1. Measuring the Quality of Mergers and Acquisitions (with Shenje Hshieh & Feng Zhang). Management Science, forthcoming. Abstract

   We develop a measure of merger and acquisition (M&A) quality using accounting theory. This measure, implied return-on-equity improvement (IRI), quantifies the minimum improvement in the target’s post-acquisition return on equity (ROE) the acquirer must attain to break even on the acquisition price. Employing a large sample of M&As from 1980 to 2018, we find that a high IRI is, on average, less attainable ex post and predicts worse acquirer financial performance. The acquirer’s ROE growth over the first three years after the M&A is 11 percentage points lower for high-IRI M&As compared to low-IRI M&As. Worse high-IRI acquirer performance is observable through higher operating costs, tighter financial constraints, lower investments, and larger and more frequent goodwill impairments. We also find that IRI increases with acquiring CEOs’ overconfidence, incentive misalignment, and difficulty in estimating synergies; IRI decreases with acquirers’ financial discipline and due diligence effort. As such, overestimating synergies and managerial incentives that drive overpayment are potential mechanisms underlying IRI’s negative association with acquirers’ post-M&A performance.

2. Growth Matters: Disclosure and Risk Premium (with Rachel Hayes & Marlene Plumlee). The Accounting Review, 2022, 97 (4), 259–286. Abstract

   Theoretical work generally predicts a negative association between disclosure and risk premium, where additional disclosure reduces estimation risk or information asymmetry. However, empirical studies frequently report mixed results. Recent theoretical studies suggest that the association between disclosure and risk premium is not necessarily always negative, and could be positive (or less negative). For example, Dutta and Nezlobin (2017) show that disclosure can be associated with higher risk premium when conditioned on firms’ growth rates. Similarly, Johnstone (2016) shows that higher signal quality can lead to higher risk premium. Motivated by these studies, we re-examine the association between disclosure and risk premium, conditional on growth. Using various proxies for risk premium, disclosure, and growth, we provide robust evidence that while the unconditional association between disclosure and risk premium is ambiguous, the conditional association is negative for lower growth firms but is less negative (or positive) for higher growth firms.

3. The Role of Disclosure and Information Intermediaries in an Unregulated Capital Market: Evidence from Initial Coin Offerings (with Thomas Bourveau, Emmanuel De George & Daniele Macciocchi). Journal of Accounting Research, 2022, 60 (1), 129–167. Abstract

   Using an international sample of 2,113 initial coin offerings (ICOs), we explore the role of disclosure and information intermediaries in the unregulated crypto-tokens market. First, we document substantial cross-sectional variation in the voluntary disclosure practices of ventures seeking to raise capital through ICOs, such as the extent of information released in a prospectus-type document called a white paper; releasing the technical source code; and communicating through social media platforms. Second, we find that, even with limited disclosure verifiability, ventures with higher levels of disclosure have a greater ability to raise capital. Finally, we find that this association is stronger in the presence of mechanisms that lend credibility to ventures’ voluntary disclosures, such as internal governance practices or external scrutiny from information intermediaries. Overall, our results suggest that voluntary disclosure and information intermediaries facilitate the functioning of ICOs as an alternative capital market.

4. Show Me the Money! Dividend Policy in Countries with Weak Institutions (with Zachary Kaplan). Journal of Accounting Research, 2021, 59 (2), 613–655. Abstract

   We hypothesize that, in weak-institution countries, firms adjust the ‘timing’ of dividend payments by committing to distribute a percentage of current earnings as dividends, revealing the extent of firm-level agency conflicts to future investors and facilitating the raising of external capital. Consistent with this hypothesis, we find that, on average, firms in weak-institution countries have a higher speed of adjustment (SOA) to their target payout ratio, pay dividends earlier in the lifecycle, and are more likely to disclose a dividend policy committing to pay a minimum percentage of earnings. Within-country tests show that, in weak-institution countries, the firms with the highest SOA dividend policies have fewer agency problems and an increased ability to raise external capital. Finally, returns tests around earnings announcements show that high-SOA dividend policies are associated with larger market reactions to earnings in weak-institution countries. Collectively, our findings suggest that dividend policy helps to alleviate agency conflicts in weak institution countries between firms and (future) investors.

5. Management Forecasts of Volatility (with Xiaoxia Peng), Review of Accounting Studies, 2021, 26 (2), 620–655. Abstract

   We examine the predictive information content of the management forecasts of stock return volatility (i.e., expected volatility) that are disclosed in annual reports. We find that expected volatility predicts near-term and longer-term stock return volatility and earnings volatility incremental to implied volatility, historical volatility, firm characteristics, and alternative measures of uncertainty. We also find that expected volatility reflects managers’ private information about their firms’ future investment activities, such as mergers and acquisitions and R&D intensity. Finally, we find that the predictive power of expected volatility is reduced when managers have stronger incentives to manage earnings. Overall, we provide novel evidence that management forecasts of volatility contain private information about future uncertainty that can be useful for forecasting volatility.

6. Earnings Beta, Review of Accounting Studies, 2021, 26 (1), 81–122. Abstract

   The literature on ‘cash flow’ or ‘earnings’ beta is theoretically well-motivated in its use of fundamentals, instead of returns, to measure systematic risk. However, empirical measures of earnings beta based on either log-linearizing the return equation or log-linearizing the clean-surplus accounting identity are often difficult to construct. I construct simple earnings betas based on various measures of realized and expected earnings, and find that an earnings beta based on price-scaled expectations shocks performs consistently well in explaining the cross-section of returns over 1981–2017. I also examine the relation between different measures of beta and several firm characteristics that are either theoretically connected to systematic risk or are empirically associated with returns, and find evidence in support of the construct validity of an earnings beta based on price-scaled expectations shocks. Overall, the findings suggest that this easy-to-construct earnings beta can be suitable for future researchers requiring a measure of systematic risk.

7. Do Common Inherited Beliefs and Values Influence CEO Pay? (with Ahmed Tahoun & Irem Tuna), Journal of Accounting and Economics, 2017, 64 (2–3), 346–367. Abstract

   We use the ethnicity of CEOs across 31 countries as a proxy for their common inherited beliefs and values and find an ethnicity effect in CEO variable pay. We find that the ethnicity effect in variable pay is not driven by the ethnicity effects in corporate policy decisions, and that changes in CEO compensation are significantly larger when CEOs are replaced with a person from a different ethnicity. Our estimated ethnicity effect captures the future time reference and religion of CEOs’ ancestors. Finally, we find an ethnicity effect in performance-firing sensitivities (i.e., the sensitivity to being fired due to poor performance).

8. Government Purchases Reloaded: Informational Insufficiency and Heterogeneity in Fiscal VARs (with Giovanni Ricco), Journal of Monetary Economics, 2017, 90 (October), 13–27. Abstract

   Using a large Bayesian VAR, we approximate the flow of information received by economic agents to investigate the effects of changes to government purchases. We document robust evidence that informational insufficiency in conventional models explains inconsistent results across samples and commonly employed identifications in recursive Structural VARs and Expectational VARs. Furthermore, we report heterogeneous effects of components of government purchases. While aggregate government purchases do not appear to produce strong stimulative effects with output multiplier around 0.7, government investment components have multipliers well above unity. State and local consumption, which captures investment in education and health, elicits a strong response.

1. Are CEOs Rewarded for Luck? Evidence from Corporate Tax Windfalls (with Martina Andreani & Lakshmanan Shivakumar). Abstract

   We take advantage of a 2017 change in tax rules in the U.S. to re-examine whether CEOs are rewarded for luck. We examine the effect of one-off tax gains and losses associated with deferred tax assets and liabilities on CEO compensation around the Tax Cuts and Jobs Act (TCJA) of 2017. Relative to other years, we find that less visible firms compensated their CEOs more for the one-time tax windfall gains during the TCJA-transition period. Further, we find evidence in support of pay asymmetry; CEOs of less visible firms were compensated more for tax windfall gains but were not compensated less for tax windfall losses. The CEO pay associated with the tax windfalls cannot be explained as firms sharing these tax gains with all employees. These results are consistent with rent-extraction by CEOs of less visible firms.

See my SSRN Author Page for a more comprehensive listing.