Scholarly Works, Finance, Insurance and Business Law

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Research articles, presentations, and other scholarship

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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.
Civil Cyberconflict: Microsoft, Cybercrime, and Botnets
Hiller, Janine S. (Santa Clara University School of Law, 2014-01)
Cyber “warfare” and hackback by private companies is a hot discussion topic for its potential to fight cybercrime and promote cybersecurity. In the shadow of this provocative discussion, Microsoft has led a concerted, sustained fight against cybercriminals by using traditional legal theories and court actions to dismantle criminal networks known as botnets. This article brings focus to the role of the private sector in cybersecurity in light of the aggressive civil actions by Microsoft to address a thorny and seemingly intractable global problem. A botnet is a network of computers infected with unauthorized code that is controlled from a distance by malicious actors. The extent of botnet activity is staggering, and botnets have been called the plague of the Internet. The general public is more commonly aware of the damaging results of botnet activity rather than its operation, intrusion, or infection capabilities. Botnet activity may result in a website being unavailable due to a denial-of-service (DoS) attack, identity theft can occur because the botnet collects passwords from individual users, and bank accounts may be emptied related to botnet activity. Spam, fraud, spyware, and data breaches are all the result of botnet activity. Technical remedies for stopping botnet attacks and damages are ongoing, but technical solutions alone are inadequate. Law enforcement is active in tracking down criminal activities of botnets, yet the number and sophistication of the attackers overwhelm it. In a new development, multiple civil lawsuits by Microsoft have created the legal precedent for suing botnet operators and using existing law to dismantle botnets and decrease their global reach. This article reviews the threats created by botnets and describes the evolution of legal and technical strategies to address botnet proliferation. The distinctive aspects of each of the cases brought by Microsoft are described and analyzed and the complex questions surrounding a botnet takedown are identified. Discussion of the details of the lawsuits are important, because over a relatively short period of time, government and private sector roles have evolved considerably in the search for a methodology to deal effectively with botnets. Theoretical and international questions surrounding the sustainability and policy ramifications of private sector leadership in cybersecurity are examined, and questions for future research are identified.
Controlling the conflict-of-interest in management buyouts
Easterwood, John C.; Singer, Ronald F.; Seth, Anju; Lang, Darla F. (MIT Press, 1994-08)
A controversial aspect of the management buyouts that were popular throughout the 1980s is the potential for a conflict of interest to arise when a manager bids to acquire the firm he manages. This study examines 184 management buyouts and reports three findings. First, returns to pre-buyout shareholders are greater when managers must bid against outside acquirers. Second, bid revisions in the face of competition exceed revisions due to shareholder litigation and negotiations with boards. Third, the incidence of competition is negatively related to the pre-buyout share holdings of managers.
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.
‘Déjà vol’: Predictive regressions for aggregate stock market volatility using macroeconomic variables
Paye, Bradley S. (2012-12)
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.
Dissecting the Equity Premium
Beason, Tyler; Schreindorfer, David (University of Chicago Press, 2022-08-01)
We use option prices and realized returns to decompose risk premia into different parts of the return state space. In the data, 8/10 of the average equity premium is attributable to monthly returns below -10%, but returns below -30% matter very little. In contrast, prominent asset pricing models based on habits, long-run risks, rare disasters, undiversifiable idiosyncratic risk, and constrained intermediaries attribute the premium predominantly to returns above -10% or to the extreme left tail. We show that the discrepancy arises from an unrealistically small price of risk for stock market tail events in the models.
Does Firm Life Cycle Stage Affect Investor Perceptions? Evidence from Earnings Announcement Reactions
Fodor, Andy; Bergsma Lovelace, Kelley; Singal, Vijay; Tayal, Jitendra (2021-08-06)
This paper argues that firms in certain life stages may be more subjectively valued by individual investors, leading to an overoptimistic bias in stock prices that is subsequently corrected upon the release of earnings news. Using a cash flow-based life stage classification, introduction and decline stage companies exhibit three-day cumulative abnormal returns (CARs) around earnings announcements that are at least 112 bps lower than firms in growth, maturity, and shake-out stages. Specifically, introduction and decline stage stocks exhibit less positive reactions to positive earnings surprises and more negative reactions to negative earnings surprises relative to companies in other life stages. Lottery stocks’ excess returns around earnings announcements (Liu, Wang, Yu, and Zhao 2020) also vary based on firm life stage. Our findings suggest that individual investors’ overoptimistic expectations for introduction and decline stage stocks are met with disappointment when value-relevant earnings news is released. This study demonstrates that firm life stage has real implications for stock price reactions to earnings announcements in financial markets.
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.
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.
Foreign currency - Denominated debt: An empirical examination
Kedia, Simi; Mozumdar, Abon (University of Chicago Press, 2003-10)
We examine the determinants of debt issuance in 10 major currencies by large U. S. firms. Using the fraction of foreign subsidiaries and tests exploiting the disaggregated nature of our data, we find strong evidence that firms issue foreign currency debt to hedge their exposure both at the aggregate and the individual currency levels. We also find some evidence that firms choose currencies in which information asymmetry between domestic and foreign investors is low. We find no evidence that tax arbitrage, liquidity of underlying debt markets, or legal regimes influence the decision to issue debt in foreign currency.
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.
Indexing and Stock Price Efficiency
Qin, Nan; Singal, Vijay (Wiley, 2015-07-28)
Indexing has experienced substantial growth over the last two decades because it is an effective way of holding a diversified portfolio while minimizing trading costs and taxes. In this article, we focus on one negative externality of indexing: the effect on the efficiency of stock prices. Based on a sample of large and liquid US stocks, we find that greater indexing leads to less efficient stock prices, as indicated by stronger post‐earnings‐announcement drift and greater deviations of stock prices from the random walk. We conjecture that reduced incentives for information acquisition and arbitrage induced by indexing and passive trading are probably the main causes for degradation in price efficiency.
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.
Investor Attention and Insider Trading
Mansi, Sattar; Peng, Lin; Qi, Jianping; Shi, Han (2025)
We identify a new mechanism of opportunistic insider trading linked to attention-driven mispricing. Insiders are more likely to sell their company's stock during periods of heightened retail attention and more inclined to buy when attention diminishes. The results are particularly pronounced for lottery-type stocks and for firms with substantial retail ownership. We demonstrate that our findings—which relate to indicators of mispricing, retail order imbalances, and Robinhood herding episodes—extend to seasoned equity issuances and cannot be solely explained by firm fundamentals. Attention-based insider trading is less likely to result in SEC enforcement actions and persists across different regulatory regimes.
Investor base, cost of capital, and new listings on the NYSE
Kadlec, Gregory B.; McConnell, John J. (Wiley, 2023-04)
In this article, we report the results of our recent study of 273 companies that during the 1980s decided to switch the trading locale of their shares from the over-the-counter (OTC) or NASDAQ market to the NYSE. We found that share prices increased by about 6%, on average, at the time the stocks became listed on the NYSE, and that the investor base of these firms increased by almost 20%. We also found that the average stock experienced a reduction in bid/ask spread of about 5% after listing. In an analysis of the relation among share prices, investor base, and bid/ask spread, we found that the stock price increase was significantly correlated with both the percentage increase in investor base and the reduction in bid/ask spread.
Is short-term debt a substitute for or complementary to good governance?
Anginer, Deniz; Demirguc-Kunt, Asli; Simsir, Serif Aziz; Tepe, Mete (Elsevier, 2022-03)
Short-term debt can reduce potential agency conflicts between managers and shareholders by exposing managers to more frequent monitoring by the credit market. Using an international dataset, we examine whether internal monitoring can substitute for external monitoring through the use of short-term debt. We find that the relationship between debt maturity and governance depends on the institutional environment in a given country. In common-law countries and in countries with stronger investor protection rights, governance and short-term debt act as substitutes. The extent of creditor rights, state-level governance quality, cultural characteristics, and economic development levels of countries also play a role in explaining the relationship between governance and debt maturity.
Is time-series-based predictability evident in real time?
Cooper, Michael; Gulen, Huseyin (University of Chicago Press, 2006-05)
We show that out-of-sample tests used in the timeseries predictability literature may suffer from test size problems related to the common practice of exogenous specification of critical parameters, such as the choice of predictive variables, traded assets, and in-sample estimation periods. We perform specification searches across these parameters and find that rejections of the null hypothesis of no predictability are very sensitive to minor variations in parameter specification. We perform simulations to determine if the observed predictability in the data is real. The simulations suggest that much of the literature's out-of-sample evidence of time-series-based predictability is consistent with data snooping.
Privacy and Security in the Implementation of Health Information Technology (Electronic Health Records): U.S. and EU Compared
Hiller, Janine S.; McMullen, Matthew S.; Chumney, Wade M.; Baumer, David L. (Boston University School of Law, 2011)
The importance of the adoption of Electronic Health Records (EHRs) and the associated cost savings cannot be ignored as an element in the changing delivery of health care. However, the potential cost savings predicted in the use of EHR are accompanied by potential risks, either technical or legal, to privacy and security. The U.S. legal framework for healthcare privacy is a combination of constitutional, statutory, and regulatory law at the federal and state levels. In contrast, it is generally believed that EU protection of privacy, including personally identifiable medical information, is more comprehensive than that of U.S. privacy laws. Direct comparisons of U.S. and EU medical privacy laws can be made with reference to the five Fair Information Practices Principles (FIPs) adopted by the Federal Trade Commission and other international bodies. The analysis reveals that while the federal response to the privacy of health records in the U.S. seems to be a gain over conflicting state law, in contrast to EU law, U.S. patients currently have little choice in the electronic recording of sensitive medical information if they want to be treated, and minimal control over the sharing of that information. A combination of technical and legal improvements in EHRs could make the loss of privacy associated with EHRs de minimis. The EU has come closer to this position, encouraging the adoption of EHRs and confirming the application of privacy protections at the same time. It can be argued that the EU is proactive in its approach; whereas because of a different viewpoint toward an individual’s right to privacy, the U.S. system lacks a strong framework for healthcare privacy, which will affect the implementation of EHRs. If the U.S. is going to implement EHRs effectively, technical and policy aspects of privacy must be central to the discussion.
Proxy favors: Confidential proxy voting with institutional dual holders
Becker, William J.; Mansi, Sattar; Nazari, Maryam; Wald, John K. (Wiley, 2023-09-08)
Research Question/Issue: For firms with institutional dual holders, is proxy voting affected by whether the vote is confidential? Does confidential voting affect firms' cost of debt?. Research Findings/Insights: Consistent with social exchange theory and reciprocity norms, we find that, in the absence of confidential voting, firms with institutional dual holders gain more favorable votes for proposals and, in particular, for management-sponsored compensation proposals. Further, these firms pay a higher cost of borrowing. This reciprocity relation does not exist if the firm has confidential voting in place. Theoretical/Academic Implications: The results are consistent with reciprocity norms creating a psychological obligation to repay valuable favors between firm managers and institutional dual holders when proxy votes are not confidential. Practitioner/Policy Implications: The findings support the popular position that confidential voting is in the best interests of shareholders and rigorous external corporate governance.

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