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Browsing by Author "Mansi, Sattar A."

Now showing 1 - 13 of 13
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    Audit Committee-CFO Political Dissimilarity and Financial Reporting Quality
    Although a large literature in accounting examines the role that audit committees play in the oversight of the financial reporting process, little is known about how the interactions between the audit com-mittee as a group and top management affects financial reporting choices. In this study, we investigate the effect of an important type of group dynamic, namely the political dissimilarity between the audit committee and the CFO, on financial reporting quality. Using a large sample of hand-collected political donation data, we find that audit committee–CFO political dissimilarity is associated with lower like-lihoods of financial restatements, lower likelihood of material weaknesses, and lower audit fees. Im-portantly, these positive financial reporting quality outcomes exist even after controlling for other features of the audit committee–CFO relationship, namely gender, age, and relative power, local ide-ological heterogeneity, and CEO ideological dissimilarity with both the audit committee and the CFO. Further testing shows that the effects of CFO–political dissimilarity on financial reporting quality is salient in settings within the purview of the audit committee where decisions are inherently complex, can be subjective, and are more likely to be associated with disagreements with management–goodwill impairments, tax avoidance, and pro-forma reporting. Overall, our results suggest that heterogeneity in political beliefs between audit committee members and the CFO is valuable.
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    Debt covenants, bankruptcy risk, and the cost of debt
    Mansi, Sattar A.; Qi, Yaxuan; Wald, John (2020-11-16)
    Are all covenants equally effective at reducing the bondholder-shareholder conflict? Examining the most frequently used bond covenants, we document that four out of 24 restrictions are associated with significantly higher bankruptcy risk. The use of these Default Indicating covenants can be partly explained by faulty contract design, greater recovery in bankruptcy, or within-creditor conflicts. Firms that use In-House Counsel to help structure their bond issue and those that use Big 4 Auditors are also less likely to include Default Indicating covenants in their bonds. Further tests show that the use of these Default Indicating covenants is associated with higher bond and CDS spreads. Overall, the results help explain the prior evidence on the relation between covenant use and the cost of debt.
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    Diseconomies of Scale in the Actively-Managed Mutual Fund Industry: What Do the Outliers in the Data Tell Us?
    Adams, John; Hayunga, Darren; Mansi, Sattar A. (2018-12-31)
    Recent research suggests that improper identification of outliers can lead to distorted inference. We investigate this issue by examining the role that multivariate outliers play in research outcomes using the Chen et al. (2004) study. We find that the documented negative relation between scale and return performance in the actively managed mutual fund industry is an artifact of extreme observations. A manual examination of the most influential observations with verifications against outside sources shows that these outliers are largely bad data. Removing the errors reduces the point estimates on the effect of fund size, rendering it economically and statistically insignificant. Further analysis employing regressions that mitigate outlier-induced bias and extending the sample through 2014 confirm our findings. Our evidence contributes to the recent research on the importance of outlier identification in finance research.
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    Economic policy uncertainty and allocative distortions
    Guedhami, Omrane; Mansi, Sattar A.; Reeb, David; Yasuda, Yukihiro (2021-12-14)
    We introduce this special issue on Economic Policy Uncertainty (EPU) with a focus on how EPU affects allocative efficiency. We observe that EPU affects the market value of firms in about 37% of Fama–French 30 industries, but leads to lower investments in 90% of them. Allocation decisions in a market economy rely on signals from the capital market, which EPU distorts. This may cause increasing conflicts of interest between managers and investors. We highlight key studies in the EPU literature and then describe each paper in this special issue. We also provide suggestions for future research.
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    Economic Policy Uncertainty, Institutional Environments, and Corporate Cash Holdings
    El Ghoul, Sadok; Guedhami, Omrane; Mansi, Sattar A.; Wang, He Helen (2022-10-11)
    We investigate the effect of economic policy uncertainty (EPU) on corporate cash holdings using a large sample of international firms. EPU intensifies concerns of investors on managerial self-dealing and political extraction. Consequently, the potential cost of cash holdings (i.e., expropriation) outweighs its benefit (i.e., precautionary motives), and the optimal amount of cash holdings decreases. We find supportive evidence that firms hold less cash when EPU is high. We further show that the market discounts excess cash holdings under high policy uncertainty, but this negative effect is mitigated by stronger investor protection, better freedom of press, and better government quality.
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    Essays in Corporate Finance
    Nguyen, Anh Ha Phuong (Virginia Tech, 2015-10-26)
    This dissertation comprises two essays in financial economics. They study how firms finance and invest in innovative and intangible assets. The first essay examines the impact of technology spillovers on corporate financing decisions for innovative firms. I find that greater technology spillovers lead to higher leverage in innovative firms. Furthermore, in firms with greater technology spillovers, equity is more costly relative to debt. I find that these financing effects are generated by at least three related mechanisms: information asymmetry, asset redeployability, and equity undervaluation. All three mechanisms lead firms to substitute away from equity and toward debt. The results are robust to exploiting variation in RandD tax credits to identify the causal effect of technology spillovers. The second essay is coauthored with Ambrus Kecskés at York University and Sattar Mansi at Virginia Tech. My coauthors and I enter the long-lived debate about whether stakeholder capital investment increases shareholder value. We argue that long-term investors are natural monitors that can ensure that managers choose stakeholder capital investment to maximize shareholder value. We find that long-term investors increase the value to shareholders of stakeholder capital investment, not as a result of higher cash flow but rather of lower cash flow risk. Also following prior work, we use indexing by investors and the staggered adoption of state laws on stakeholder orientation for identification. Our findings suggest that firms can create value for shareholders by investing in stakeholder capital as long as managers are properly monitored by long-term investors.
  • Index fund trading costs are inversely related to fund and family size
    Adams, John; Hayunga, Darren; Mansi, Sattar A. (Elsevier, 2022-07)
    Trading costs are a significant, but unobserved, drag on mutual fund performance. Because an index fund does not engage in securities selection or market timing, its trading costs are equivalent to its underperformance relative to its benchmark plus any securities lending in-come it earns. Using a large sample of index funds, we find positive returns to scale at the fund and family levels. We also find greater fund size helps alleviate the higher trading costs associated with illiquid equities and that net trading costs are comparable in magnitude to expense ratios.
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    Institutional Shareholder Attention, Agency Conflicts, and the Cost of Debt
    El Ghoul, Sadok; Guedhami, Omrane; Mansi, Sattar A.; Yoon, Hyo Jin (Institute for Operations Research and Management Sciences, 2020-01-15)
    Using Kempf, Manconi, and Spalt’s (2017) measure of shareholder inattention, constructed from exogenous industry shocks to institutional investor portfolios, we find that firms with distracted shareholders are associated with a higher cost of debt. This effect is stronger for firms with more powerful CEOs, higher information asymmetry, and those operating in less competitive product markets. Further testing suggests that the inattention–cost of debt relation is driven primarily by dual holders directly observing shareholder distraction. Our results are robust to controlling for inattention at the retail investor level and to other external monitors, including credit rating agencies, financial analysts, and Big 4 auditors. Overall, our evidence suggests that institutional shareholder inattention has an incrementally negative effect on bond pricing.
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    An Investigation of the Effectiveness of the Division of Corporate Finance as a Monitor of Financial Reporting
    Edmonds, Jennifer Echols (Virginia Tech, 2011-12-14)
    This study uses the Securities and Exchange Commission's (SEC) comment letters to investigate the SEC's role as a monitor of financial reporting. I examine whether the SEC effectively comments on firms with poor disclosure quality. I utilize forward earnings response coefficients (FERC) as a measure of the market's perception of disclosure quality. I expect comment letter firms to have lower disclosure quality and thus lower FERCs. Secondly, within the firms selected for comment, I investigate whether the Division allocates a greater amount of resources towards firms with more severe disclosure deficiencies. Results indicate that comment letter recipients have significantly lower forward earnings response coefficients than non- recipients. Results also document that comment letter recipients have lower contemporaneous earnings response coefficients than non-recipients. These findings are consistent with the DCF being effective in selecting firms that are perceived by the market as having low disclosure and earnings quality. However, within comment letter firms, I am unable to provide any evidence that the DCF allocates more resources to firms with lower forward earnings response coefficients.
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    Relative valuation of alternative methods of tax avoidance
    Inger, Kerry Katharine (Virginia Tech, 2012-04-30)
    This paper examines the relative valuation of alternative methods of tax avoidance. Prior studies find that firm value is positively associated with overall measures of tax avoidance; I extend this research by providing evidence that investors distinguish between methods of tax reduction in their valuation of tax avoidance. The impact of tax avoidance on firm value is a function of tax risk, permanence of tax savings, tax planning costs, implicit taxes and contrasts in disclosures of tax reduction in the financial statements. My empirical results suggest that tax avoidance resulting from stock option tax benefits is positively associated with firm value, accelerated depreciation is not associated with firm value and deferral of residual tax on foreign earnings is negatively associated with firm value. Prior studies that find the positive association between firm value and tax avoidance is attenuated in poorly governed firms suggest the discount results from investor concern of managerial opportunism. Self-serving managers conceal diversion of tax savings from investors under the pretext that aggressive tax positions must be hidden from tax authorities in the financial statements. Under this theory transparent tax reduction methods that are clearly supported by the law should not be discounted by investors of poorly governed firms. However, I find that tax avoidance resulting from transparent stock option tax deductions is discounted in poorly governed firms, while tax avoidance derived from opaque deferral of the residual tax on foreign earnings is not, inconsistent with investors believing that managers are exploiting the compromised information environment associated with complex tax transactions.
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    Retail Investors' Attention and Insider Trading
    Mansi, Sattar A.; Peng, Lin; Qi, Jianping; Shi, Han (2019-01-07)
    We document a significant increase in opportunistic insider trades when retail investors are paying greater attention to the stock. Using Google SVI to proxy for their level of attention, we find that a higher (lower) SVI on a stock is associated with more insider sales (purchases) of the stock and greater abnormal returns on the sales (purchases). A value-weighted long-short portfolio mimicking insider trades would earn an abnormal return of 1.19% per month (14.28% per year), excluding transaction costs. We also find that the SVI-related insider traders tend to be non-independent directors who have long tenures but no senior executive positions in their firm and the firm tends to exhibit weaker governance, lower reputation, and poorer social responsibility. Our results are stronger for lottery-type stocks but are weaker for stocks with large attention of local investors. Interestingly, the risk of SEC investigation and litigation is lower on SVI-related insider sales and this type of sales actually rises following an increase in news releases of SEC enforcement action. Our results are robust to various identification tests. Overall, certain insiders appear to engage in trades to take advantage of variations of retail investors’ attention to their stock.
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    Scale and Performance in Active Management are Not Negatively Related
    Adams, John; Hayunga, Darren; Mansi, Sattar A. (2021-08-16)
    We revisit the nature of returns to scale following Pástor, Stambaugh, and Taylor (2015). Using replicated versions of their domestic equity fund sample, we confirm their negative and significant relation between industry scale and performance. However, upon closer examination we find the diseconomies of scale at the industry level result is an artifact of data errors that comprise less than 0.05% of the sample―168 out of 332,516 observations―that occurred most often in the year 2000. We are unable to find industry level diseconomies of scale in the post 2001 era. A major source of these errors is the incorrect use of Morningstar’s current performance benchmarks to measure historical return performance. We confirm the non-result findings using Fama-French three-factor adjusted returns, which are not subject to benchmarking errors.
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    Two Essays on Mergers and Acquisitions
    Li, Wei-Hsien (Virginia Tech, 2012-03-28)
    This dissertation consists of two chapters. The first chapter examines the valuation effect of the Q-hypothesis of mergers and acquisitions. The Q-hypothesis of mergers and acquisitions proposes that takeovers of low-Q targets by high-Q acquirers should be value creating as acquirers redeploy the targets' assets. I revisit the valuation effects of mergers and acquisitions by considering the potential costs of asset reallocation, impact from misvaluation, and the size of the reallocated assets. By examining the combined announcement returns and changes in operating performance, I find evidence consistent with both the benefits and costs of asset reallocation in the full sample of M&As from 1989 to 2010. Controlling for impact for market misvaluation in the proxy of Q, I find that the relation between value creation and the Q-difference is an inverse U-shape. This is direct evidence in support of the Q-hypothesis of M&As using firm-level data from after 1990. The results are not driven by the acquirer's corporate governance structure and the difference in industry. The second chapter investigates investigate the effect of CEO overconfidence on learning from the market in completing the announced mergers and acquisitions (M&As). Overconfident CEOs overestimate their ability to create value and believe that the market incorrectly values the firm. Therefore, they will be less likely to revise their M&A announcement according to unfavorable market reaction. I construct a proxy for CEO overconfidence based on the CEO's decisions on exercising options similar to Malmendier and Tate (2005, 2008). Controlling for the corporate governance structure of the firm, I find that an overconfident CEO is more likely to complete a bid despite unfavorable market feedback. I do not find my results are driven by alternative interpretations including managerial quality and private information.