The Financial Review

Richard W. Sias

A growing literature evaluates the relation between lag returns and demand by institutional investors. Given that lag returns and institutional ownership are directly observable, it is surprising that previous tests yield dramatically different conclusions. This study examines differences across studies and finds that four factors account for these discrepancies: 1) value-weighting versus equal-weighting across stocks, 2) averaging versus aggregating over managers, 3) disagreement in the signs of measures of institutional demand, and 4) correlation between current capitalization and both lag returns and measures of institutional demand. Controlling for these factors, the results across different methods are remarkably uniform.

Keywords: Institutional investors; institutional trading; momentum

Sanjiv Sabherwal

I analyze the firm-specific determinants of the U.S. share of trading volume for 126 U.S.-listed Canadian firms. I find that the U.S. share of volume is directly related to the mass of informed and liquidity traders in the U.S. relative to Canada, as proxied by relative analyst following, relative duration of listing, and the U.S. share of sales. Evidence also supports the market liquidity argument that the market with lower spreads and greater depths has greater volume. Finally, the U.S. share is directly related to the relative sensitivity of the stock’s value to information in the U.S.

Keywords: Cross-listed stocks, trading volume, analyst following, decimalization

Claire E. Crutchley, Marlin R.H. Jensen, Beverly B. Marshall

We examine the governance characteristics, earnings quality, growth rates, dividend policy, and compensation structure of 97 firms recently under investigation by the Securities and Exchange Commission (SEC) for accounting fraud. Our results show that the corporate environment most likely to lead to an accounting scandal manifests significant growth and accounting practices that are already pushing the envelope of earnings smoothing. Firms operating in this environment seem more likely to tip over the edge into fraud if there are fewer outsiders on the audit committee and outside directors appear overcommitted.

Keywords: Accounting fraud, corporate governance, earnings management, dividends, executive compensation

Steven X. Zheng

I examine the relation between initial public offering (IPO) long run stock performance and the amount of cash raised by the firm in the offering. I find that IPOs raising more cash have poorer long run performance. The result is robust to different measurement methods. The evidence suggests that the market underreacts to free cash-flow related agency problems in IPOs. Consistent with this interpretation, I find that IPO long run performance is more sensitive to the new cash raised in the offering if an IPO firm has lower capital expenditure or higher opening bid-ask spread.

Keywords: Institutional investors; institutional trading; momentum

Jeffrey T. Brookman, Saeyoung Chang, Craig G. Rennie

The CEOs of firms announcing layoffs receive 22.8% more total pay in the subsequent year than other CEOs. The pay increases result almost entirely from increases in stock-based compensation and are found to persist. In addition, layoff announcements are accompanied by shareholder value increases averaging $40 million to $95 million. One-time labor cost savings from layoffs average $65 million. We conclude CEOs receive pay increases following layoffs as rewards for past decisions and to motivate value-enhancing decisions in the future.

Keywords: CEO pay, corporate governance, corporate restructuring, executive compensation, layoffs

Narayanan Subramanian, Atreya Chakraborty, Shahbaz Sheikh

We examine whether the threat of executive turnover faced by a firm affects its decision to reprice stock options held by its executives. We estimate a model of voluntary turnover among top executives and show that the predicted turnover from this model is positively related to the probability of repricing. The relationship is robust to the inclusion of several known determinants of repricing. Our results are consistent with a model in which a tight labor market makes executives hard to replace, forcing firms to reprice stock options when they go underwater.

Keywords: Option repricing, executive compensation, incentive compensation, management turnover, CEO turnover.

Dalia Marciukaityte, Anita K. Pennathur

We examine private equity with warrant (unit) placements and compare them with private equity placements. Firms making unit placements are smaller, younger, riskier, and characterized by higher information asymmetry than equity-placing firms. Furthermore, unit-placing firms experience good pre-placement stock performance; however, their post-placement performance is poor and worse than that of equity-placing firms. We also find that very few of the placed warrants are in the money at expiration. Our results are consistent with the window of opportunity hypothesis and the theory of Miller (1977), suggesting that warrants are especially desirable to a clientele of overoptimistic investors.

Keywords: Unit private placements, equity private placements, warrants, window of opportunity, investor clientele