post settling up costs such as North America sales and CEO’s US education reduced the probability of financial fraud. Our results support the importance of legal and regulatory institutions as a necessary condition for properly functioning capital markets.

Practitioners have long criticized risk-factor disclosures in the 10-K as generic and boilerplate. In response, regulators emphasize the importance of being specific. By using a computing algorithm, this paper establishes a new measure (Specificity) to quantify the level of specificity of firms’ qualitative risk-factor disclosures. We first examine determinants of variations in Specificity and document that firms with high proprietary costs provide less specific risk-factor disclosures. More importantly, we find that, controlling for numerous determinants, the market reaction to the 10-K filing is positively and significantly associated with Specificity. In addition, our results suggest that analysts are better able to assess fundamental risk when firms’ risk-factor disclosures are more specific. Together, these findings suggest that more specific risk-factor disclosures benefit users of financial statements.

This paper uses a unique transaction-level fund trading dataset to evaluate institutional investors’ trading performance. Our research design follows a two-step procedure. In the first stage, we identify funds that heavily sold shares in firms before their public revelation of stock option backdating investigations, and thus establish fund-firm pairs of interest. Results show that the funds earn more than 9% on their paired firms in the backdating event. In the second stage, we focus on trading that takes place at other times and find that the funds are more likely to make correct trades before the earnings announcements of their paired firms, and they trade more actively and perform better on these paired firms in general. However, the superior performance is evident only in the pre-backdating-announcement period. We interpret our results as evidence that institutions possess information advantage on their paired firms, but this advantage deteriorates following the backdating revelation.

We extend the theory and empirics in Chen, Hong, and Stein (2002) by assuming that investors subject to market sentiment hold a biased belief in the aggregate. With a dynamic multi-asset model, we predict that the breadth-return relationship can be either positive or negative depending on the relative strength of two offsetting forces — disagreement and sentiment. Using the sentiment index developed in Baker and Wurgler (2006, 2007), we find evidence consistent with our predictions. The breadth-return relationship is positive when the sentiment effect is small. However, the relationship becomes negative when (i) the time-series variation of market-wide sentiment is high and (ii) the cross-sectional dispersion of firm-specific exposure to market-wide sentiment variation is large. Our unified framework reconciles a few seemingly inconsistent empirical studies in this literature and explains puzzling cross-sectional return patterns observed during the Internet bubble and the subprime crisis periods.

We study the behavior of short sellers as informed market participants and examine potential sources of their information. Using a newly available dataset with high-frequency short sales data, we find evidence of significant increases in short sales immediately prior to large insider sales, but not prior to small insider sales. We examine a number of explanations that the increase in short sales is driven by public information, either about the firm or about the impending insider sale. The evidence is inconsistent with these explanations, but is consistent with front-running facilitated by leaked information. The front-running appears to be concentrated in firms with poor accounting quality, suggesting that information about a large insider sale reinforces short sellers' adverse opinion about firm value when accounting quality is poor. JEL Classifications: G14, G18, G30, M41

Using alcohol, tobacco, and gaming consumption data and people’s attitudes toward these sin products to proxy for social norm acceptance levels, we show a strong interaction effect between social norms and financial incentives, which significantly influence the behavior of market participants. Specifically, institutional investors’ shareholdings and analyst coverage of sin companies increase with the degree of social norm acceptance. The association between shareholdings/coverage and social norm acceptance is less pronounced for firms with higher future expected performance. Our results show that social norms and financial incentives have a powerful interaction effect in determining the behavior of market participants, suggesting that social norms can be crossed when motive and opportunity exist.

Prior studies have documented the asymmetrical behavior of selling, general and administrative (SG&A) costs (i.e., SG&A costs increase more when activity rises than they decrease when activity falls), and have explained this phenomenon primarily with economic factors. Drawing on agency theory, we argue that SG&A cost asymmetry is driven not only by economic factors but also by the agency problem which causes a shift in SG&A cost asymmetry away from its optimal level. Using data for S&P 1500 firms over the period 1996–2005, we find that the degree of SG&A cost asymmetry is positively associated with managers’ empire building incentives due to the agency problem (measured by free cash flow and CEO horizon, tenure, and compensation structure), suggesting that the agency problem provides an additional explanation for SG&A cost asymmetry. Moreover, we find that strong corporate governance mitigates the positive association between the agency problem and the degree of SG&A cost asymmetry. In additional analyses, we also find that the agency problem influences cost stickiness to a greater extent in mature firms and in firms where SG&A costs create low future value.

We test the hypotheses that (i) poor accounting quality is associated with delayed stock price adjustment to information, and (ii) the accounting quality component of price delay predicts stock returns. We define accounting quality as the precision with which financial reporting informs equity investors about future cash flows. Consistent with our hypotheses, the results suggest poor accounting quality is associated with less timely price adjustment and higher future stock returns.

Extant studies provide two additional explanations other than backdating for the abnormal stock returns around CEO option grants – timing of option grants and timing of corporate disclosures. We examine the effect of the Sarbanes-Oxley Act of 2002 (SOX), the stock option backdating scandal, and the new compensation disclosure rules of 2006 on these opportunistic timing behaviors. We find no evidence of opportunistic timing relative to scheduled option grants in the pre-SOX, post-SOX, and post-Backdating-Scandal periods. However, opportunistic timing behaviors for unscheduled option grants exist in the pre-SOX period and persist in the post-SOX period. In addition, we distinguish timing of option grants from timing of corporate disclosures by categorizing quarterly earnings announcements into fixed and variable dates and find the persistence of both types of timing behaviors. We also analyze option grants to independent directors and find no evidence of timing behaviors in all three sample periods. Overall, our results suggest that SOX does not affect opportunistic timing behaviors related to CEO option grants. However, the backdating scandal combined with the subsequent compensation disclosure rules have deterred these behaviors.

Guan appreciates research start-up grant from City University of Hong Kong. Lu and Wong acknowledge financial support from the Rotman School of Management at the University of Toronto and the Social Sciences and Humanities Research Council of Canada.

Motivated by investor disagreement and corporate disclosure literatures, we examine how stock price shocks affect future stock returns. We find that both large short-term price drops and hikes are followed by negative abnormal returns over the subsequent year, consistent with the conjecture that price shocks are useful indicators of intertemporal spikes in investor disagreement and investor opinion converges gradually. The asymmetric drifts involve return continuation for negative price shocks versus return reversal for positive price shocks, and are in sharp contrast to the general findings of symmetric drifts in corporate event studies. Moreover, price shocks associated with public news events are followed by significantly weaker downward drifts, suggesting that news disclosures mitigate disagreement-induced overpricing. Examining the dynamics of a disagreement proxy during and after price shocks, we provide further evidence for the disagreement hypothesis. The economic significance of the price shock effect is illustrated with a revised momentum strategy that generates an annualized abnormal return of 16.92 percent.

This paper examines the economic consequences of the revelation of CEO stock option backdating and the confounding effect of the good-timing of earnings disclosure in explaining the "trough" pattern in stock returns around option grant dates. First, we investigate 136 firms identified in the Wall Street Journal (WSJ) as of December 2006 as having been implicated in option backdating. Using the CRSP 2006-2007 data, we find that the economic loss upon the revelation of backdating is $129 billion and that it is significantly associated with the potential option expenses. Second, using a full sample from the Thomson Financial Insider Filing Database, we document that backdating and good-timing jointly existed in the full sample before the Sarbanes-Oxley Act of 2002 (SOX). Moreover, our evidence suggests that while the SOX mitigates the backdating problem, the trough pattern in stock returns around option grant dates in the post-SOX period is mainly driven by good-timing.

This paper presents a two-period trading model in the setting of sequential events - earnings announcements and the SEC filings of financial statements. The model indicates that some earlier informed investors rationally delay their trades until the filings. It suggests that earnings announcements and the SEC filings should be investigated as interdependent events and that the relative information content of the two events depends on the distribution of informed investors over time. Using the filings dates recorded in EDGAR from 1994 to 2005, the study provides consistent empirical evidence: First, after controlling for earnings released within three days of the SEC filings, stock prices respond to the SEC filings of annual financial statements but not to the filings of quarterly statements; Second, the relative information content is associated positively with analysts following, institutional ownership, and is associated negatively with the proxies for the complexity of earnings.

This study uses a sample of 50 firm events identified in The Global Research Analysts Settlement in which analysts were ex-post discovered to have acted strategically. We find that quarterly institutional holdings of these firms decline significantly over the event period established by the settlement. This finding is further supported by daily trading evidence. Trades initiated by institutional investors are dominated by sell orders while the opposite holds true for trades initiated by individual investors. In addition, there is evidence that institutional traders time the market by placing orders in the right direction at the right time, hence avoiding significant economic losses. The results suggest a wealth transfer from individual investors to institutional investors when analysts act strategically.

This article provides evidence about the wealth change and redistribution effects of Section 404 of Sarbanes-Oxley (SOX), which requires that management assess and publicly report on the effectiveness of their firm's internal controls, and that auditors publicly provide an opinion on management's assessment, as well as the effectiveness of the internal controls. This section is the most expensive, burdensome and contentious part of SOX - mainly because the benefits are elusive, and according to some critics, non-existent. We analyze a sample of 102 firms that report a deficiency in their internal controls between November 1, 2003 and December 31, 2004 and that have no confounding news during the event window. We find that the cumulative size-adjusted abnormal returns are -1.8% during the three-day event window for firms that report internal control deficiencies. This economically-significant wealth change supports the idea that investors value internal control news and that they are not (at least fully) aware of these deficiencies prior to the disclosures. We confirm these results for a small sample of firms reporting deficiencies in the first calendar quarter of 2005. More importantly, using trading data from the NYSE TAQ database, we find that small- (large-) investor net buying is positively (not) associated with returns. More specifically, it is small-investor net selling that is driving the negative returns. These results are consistent with the redistribution of wealth from large to small investors during the announcement period. In summary, our results support the conjectures made by regulators underlying the regulation and show that small investors benefit more from these disclosures than large investors.

This paper tests several predictions from an information diffusion framework in the quarterly earnings announcement setting. First, post-announcement drift is documented only for earnings announcements that have high information content (uncertainty), measured by high abnormal trading volume and return volatility surrounding the announcements. The results are robust after controlling for the magnitude of earnings surprise. Second, in contrast to prior findings, empirical evidence in this study suggests that the magnitude of drift for good (bad) news firms in the diffusion period is positively (negatively) related to analyst following and institutional ownership. Third, price movement after a second earnings announcement is affected by the information contained in the previous announcement. The result suggests the existence of the superposition effect of two information diffusion processes. These findings are consistent with information diffusion at work in capital markets.

This paper presents evidence on the correlation between stock returns in January and the earnings information released in the month. The annual earnings announced in January are predominantly positive, and the stock returns in late January are abnormally high than in the remainder of the year. Both time-series and cross-sectional analysis shows a strong relationship between stock returns and the earnings information released in January, particularly in the second half of the month. The results suggest that the earnings information may be one important driving force of the January Effect.