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Long-term economic consequences of hedge fund activist interventions


The long-term benefits of interventions by activist hedge funds’ for their shareholders are unproven, according to new insights from Ed deHaan (Foster School of Business), David Larcker (Stanford Graduate School of Business), and Charles McClure’s (Chicago Booth School of Business). The author’s research examines the long-term economic consequences associated with hedge funds by using a methodology that allowed investigators to better capture the effects on shareholder returns, by using value-weighted long-term returns. The findings demonstrate that the long-term returns by pre and post-activism produce a relatively minor difference, to none at all. The impact on operating performance was also assessed, and the authors found abnormal trends in pre-activism performance were determined by prior results. They also found no evidence of abnormal post-activism performance improvements, based on using a matched sample.

The study concludes that there is no evidence that shareholders would gain long-term benefits by using activist hedge fund interventions, whilst also acknowledging that there is no evidence of this being detrimental to its shareholders.


Learn more in “Long-term economic consequences of hedge fund activist interventions” by Ed deHaan, David Larcker and Charles McClure (2019), Review of Accounting Studies (June 2019, Volume 24, Issue 2, pp 536–569) at Springer.

  • An investigation of auditors’ judgments when companies release earnings before audit completion

    Releasing annual earnings prior to the completion of auditing, is common practice in most U.S. public companies, according to the latest insights into financial reporting quality (FRQ), from Lori Shefchik Bhaskar (Indiana University), Patrick E. Hopkins (Indiana University), and Joseph H. Schroeder (Indiana University). The research conducted a controlled experiment with audit professionals and senior managers, to investigate how this impacted the auditing industry. The study also examines auditor judgement and whether audit committees have been successful in improving their judgement.

    Companies are motivated to release earnings prior to audit completion and coerce auditors to conform with these goals, to avoid having to release a post-announcement audit adjustment.

    In the few instances where audit committees had formed strong working relationships with auditors and they were proactively involved in accounting issues, audit committees were able to prevent auditors from making improper judgements completely.    

    Evidence also provides insights into the unintended consequences of early releases of earnings and how audit committees can best be used to prevent client pressures from affecting auditor’s judgements. 


    Learn more in “An Investigation of Auditors’ Judgments When Companies Release Earnings Before Audit Completion” by Lori Shefchik Bhaskar Patrick E. Hopkins Joseph H. Schroeder, The Journal of Accounting Research (Volume57, Issue2, May 2019, Pages 355-390) at Wiley Online Library.

  • Strategic reactions in corporate tax planning

    Accounting firms often react to changes in tax planning made by their competitors, by adjusting their own tax planning, to match other firms. These are the new insights from Christopher S. Armstrong (The Wharton School - University of Pennsylvania), Stephen Glaeser (UNC Kenan-Flagler) and John D. Kepler (The Wharton School - University of Pennsylvania). The authors conducted studies in two distinct settings, where an external increase and decrease were made in tax planning, by the firm’s competitor. The results demonstrate that this reaction commonly stems from concerns about appearing too tax aggressive, compared to their competitors. Learnings from competitor’s tax planning, was a partial influence on these reactions however there was no evidence demonstrating “follow the leader” dynamics.

    Indications show that this practice may also impact policies aimed at restricting tax planning for specific firms, as this could cause a “strategic reaction” in other firms, copying their tax planning. Consequently, targeted policies could inadvertently have a broader influence, as accounting firms strategically react to their competitors.

    Learn more in “Strategic Reactions in Corporate Tax Planning” by Armstrong, C. S., Glaeser, S., & Kepler, J. D. (2019). Strategic Reactions in Corporate Tax Planning. Journal of Accounting and Economics (In press, corrected proof, Available online 9 March 2019) at ScienceDirect.

  • The team at the top matters!

    Financial reporting quality is impacted by characteristics of a firm’s management team, according to new insights from Dana Zhang (Susquehanna University). The study examines accounting restatements as well as accrual and real earnings management to assess the characteristics of management teams and their influence. Results found that firm’s with top management teams with similar backgrounds, such as belonging to the same demographic, education levels as well as longer periods of time spent working together, resulted in an increased likelihood that financial statements would be misreported. Conversely, however, increased homogeneity in top management teams was found to have a positive impact related to restatements, which were less likely to occur when the management team’s composition had a lower quotient of audit committee members with long-tenure and independent executives.

    Read more about “Top Management Team Characteristics and Financial Reporting Quality” by Dana Zhang, The Accounting Review (September 2019, Vol. 94, No. 5, pp. 349-375.) at aaapubs.

  • Does past performance matter? Investor reaction to disclosure of past performance and future plans

    Current-period performance at firms influences investors’ beliefs on whether it is accurate for managers to apply an optimistic strategy for the future, according to insights from Scott A. Emett (Arizona State University). The author’s research conducted three experiments, producing new evidence with these findings and also examined how this impacted investors' evaluation of whether to focus on the challenges (possible negative affects) or opportunities (possible positive affects) in future orientated disclosures. In instances where firms are performing well, investors believe that investments should be focused on challenges rather than opportunities. While managers of firms that are underperforming, can rectify this by being optimistic and investing more heavily into these opportunities rather than the challenges in their future oriented disclosures.


    Read full paper “Investor Reaction to Disclosure of Past Performance and Future Plans” by Scott A. Emett, The Accounting Review (September 2019, Vol. 94, No. 5, pp. 165-188) at aaapubs.

  • Financial reporting quality, investment horizon, and institutional investor trading strategies

    Poor financial reporting quality (FRQ) influences the holding costs of trading strategies, according to new insights by Brian J. Bushee (University of Pennsylvania), Theodore H. Goodman (Purdue University) and Shyam V. Sunder (Eller College of Management). These authors examined a sample of firms listed in the United States, which demonstrated that poor FRQ also impacted short-term investors, who will move their portfolios when poor FRQ is identified. Instead, they move their portfolios to stocks with a proven history of success, where returns are assured and produced more rapidly.

    The findings also show that misevaluations may persist when arbitrageurs consider poor financial quality will cause high holding costs, even where less transparent financial disclosures were understood by arbitrageurs.


    Learn more in “Financial Reporting Quality, Investment Horizon, and Institutional Investor Trading Strategies” by Brian J. Bushee, Theodore H. Goodman, and Shyam V. Sunder, The Accounting Review (May 2019, Vol. 94, No. 3, pp. 87-112.) at aaapubs.

  • How do venture capitalists make decisions?

    When selecting investments, the organization’s management team is the key determinant for a venture capitalist’s (VCs) decision, according to new insights by Paul A. Gompers (Harvard Business School), Will Gornall (Sauder School of Business), Steven N. Kaplan (Chicago Booth), and Ilya A. Strebulaev (Stanford University). The authors discovered this through a comprehensive survey they conducted across 885 well-established VCs from 681 firms. They also evaluate how VCs’ conduct pre-investment screening, in structuring investments, and in post-investment monitoring and advising, based on Kaplan and Strömberg’s (2001) framework.

    The most important factor in VCs investment decisions is the management team, more than other areas of the business, such as product, service or technology. However, the stage of the company and industry showed deviations to this result.

    When it came down to the ultimate success or failure of their investment, VC’s believe this outcome is determined by the organization’s team not the business itself.  Deal selection was another important factor for VCs, more than deal sourcing and post-investment value-added.

    The survey also revealed uncommon practices by VCs, where many don’t use the techniques taught in business schools, such as net present value or discounted cash flow. Instead their valuation is based on multiples of invested capital and internal rates of return.


    Read more about this in “How do venture capitalists make decisions?” by Paul A. Gompers, Will Gornall, Steven N. Kaplan and Ilya A. Strebulaev (2019), Journal of Financial Economics (Available online 25 June 2019) at ScienceDirect.

  • Are institutional investors with multiple blockholdings effective monitors?

    Multiple blockholdings provide information advantages and governance experience, thereby providing institutions with the mechanisms to perform effective monitoring, according to new insights from Jun-Koo Kang (Nanyang Business School), Juan Luo (Business School, University of Adelaide) and Hyun Seung Na (Korea University Business School). The authors examined institutional investors with multiple large holdings to determine whether these firms become too busy to monitor portfolios effectively, when they hold too many of them. They also examined how this impacts their governance incentives and abilities.

    The study demonstrates that the number of blocks owned by institutional investors, has a beneficial correlation to forced CEO turnover-performance sensitivity and that forced CEO turnover announcements were linked with abnormal returns. Multiple blockholdings provided these institutions with greater results compared to other institutions in the same industry. Particularly where firms are experienced in shareholder activism, or investments in portfolio firms are long-term. The findings determine multiple blockholdings provide distinct information advantages and governance experience which are considered important for effective monitoring by institutional investors.


    Learn more in “Are Institutional Investors with Multiple Blockholdings Effective Monitors?” Kang Jun-Koo, Luo Juan and Na Hyun Seung, Journal of Financial Economics (Volume 128, Issue 3, June 2018, Pages 576-602 ) at ScienceDirect .

  • Your management team matters!

    Paul A. Gompers (Harvard Business School), Will Gornall (Sauder School of Business), Steven N. Kaplan (Chicago Booth), and Ilya A. Strebulaev (Stanford University) aim to understand better how venture capitalists make decisions. After conducting a survey with 885 institutional venture capitalists (VCs) at 681 firms, they provide detailed information on VCs’ practices in pre-investment screening, in structuring investments and in investment monitoring as well as advising. VCs put greater value on the management team than on business-related points such as product or technology and they attribute investment success more to the team than to the business. Also, the VCs rate deal selection appears to be more important than deal sourcing and post-investment value-added. Surprisingly, VCs do not seem to use the net present value or discounted cash flow techniques taught at business schools and recommended by academics in finance, but rather base their valuation on multiples of invested capital and internal rates of return.


    Read full paper “How do venture capitalists make decisions?” by Paul A. Gompers, Will Gornall, Steven N. Kaplan and Ilya A. Strebulaev (2019), Journal of Financial Economics (Available online 25 June 2019) at ScienceDirect.

  • Does the identity of engagement partners matter?

    W. Robert Knechel (University of Florida), Ann Vanstraelen (Maastricht University), and Mikko Zerni (Jyväskylä University School of Business and Economics) examine the persistence and economic consequences of variations in reporting style across audit partners in individual engagements. The results show that both aggressive and conservative audit reporting persist over time and extend to other clients of the same partner. This result holds for both, private and publicly listed companies. Their results also show that the market penalizes client firms susceptible to aggressive audit partner reporting decisions. In particular, the authors find that the proxies for aggressive audit reporting are related to higher interest rates, worse credit ratings and less favorable forecasts of insolvency for private client companies, and a lower Tobin's Q for publicly listed client companies. Collectively, these results imply that audit partner aggressive or conservative reporting is a systematic audit partner attribute and not randomly distributed across engagements.


    Read the full paper “Does the Identity of Engagement Partners Matter? An Analysis of Audit Partner Reporting Decisions” by W. Robert Knechel, Ann Vanstraelen, and Mikko Zerni in Contemporary Accounting Research at Wiley Online Library.

  • Are early stage investors biased against women?

    Wanted: more women as investors!


    According to a recent report by PitchBook, initiatives to counter male bias and to increase female-founded or co-founded companies are starting to show their success. Research by Michael Ewens (California Institute of Technology) and Richard R. Townsend (Rady School of Management) supports these initiatives. They investigated whether male investors have a bias against women when they seek to make investments in startups. The scholars used a unique, proprietary dataset from AngelList that shows interesting details on gender in fundraising startups. The authors’ key finding is that female entrepreneurs are less successful than their male competitors in raising investments from male financiers. Gender differences, or quality of the startups involved, do not seem to drive results. To boost more female entrepreneurship, the results suggest increasing the number of female investors to overcome the observed bias against female founders. This will prove difficult, however, because early stage investors are usually drawn from a pool of former entrepreneurs that – at least for now – are predominantly male.


    Read the full paper “Are Early Stage Investors Biased Against Women?” by Michael Ewens and Richard R. Townsend (2019) in the Journal of Financial Economics at ScienceDirect.

  • Investor relations and information assimilation

    Do investor relations teams contribute to positive market effects?


    Kimball L. Chapman (Washington University in St. Louis), Gregory S. Miller (University of Michigan) and Hal D. White (Penn State University) ask whether investor relations (IR) teams provide value by facilitating the assimilation of firm information by market participants. Using a sample of U.S. firms, the scholars find that companies with IR officers have a lower stock price volatility, a lower analyst forecast dispersion, a higher analyst forecast accuracy, as well as a swifter price discovery. The longer the IR officers are with the firm, the stronger are the above-described results. Overall, their findings suggest that in-house IR teams, especially the more experienced IR officers, help to facilitate information assimilation, which holds positive market effects.


    Read full paper “Investor Relations and Information Assimilation” by Kimball L. Chapman, Gregory S. Miller and Hal D. White, The Accounting Review (March 2019, Vol. 94, No. 2, pp. 105-131) at aaapubs.

  • Is your investment bank having conflicts of interest?

    Oya Altınkılıç (Robert H. Smith College of Business, University of Maryland), Vadim S. Balashov (Rutgers School of Business) and Robert S. Hansen (A.B. Freeman School of Business) investigate investment banks’ influence concerning the agreement between their research analysts’ behavior and their clients’ interests in the post-reform era (reforms incl. Reg. FD, 2000 and SOX, 2002) in the United States. Banks with meaningful monitoring seem to discipline their analysts with worse career outcomes for writing biased reports, for issuing shirking reports and for being involved in earnings guidance games. The higher the reputation of a bank the more monitoring is provided to discipline their analysts. The research suggests that it is important for banks to align analysts’ behavior with their clients’ interests.


    Read full paper “Investment bank monitoring and bonding of security analysts’ research” by Oya Altınkılıç, Vadim S. Balashov and Robert S. Hansen, Journal of Accounting and Economics (Volume 67, Issue 1, February 2019, Pages 98-119) at ScienceDirect .


  • Let your portfolio companies exchange themselves!

    Let your portfolio companies exchange themselves!


    Juanita González-Uribe (London School of Economics) studies cross-company exchanges that can help to boost profits from inventions between early-stage companies and venture capital (VC) investors. Her study focuses on portfolio companies’ exchanges of innovation in the United States over a period of 1976-2008. The exchanges in her study are approximated by cross-company patent citations, patent re-assignments, exchanges of workers, M&A as well as strategic alliances. Using an event-time approach, she finds that after the firms join the VC’s portfolio for the first time, exchanges between them and other companies in the VC’s portfolio increase by about 60%. She suggests that new joiners particularly drive this increase. Apart from the main finding, her results also suggest that portfolio exchanges can be used for the portfolio selection conducted by VCs. Overall, results align with the idea that VC’s portfolios can offer complementary resources to encourage and help the portfolio firms.


    Read full paper “Exchanges of innovation resources inside venture capital portfolios” by Juanita González-Uribe, Journal of Financial Economics (Available online 25 May 2019) at ScienceDirect .

  • Too busy or well-connected? Evidence from a shock to multiple directorships

    Board members – too busy or not busy enough?

    In corporate boardrooms, industry expertise is in high demand. So much so that the busiest directors sit on multiple boards. This is a blessing and a curse. One the one hand, multiple directorships contribute to information flow and resource sharing – positive factors in firm performance. On the other, busy directors – the most prized advisors – have little time to give to their multiple board duties. Which matters more?


    Researchers Anna Bergman Brown (University of Connecticut), Jing Dai (Southwestern University of Finance and Economics), and Emanuel Zur (University of Maryland) looked at “shocked directors” – those who lose board seats when a board is terminated by M&A – to test board connectivity and director busyness on board performance. Boards with shocked directors enjoyed improved operating performance, monitoring, and strategic advising. The reason?  The reduction in work load due to the loss of the terminated board meant those shocked directors could devote more time, energy, and expertise to their remaining board appointments.


    Read the full paper “Too Busy or Well-Connected? Evidence from a Shock to Multiple Directorships” by Anna Bergman Brown, Jing Dai, and Emanuel Zur in The Accounting Review (Vol. 94, No. 2, March 2019 pp. 83–104) at the American Accounting Association.

  • Do women managers keep firms out of trouble? Evidence from corporate litigation and policies

    Tired of lawsuits? Hire more C-suite women.


    The development of new product and service lines is not without risk, especially the risk of litigation. And most major companies must commit considerable revenue each year defending themselves from litigation – whether from customers, competitors, employees, or investors. But must this always be the case?


    In examining the archival data of corporate litigation and policies, researchers Binay K. Adhikari (The University of Texas Rio Grande Valley), Anup Agrawal (Culverhouse College of Commerce), and James Malm (College of Charleston, Charleston) found that where women have more power in the executive suite, companies faced fewer operations-related lawsuits. The evidence points to multiple causes for this gender-related disparity.  For diverse reasons, female executives have been shown to be more risk-averse than their male peers, preferring policies that provoke fewer operations lawsuits. The researchers also noted that female leaders choose companies that have low risk-taking cultures.


    Read the full paper “Do Women Managers Keep Firms out of Trouble? Evidence from Corporate Litigation and Policies” by Binay K. Adhikari, Anup Agrawal, and James Malm in the Journal of Accounting and Economics (Volume 67, Issue 1, February 2019, Pages 202-225) at ScienceDirect.

  • Auditor–client compatibility and audit firm selection

    How do audit firms select their clients?


    Stephen V. Brown and W. Robert Knechel (University of Florida) examine this question using a unique text‐based measure of similarity of clients´ financial disclosures. They find that clients with the lowest similarity scores are significantly more likely (9.4%–10.6%) to switch auditors, and will change to an audit firm to which clients´ they are more similar. Regarding the effect on audit quality, they find that discretionary accruals are lower when similarity is higher. Accounting restatements are more likely when text disclosures that are unaudited—business description, and management discussion and analysis—are more similar. However, there is no such similarity effect for the audited footnotes. The authors also find that firms that are more similar are less likely to receive a going concern opinion, but this opinion reporting decision is more accurate. It is unclear if this reflects higher or lower audit quality since firms that are candidates for a going concern opinion are intrinsically different from the average firm in an auditor's portfolio due to their financial distress. One implication of these results is that auditors might have greater involvement in the quality of the text disclosures that are currently not audited.


    Read full paper “Auditor–Client Compatibility and Audit Firm Selection” by Stephen V. Brown and W. Robert Knechel, Journal of Accounting Research (Volume 54, Issue 3, June 2016, Pages 725-775) at Wiley Online Library.

  • Improving experienced auditors’ detection of deception in CEO narratives

    How good are deception detection capabilities of experienced auditors?


    Jessen L. Hobson (University of Illinois at Urbana-Champaign), William J. Mayew (Duke University), Mark E. Peecher (University of Illinois at Urbana-Champaign), and Mohan Venkatachalam (Duke University) experimentally study this question, using CEO narratives from earnings conference calls as case materials. They randomly assign narratives of fraud and non-fraud companies to auditors as well as the presence versus absence of an instruction explaining that cognitive dissonance in speech is helpful for detecting deception. The authors find that auditors’ deception judgments are less accurate for fraud companies than for non-fraud companies, unless they receive this instruction. They also find that instructed auditors more extensively describe red flags for fraud companies and more accurately identify specific sentences in narratives that pertain to underlying frauds. These findings indicate that instructing experienced auditors to be alert for cognitive dissonance in CEO narratives can activate deception detection capabilities.


    Read full paper “Improving Experienced Auditors’ Detection of Deception in CEO Narratives” by Jessen L. Hobson, William J. Mayew, Mark E. Peecher, and Mohan Venkatachalam, Journal of Accounting Research (Volume 55, Issue 5, December 2017, Pages 1137-1166) at Wiley Online Library.

  • The life cycle of corporate venture capital

    Why do more and more large public firms consider and establish corporate venture capital (CVC) divisions to make equity investments in early-stage entrepreneurial ventures?


    In his recent work, Song Ma from Yale School of Management investigates the full lifecycle of corporate venture capital by asking why industrial firms start and terminate their CVC divisions and how they invest in startups. He finds that CVC entry concentrates in firms that experience deteriorations of internal innovation. At the investment stage, CVCs select startups with a similar technological focus but which have a non-overlapping knowledge base, and then integrate technologies generated from these ventures that create strategic value. CVCs are terminated when parent firms’ innovation recovers.


    Read full paper “The Life Cycle of Corporate Venture Capital” by Song Ma, Review of Financial Studies (hhz042) at Oxford Academic.

  • Squaring venture capital valuations with reality

    Are unicorns overvalued?


    Both in our research and in teaching we do not only investigate established public firms, but also try to draw parallels and show differences to private early-stage venture capital-backed firms. Our students are very excited about the results from recent research on those companies. One example receiving a lot of attention in the venture capital industry is the work by Ilya Strebulaev (Stanford GSB) and Will Gornall (UBC Sauder). The authors look at financial terms from legal filings of 135 U.S. unicorns – private companies with reported valuations above $1 billion – and find reported unicorn post-money valuations average of 48% above their fair value, with 13 being more than 100% above. The reason is that reported post-money valuations assume all shares are as valuable as the most recently issued preferred shares. However, most unicorns gave recent investors major protections such as IPO return guarantees, vetoes over down-IPOs, or seniority to all other investors. Common shares lack all such protections and are 56% overvalued. After adjusting these valuation-inflating terms, almost one-half (65 out of 135) of unicorns lose their unicorn status.


    Read abstract “Squaring Venture Capital Valuations with Reality” by Will Gornall and Ilya A Strebulaev, Journal of Financial Economics (JFE), forthcoming, at SSRN.

  • Firm performance, reporting goals, and language choices in narrative disclosures

    Do reporting goals and firm performance influence language choices?


    Research by H. Scott Asay (University of Iowa), Robert Libby and Kristina Rennekamp (both Cornell University) showed significant correlation between these factors. In the primary experiment with experienced managers, participants provide reports that are significantly less readable when firm performance is bad than when performance is good, particularly when participants have a strong self-enhancement motive in the form of a reporting goal to portray the firm as favorably as possible. In the supplemental experiment, authors provide some evidence that participants provide less readable bad news reports when they have a reporting goal to portray the firm in the least unfavorable light possible, rather than in as favorable a light as possible. In both experiments, the results do not appear to be driven by intentional obfuscation. In order to frame poor performance in a positive light, managers focus more on the future, provide causal explanations for poor performance, and use more passive voice and fewer personal pronouns.


    Read the full paper Firm performance, reporting goals, and language choices in narrative disclosures”  (2018) by H. Scott Asay, Robert Libby and Kristina Rennekamp, Journal of Accounting and Economics (Volume 65, Issues 2–3, April–May 2018, Pages 380-398) at ScienceDirect.

  • Corporate jets and private meetings with investors

    Can private interactions between managers and investors be measured?


    Brian Bushee (The Wharton School), Joseph Gerakos (The Tuck School of Business at Dartmouth) and Lian Fen Lee (Boston College Carroll School of Management) use an exciting data set, namely corporate jet flight patterns, to identify private meetings with investors. Of course, private interactions between managers and investors take place through a number of channels, for instance phone calls and emails. However, they are not observable and, thus, cannot be measured. Using approximately 400,000 flights, the authors overcome the unobservability challenge. They define a “roadshow” as a three-day window that include flights to money centers (e.g. Boston, Chicago, New York, and San Francisco) and to non-money centers in which the firm has high institutional ownership, and find that these roadshows exhibit greater abnormal stock reactions, analyst forecast activity, and absolute changes in local institutional ownership than other flight activity. They also find positive trading gains in firms with more complex information and infrequent private meetings, suggesting that roadshows provide participating investors an advantage over non-participating investors.


    Read “Corporate jets and private meetings with investors” (2018) by Brian J.Bushee, Joseph Gerakos and Lian Fen Lee,  Journal of Accounting and Economics  (Volume 65, Issues 2–3, April–May 2018, Pages 358-379)  at ScienceDirect.

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