Miracle-dz/UniFAR-FTUs huggingface dataset:
On the Capital Structure of Liability Driven Businesses: The Case of Insurance

Providing risk-sharing benefits to risk-averse policy holders is a primary function of insurance companies. We model that policy holders are paying a fee over the present value of indemnifications (i.e., technical provisions) to enjoy these risk-sharing benefits. Although the traditional Modigliani-Miller logic is typically applied to study the capital structure of insurance firms, this fee implies that a capital structure largely consisting of technical provisions is optimal (i.e., value maximizing) for insurance firms, making the Modigliani-Miller logic inappropriate. However, to support the issuance of technical provisions with socially desirable properties, insurance firms choose a solvency risk target vis-à-vis policy holders and maintain a minimal surplus consistent with this risk choice to absorb losses. We show that the Modigliani-Miller logic applies to the funding of this loss-absorption capacity. This explains why insurance companies may use, next to equity and technical provisions, financial debt in supporting their activities.
Picking Pennies

People often expose themselves to negative tail risk by taking on losing bets in which randomly-occurring major losses eradicate all previous gains. Why is this? Here I present evidence from a collection of laboratory experiments aimed at testing several plausible causal explanations.The evidence suggests that one important determinant of this behavior is an urge to gamble despite a desire to stop. These findings highlight the importance of purely motivational factors (alongside and independent of cognitive factors) in helping to understand how people respond to negative tail risk.
The Interaction between Informal and Formal Institutions: Corruption Culture and External Auditor Monitoring

The literature shows that a firm’s fraud risk is rooted in its culture. I investigate whether auditors play a role in mitigating the impact of corrupt corporate cultures on accounting fraud. I find that, on average, firms with high corruption cultures are less likely to have high-quality auditors and that this negative association is more pronounced when firms can better generate funds internally. Nevertheless, the association between corruption culture and auditor choice has an inverted-U relationship. This is consistent with firms with high corruption cultures demanding higher-quality auditors to mitigate agency conflicts and that auditors rejecting clients when fraud risk is too high. Given auditor choice, audit effort is higher for firms with higher corruption cultures and mitigates the positive relation between corruption culture and financial reporting fraud. This paper operationalizes the nature of audit production and acknowledges the value of auditors in detecting and correcting fraud in pre-audit financial statements.
Does Visibility of an Engagement Partner’s Association with Recent Client Restatements Increase Fee Pressures from Non-Restating Clients?

We examine whether engagement partners who have recently been associated with client restatements experience increased audit fee pressures from their non-restating clients. Using data from the United States (U.S.) and Taiwan, we find evidence of lower audit fees among non-restating companies whose audit engagement partner was recently associated with another client’s restatement. These findings are generally strongest when the partner-associated restatement is more prominent or severe, and in the U.S., when non-restating clients are in the same industry as the restating client. Although we find very limited evidence that fee pressures lead to lower quality audits for these partners’ other clients in Taiwan, we find that when the partner-associated restatement is more prominent or severe, fee pressures negatively impact audit quality in the U.S. These findings provide further insight on the impact of engagement partner disclosure for audit quality.
Impact of Segment Level Natural Resource Operational Risk Reporting on Earnings Predictions

Non-financial reports alert investors to operational risks associated with issues such as insufficient access to natural resource inputs and related costly interruptions to production, while segment level reports alert investors to operational risk distribution across a firm. An important issue, to date unexplored, is how segment level non-financial reporting impacts earnings predictions. We report the results of an experiment used to examine how mining company segment-level water reports affect investors’ earnings predictions, where water reports indicate whether the firm and its segments will have access to sufficient water to meet production needs. We find that investors do not change their earnings predictions when firm and segment-level reports indicate low water risk but they do revise down their earnings predictions when firm and segment-level water reports indicate high water risk. This is consistent with investors responding to the additional information provided in segment-level reports confirming that water risk is high across the firm. Regardless of whether firm-level water reports indicate high or low water risk, when segment-level reports indicate that one segment is low water risk and another is high water risk, investors revise down their earnings predictions. This is consistent with investors recognizing that natural resource operational risk concentration in one segment can affect earnings more than evenly-distributed risk. Overall, our findings suggest that belief-adjustment theory explains how investors react to prospective operational risk information contained in segment-level water reports according to the similarity of the segment-level risks, and that this information is factored into earnings predictions.
A Comparison of the Stock Market Reactions of Convertible Bond Offerings between Financial and Non-Financials Institutions: Do They Differ?

We focus on the stock price reaction to convertible bond offering made by financial institutions and find that the cumulative abnormal return over the three day interval around convertible bond issuance is 1.41 percentage higher than that for non-financial institutions. This result supports our hypothesis that since financials are heavily regulated, the market is less likely to assume that the issuance of convertible bond by financials signals information that are overvalued. Our results remain robust after controlling for a number of firm-, issue-, and market-specific characteristics as well as the level of short selling pressure induced by convertible bond arbitrageurs.
Financial Decisions and Growth Opportunities: A Spanish Firms Panel Data Analysis

This paper analyzes the influence of financial leverage decisions, dividend payout policies and the ownership structure on the firm market value when companies either face, or do not face, profitable growth opportunities. We use a sample of 101 large non-financial publicly traded Spanish companies. Our results confirm the relevance of debt and dividends in terms of firm value creation by showing a negative relationship between firm value and leverage in the presence of growth opportunities. On the contrary, this relationship turns out to be positive when firms have no profitable investment projects and dividends show an outstanding role in improving value creation. Our results also demonstrate the relevance of ownership structure in the allocation of firm resources.
Group Development with Awareness of Social Loafing

We extend the social loafing literature by investigating the role of group development process on perceptions of social loafing within groups. Building on extant literature, we contend that group members association with the group development stages can help in predicting their perceptions of social loafing. While conducting this study we also developed a newer, shorter, better, and cost effective scale to measure four stages of group development. Results of mixed-effect modeling in R utilizing data from 161 individuals nested in 39 groups show that group development stage of Inclusion and Dependency (stage 1) has no significant effect on perceptions of social loafing. Whereas, group development stage of Counter dependency and Fight (stage 2) has positive, and Trust and Structure (stage 3) and Work (stage 4) has negative effect on perception of social loafing by group members. Results and direction for future research are discussed.
Opportunistic stock splits

We investigate CEOs who combine insider selling with stock splits, which is suspicious because dumping stocks is inconsistent with the positive stock-split signal. Our empirical results indicate that, compared with other splits, these suspicious splits are followed by a 53 percent lower buy-and-hold-abnormal return, a 68 percent higher likelihood of announcing an earnings restatement, and a 48 percent higher likelihood of CEO turnover within the 5-year, post-split period. Our results are robust to the use of propensity-score matching and to controlling for CEO characteristics, incentives, and corporate governance. Our findings concerning these stock splits highlight agency issues that are understudied.
The Disclosure of Cybersecurity Risk

Following a data breach, interlocking firms are more likely to disclose exposure to cybersecurity risk in their annual report. Firms connected by auditors, via economic rivalry, or along a supply chain do not show similar disclosure propagation. The evidence suggests that disclosure propagation over interlocking firms is driven by a director’s self-interests or by a behavioral response to cybersecurity risk saliency, rather than by an improved monitoring for risk exposure. This finding sheds insight into the expanding length of risk factor disclosures and suggests that not all of this growth may be in the best interests of shareholders.
The Governance Role of Auditors: Evidence from Derivative Lawsuits

This paper examines whether external auditors play a unique governance role distinct from other mechanisms of corporate governance. We exploit the staggered adoptions of the Universal Demand (UD) laws by U.S states, which have been shown to result in the decline of various corporate governance mechanisms. We examine whether auditors step up their monitoring when outside shareholders place a greater demand on external monitoring, yet other governance mechanisms decline. We find that external auditors are more likely to issue going-concern opinions to financially distressed firms after their incorporation states have adopted the UD laws. Further, the increased propensity to issue going-concern opinions is driven by auditors’ reputation and litigation concerns. The effect is stronger when alternative governance mechanisms are weak, and it is not attenuated by auditors’ financial ties to clients. We also find evidence of greater auditor monitoring after the passage of UD laws using two alternative outcomes, i.e., the reporting of internal control weakness and the length of audit reporting lag. Overall, our findings suggest the unique monitoring role of external auditors as they step up their oversight of the audited firms in the lapse of other monitors.
Ancestral Connection and Alliances

This paper studies the cultural determinants of firm boundaries. We find that, when forming business alliances, the historical ancestral composition of the area where firms locate plays an important role in their choices of partners and the location of new ventures. Exploiting immigration to U.S. cities induced by WWI and the Immigration Acts of the 1920s, which unexpectedly altered the number and the mix of immigrants, we find that the effect of historical immigration in shaping firm boundaries in the U.S. today is likely causal. Further, partnering firms experience significantly better performance when the ancestral connection between their headquarters or between their inventors is stronger. Shared values and better communication between firms’ key stakeholders, as opposed to connections between corporate leaders, likely underlie the role of ancestral connection. Our results highlight the importance of culture in inducing cooperation between firms when facing contractual incompleteness. JEL Classification: D41, G30, J10
An Empirical Assessment of Real Activities Manipulation Measures

I empirically assess the extent to which real earnings management metrics capture opportunistic behavior versus firms' fundamental factors such as performance. For the traditional proxies proposed by Roychowdhury (2006), I find (1) the economic magnitude of the proxies to be high relative to two relevant benchmarks; (2) they exhibit persistence; and (3) they vary predictably with performance. These findings suggest that the traditional proxies likely capture opportunistic behavior but also likely reflect fundamental factors. I also examine several adjusted proxies based on refinements proposed by subsequent studies. I find that those proposed by Vorst (2016) and those based on Kothari, Mizik, and Roychowdhury (2016) seem to be the most effective at attenuating correlation with underlying fundamentals. Additional simulation tests on bias and power reveal that, between the two adjusted proxies, those based on Kothari et al.'s (2016) are generally more preferable
Inferring the financial materiality of non-financial news

We describe a methodology to infer the value-relevance of Corporate Social Responsibility (CSR) issues from media news. We infer three broad CSR topic attributions of corporate irresponsible behavior using a computational linguistics technique known as Latent Dirichlet Allocation (LDA). The first topic relates to media criticisms of controversial/unethical behavior, the second relates to attributions of corporate difficulties, while the third topic reflects attributions of illegal behavior, violations and litigation. We provide evidence to suggest a negative and statistically significant relation for corporate difficulties and illegal behavior and future stock returns and earnings surprises. By contrast, we find no evidence of a statistically significant relation between controversial behavior and future firm performance. Our findings remain robust after controlling for more traditional measures of CSR using MSCI KLD firm-level indicators and media sentiment. JEL Classification: G12, G14
Learning Across Hierarchies and Boundaries: Partner Exposure and Hierarchy in Cross-Discipline Temporary Teams

In many workplaces, temporary teams comprised of cross-discipline team members convene and coordinate complex work, despite team members having not worked together before. Most related research has found consistent performance benefits when members of temporary teams work together multiple times (team familiarity). Recent work in this area broke new conceptual ground by instead exploring the learning and performance benefits that team members gain by being exposed to many new partners. However, that new work examined partner exposure within solo-discipline teams. In this paper, we aim to extend this research area by developing and testing theory about partner exposure in temporary cross-discipline teams where members are working across professional and discipline boundaries. We use visit-level data from a hospital ED and leverage the ad hoc assignment of attendings, nurses, and residents to teams and the round-robin assignment of patients to these teams as our identification strategy. We find a significant positive performance impact of residents’ exposure to more nurses and a significant negative impact of residents’ exposure to more attendings. Both of these effects are lessened on patient cases with more structured workflows. In teams that do not include a resident, we find a significant negative performance effect of nurses’ exposure to more attendings. The magnitudes of these effects do not differ based on whether the experiences were accumulated more recently or longer ago. Our results suggest that interaction with cross-discipline partners is an important but often unrecognized part of disciplinary training and team composition.
Mortgage Innovation and House Price Booms

We study the genesis of the 2000s housing boom in Denmark, a country with a similar mortgage-finance system to the U.S., but with strictly enforced recourse borrowing and a robust regulatory mortgage lending framework that limits housing speculation. The rapid legalization of interest-only (IO) mortgages ignited the boom. Due to their introduction, house prices increased 36 percent, with larger impacts in areas with greater ex-ante benefits of such mortgages. These results are congruent with IO mortgages easing debt-service burdens in a wide-scale credit supply expansion, which in turn fueled house price expectations and the further use of alternative mortgage products.
Comparing Non-GAAP EPS in Earnings Announcements and Proxy Statements

We compare non-GAAP earnings per share (EPS) in firms’ annual earnings announcements and proxy statements using hand-collected data from U.S. Securities and Exchange Commission filings. We find that proxies for capital market incentives (contracting incentives) are more highly associated with firms’ disclosure of non-GAAP EPS in annual earnings announcements (proxy statements). However, we find systematic differences in the properties of firms’ non-GAAP earnings and exclusions depending on whether they disclose non-GAAP EPS in both the earnings announcement and the proxy statement. When firms disclose non-GAAP EPS in both documents, we find that non-GAAP EPS is more useful for assessing firm value. Specifically, these firms are more likely to: (1) exclude nonrecurring items, (2) exclude less persistent earnings components, and (3) provide less aggressive non-GAAP EPS. Our results suggest that non-GAAP EPS is higher in quality for investors when disclosed in both the annual earnings announcement and the proxy statement. We provide some of the first large-sample evidence consistent with the use of non-GAAP EPS metrics in both financial reporting and compensation contracting. This paper was accepted by Brian Bushee, accounting.
Resource Adjustment Costs, Cost Stickiness, and Value Creation in Mergers and Acquisitions

We examine whether resource adjustment costs, such as installation and disposal costs for fixed assets, or hiring and firing costs for employees, impede value creation in mergers and acquisitions (M&amp;A). We focus on M&amp;A deals because they are major corporate investment decisions. As a proxy for adjustment costs, we use a firm-level measure of cost stickiness. We predict that acquirers with high adjustment costs have less flexibility in restructuring resources following the acquisition and will find it more costly to merge the target firm’s operations. Consistent with this prediction, we find that the acquirer’s adjustment costs are negatively associated with abnormal returns around the acquisition announcement. Additionally, adjustment costs are also negatively associated with deal synergies. Relatedly, we find that acquirers with high adjustment costs purchase targets with high adjustment costs. In accordance with this finding, we show that acquirers with high adjustment costs purchase intangible-intensive targets. Collectively, our results highlight the important implication of adjustment costs in M&amp;A deals for managers and capital market participants.
Extrapolative Bubbles and Trading Volume

We propose an extrapolative model of bubbles to explain the sharp rise in prices and volume observed in historical financial bubbles. The model generates a novel mechanism for volume: because of the interaction between extrapolative beliefs and disposition effects, investors are quick to not only buy assets with positive past returns but also sell them if good returns continue. Using account-level transaction data on the 2014–2015 Chinese stock market bubble, we test and confirm the model’s predictions about trading volume. We quantify the magnitude of the proposed mechanism and show that it can increase trading volume by another 30%.
Anti-Corruption Regulation and Shareholder Value: Evidence from China

We examine the impact of China’s 2012 anti-corruption campaign, which primarily targeted the excesses of government officials and SOE executives, on individual firms’ shareholder value. We find that the anti-corruption campaign had a negative impact on the shareholder value of publicly listed Chinese firms that sell luxury goods and services. The campaign also significantly curtailed the luxury goods and services consumption by the publicly listed SOEs relative to the publicly listed non-SOEs. However, the overall impact of the campaign on shareholder value is negative for the SOEs relative to the non-SOEs. There is also evidence that the impact of the campaign is permanent. Our findings illustrate the complexities in the effects of the campaign on the behavior of publicly listed SOEs.
Gatekeeper Competition

This paper investigates competition among vertically differentiated gatekeepers who are approached under sequential directed search with asymmetric information. Gatekeepers control access to a scarce resource and their identity benefits those with whom they match. A key prediction of the model is that excessive delay, or “red tape,” arises in equilibrium and is used by the top gatekeeper to increase competition. Though seemingly costly, the delay often improves equilibrium sorting and can increase the aggregate match surplus. The model is phrased in terms of academic publishing with journals as gatekeepers, and several predictions match observed patterns within this market. Key insights also apply to other gatekeeper markets such as venture capital or policy making.
(Interim) Bayesian efficiency implies two-agent Bayesian implementation

We study the relationship between two-agent implementation problems and the notion<br>of interim efficiency due to Holmström and Myerson (1983) in Bayesian environments<br>with private values and independent types. We present a general property, Bayesian<br>efficiency, and show that it is sufficient for implementation of social choice functions. <br>We also show that this condition is sufficient for implementation of social choice sets<br>under a weak domain restriction - in particular, no economic condition is required. As<br>an application, we show that the generalized two-person Nash bargaining solution, due<br>to Myerson (1984), is Bayesian efficient.
What If Borrowers were Informed about Credit Reporting? Two Randomized Field Experiments

<p style="margin:0in;margin-bottom:. 0001pt;text-align:justify;text-justify: inter-ideograph;line-height:115%;background:white"><span style="color:black; background:white">Using two randomized field experiments, we examine how warning borrowers that their loan performance will be reported to a public credit registry affects their loan take-up and repayment decisions. We show that credit warnings increase loan take-up rates. The main drivers appear to be anticipation of reduction in incumbent lenders’ informational rents and improvement in access to formal credit. Moreover, credit warnings reduce default rates by 3.8–7 percentage points. This reduction is comparable for borrowers who receive the credit warning before and after the loan take-up. As credit warnings received before, but not after, a loan take-up can affect the borrower’s take-up decision, and thus the credit-risk composition of borrowers, the results suggest that credit warnings have little net effect on borrowers’ credit-risk composition due to selection. </span><span style="font-size:11.5pt;line-height: 115%;font-family:"Segoe UI",sans-serif;color:#212121;background:white"> </span><span style="color:black"><o:p></o:p></span></p>