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We examine the relation between institutional investors' horizons and bank transparency. The novelty of this research is to consider three important aspects of transparency: disclosure quality, private information gathering and auditor fees. We find strong evidence indicating that banks dominated by long‐term (short‐term [ST]) institutional shareholders exhibit higher (lower) levels of disclosure quality. However, there is no evidence that investor horizon has a differential effect on private information gathering and audit pricing. The study employs alternative proxies and estimations such as two‐stage least squares and propensity score matching to address endogeneity. We also document that banks with higher ST institutional shareholding are associated with lower crash risk. These findings are particularly significant because poor bank transparency has been identified as a contributing factor to the 2007–2009 financial crisis. [ABSTRACT FROM AUTHOR]

We examine whether the facial attractiveness of borrower firms' chief financial officers (CFOs) influences bank loan contracting terms. Using a machine learning‐based algorithm to measure facial attractiveness, we document that firms led by CFOs with greater facial attractiveness receive more favourable loan contracts from their banks. We further show that the relation between CFO facial attractiveness and bank loan contracting terms is significantly influenced by the characteristics of both the borrower and the lender. Collectively, our results suggest that loan contracting is not an entirely rational process, as the 'beauty premium' is at least partly driven by taste‐based discrimination. [ABSTRACT FROM AUTHOR]

We investigate the association between disclosures about key value drivers (i.e., growth, synergies, human capital, brands, customers, and technology) in press releases announcing mergers and acquisitions (M&A) deals and acquirer stock returns upon the announcement. We find that, after controlling for the main characteristics of the deal, acquirers that use more terms about these value drivers in press releases exhibit more negative market returns around the M&A announcement. An increase of 10% in the number of terms used about generic value drivers is associated with a decrease in announcement market‐adjusted returns of approximately 43 basis points. The negative association between terms about value drivers and acquirer stock returns is stronger for larger deals. We also find that disclosures about these value drivers in M&A announcement press releases are consistent with the subsequent subjective valuation of intangible assets recognized in acquirers' financial statements through the purchase price allocation. Our findings are relevant for investors attempting to interpret early signals about the performance of M&A and for managers communicating about these strategic investment decisions. [ABSTRACT FROM AUTHOR]

Under International Financial Reporting Standards, managers can use two approaches to increase the estimated fair value of goodwill in order to justify not recognizing impairment: (1) make overly optimistic valuation assumptions, and (2) increase future cash flow forecasts by inflating current cash flows. Because enforcement constrains the use of optimistic valuation assumptions, we hypothesize that enforcement influences the relative use of these two choices. We test this hypothesis by comparing a sample of 1,958 firms from 36 countries that are likely to delay recognizing goodwill impairment (suspect firms) to a sample of control firms. First, we find that firms in high‐enforcement countries use a higher discount rate to test goodwill for impairment than firms in low‐enforcement countries. We also find a more positive association between discount rate and upward cash flow management for suspect firms than for control firms. This result is consistent with suspect firms substituting optimistic valuation assumptions with inflated current cash flows. Second, we find that, relative to control firms, suspect firms exhibit higher upward cash flow management in high‐enforcement countries than in low‐enforcement countries. Third, we show that suspect firms in high‐enforcement countries are more likely to eventually impair goodwill. [ABSTRACT FROM AUTHOR]

The article focuses on the relationship between the amount of prior information available about a corporation and stock return variability at annual earnings announcements. It states that the number of security analysts' forecasts and firm size has an inverse relationship with security return variability. It presents empirical analysis showing that test statistics derived from market model prediction errors relying on normal distribution theory have a higher means and lower variance than distributions empirically generated. It states that differential availability of prior information has a differential affect on significance levels of tests that these statistics rely upon.

The article shows the relationship between stock price movements and composit earnings forecasts as created by investment analysts. While corporations rarely release earnings forecasts to the public even though such information must be given to analysts for their earnings forecasts. The authors examined the forecasts that were prepared by 35 brokerage firms and the changes that were made to those forecasts. The researchers used the rank-order correlation coefficients system that was devised by Charles Spearman to see if there was a relationship between unsystematic returns and different information variables.

Abstract: We study whether banks use the allowance for loan losses (ALL) for efficiency or for opportunistic reasons. We find that banks that had higher abnormal ALL during the period prior to the 2007–2009 crisis engaged in less risk taking during the pre‐crisis period and had a lower probability of failure during the crisis period. In testing earnings management to meet or beat earnings benchmarks, we find that abnormal ALL is unrelated to next period's loss avoidance and just meeting or beating the prior year's earnings. Our results suggest that banks use ALL for efficiency and not for opportunistic purposes. [ABSTRACT FROM AUTHOR]

We analyze the effect of business and financial market cycles on credit ratings using a sample of firms from the Russell 3000 index that are rated by Standard and Poor's over the period 1986-2012. We also examine investor reaction to credit rating actions in different stages of business and financial market cycles. We document that credit rating agencies are influenced by business and financial market cycles; they assign lower credit ratings during downturns of business and financial market cycles and higher ratings during upturns. Our study is the first to find strong evidence of pro-cyclicality in credit ratings using a long window. We also document stronger investor reaction to negative credit rating actions during downturns. Our results confirm theoretical predictions and inform regulators. [ABSTRACT FROM AUTHOR]

Despite the importance of sell-side financial analysts as information intermediaries in the capital market, little is known about how managerial equity ownership is associated with their information environment. Using Barron, Kim, Lim and Stevens' (1998) framework for measuring the precision of financial analysts' information, we observe that managerial ownership is positively associated with the precision of financial analysts' public (common) and private (idiosyncratic) information, largely consistent with the alignment view of managerial equity ownership. These results are robust to controlling for various economic and statistical factors that might affect the inference. [ABSTRACT FROM AUTHOR]

Manuscript Type: Empirical Research Question/Issue: This study examines the determinants of forming a governance committee and whether such a committee constrains managerial opportunism. Research Findings/Insights: This study examines a sample of S&P 1,500 firms over the period of 1996 to 2002. It finds that firms with a larger, more independent, and more active board, higher agency costs (as indicated by lower managerial ownership and lower takeover vulnerability), and past occurrence of class-action lawsuits are more likely to voluntarily form a governance committee. This study also provides evidence that having a governance committee brings real consequences in that it constrains managerial opportunism by reducing aggressive financial reporting. Theoretical/Academic Implications: Consistent with substitution theory, this study documents that a firm is more likely to form a governance committee to compensate for its severe agency problems. It also demonstrates that delegating some corporate governance duties to a specific board committee could improve the effectiveness of board monitoring. Practitioner/Policy Implications: This study provides insights to regulators who are interested in regulating board structure. It suggests that whether a firm needs to form a governance committee is endogenously determined by the firm's characteristics when the firm has an independent board. In addition, this study documents that a voluntarily formed governance committee is able to mitigate agency costs in the form of constraining managerial accounting discretion. [ABSTRACT FROM AUTHOR]

We study the relationships between three variables which proxy for the ex-ante level of information asymmetry – forecast dispersion, forecast revision volatility, and the level of analyst coverage, and equity bid-ask spread and depth changes around quarterly earnings releases. Kim and Verrecchia (1994) suggest that earnings releases increase the level of information asymmetry and lower the level of liquidity in the security market. Using both an OLS regression framework and a simultaneous equations model, we examine whether equity bid-ask spreads increase and depths decrease as the level of information asymmetry increases. Our results indicate that spreads are higher (relative to a non-event period) around earnings announcements when information asymmetry is more pronounced; however, depths are lower only on the day following the announcement when there is greater information asymmetry. Relative spreads have a significant positive relation with both forecast dispersion and revision volatility and a significant negative relation with analyst coverage. Relative depths have a significant negative relation with forecast dispersion and a significant positive relation with analyst coverage. Our findings indicate that the equity specialist adjusts both spreads and depths when confronting informed traders around earnings releases and that these adjustments are more pronounced when the level of information asymmetry is greater. [ABSTRACT FROM AUTHOR]

This study investigated the accuracy of combinations of statistical and judgmental forecasts of annual accounting earnings. Combined forecasts were generated as equally weighted (i.e., simple averages) and unequally weighted combinations of individual forecasts from time-series models of quarterly and annual earnings (statistical forecasts) and security analysts' forecasts of quarterly and annual earnings (judgmental forecasts). The effect of the number of individual forecasts combined on the accuracy of the combined forecasts was also examined. The empirical results indicated that, on the average, combined forecasts were more accurate than individual forecasts. The results also indicated that although analysts' forecasts are based on a wider information set, the accuracy of their forecasts could be improved by combining them with forecasts generated from statistical models. Even if the best individual forecast could be identified in advance, gains in accuracy could be achieved by using combinations of two other forecasting methods. Several of the combined forecasts were superior to the most accurate individual forecast. Forecasts combined by using unequal weights derived from a regression model proved more accurate than equally weighted combinations. Forecasting accuracy improved and the variability of accuracy across different combinations decreased as the number of forecasts in the combination increased. [ABSTRACT FROM AUTHOR]

Presents a study which examined the impact which the segment disclosures provided under the Statement of Financial Accounting Standards (SFAS) number 14 has on the security prices along with the security analysts' earnings forecasts. Reference to the changes made by SFAS No.14 to the existing Securities and Exchange Commission (SEC) line-of-business disclosure requirements; Speculation of the stock price revisions at the time of first disclosure increasing.

The article presents a study, which investigates the trading volume reaction associated with quarterly earnings announcements and the effects of predisclousure information asymmetry on trading volume. It makes two contributions to understanding the incremental role of predisclosure information asymmetry in trading volume reaction to accounting earnings announcements. First, whereas prior research is concerned with trading volume reaction to annual earnings announcements, our study empirically investigates trading volume reaction to quarterly earnings announcements. Compared with annual accounting information, quarterly accounting information is more timely and thus more relevant. On the other hand, quarterly financial statements are not audited; hence they are less reliable. This study provides evidence on whether the net relative information content of quarterly vs. annual accounting information results in differential impacts of their respective announcements on trading volume. Second, in addition to examining the relation between trading volume during quarterly earnings announcements and the degree of predisclosure information asymmetry, the study also provides empirical evidence on the relation before and after the announcements.

This article provides additional empirical evidence on the information content of dividends. The study examines the increase in earnings forecast accuracy which is obtained by combining dividend or payout ratio information with earnings information to produce a composite forecast. Three earnings forecast models are used - two based on annual earnings and one on quarterly earnings. Model based on past earnings and dividend information was developed by combining forecasts of annual earnings generated from each of models with forecasts either of payout ratio or of dividends per share. The mean forecast errors of all the models are negative, indicating that, on average, the firms in the sample had earnings that were greater than expected, given past information.

Examines whether security analysis efficiently or inefficiently utilize the information contained in past series of annual and quarterly earnings in producing earnings forecasts. Comparison of equal-weighted combinations of security analysts' forecasts with forecasts from statistical models based on historical earnings; Improvements in proxying for market earnings expectations.

Examines issues related to the forecasting of annual accounting earnings. Improvement in forecasting that can be obtained by including information about dividend payout along with past earnings series in forecasting models; Comparative ability of quarterly and annual time series models to predict annual earnings.