US-listed Firms Research Articles

Bankruptcy Prediction Based on Stochastic Processes: A New Model Class to Predict Corporate Bankruptcies?

This study proposes a simple theoretical framework that allows for assessing financial distress up to five years in advance. We jointly model financial distress by using two of its key driving factors: declining cash-generating ability and insufficient liquidity reserves. The model is based on stochastic processes and incorporates firm-level and industry-sector developments. A large-scale empirical implementation for US-listed firms over the period of 1980-2010 shows important improvements in the discriminatory accuracy and demonstrates incremental information content beyond state-of-the-art accounting and market-based prediction models. Consequently, this study might provide important ex ante warning signals for investors, regulators and practitioners.

The Determinants of the Value Created by Stock Repurchase Programs

This paper aims to extend the empirical literature on the determinants of the value created by stock repurchase programs by analyzing the characteristics of the repurchase decision-making groups. Based on a sample of 200 US-listed firms from 1998-2004, the paper examines empirically the relationship between value created by stock repurchase programs and board of directors’ characteristics. The analysis depends on panel data analysis to consider unobservable fixed-effects in this relationship. The results provide evidence of a significant relation between board of directors’ characteristics and value created by the stock repurchase programs. The two important determinants are directors’ independence and directors’ outside experience. However, we find that this relationship changed significantly for some measures after the adoption of the 2002 Sarbanes-Oxley Act.

Should We Invest More in Multinational Companies (MNCs) When Domestic Markets Decline?

Investments in domestic multinational firms can provide an indirect route for investors to diversify internationally (Farooqi, Huerta, & Ngo, 2015). Therefore, a priori, one would expect investors to increase their exposure to MNCs when the domestic market is declining, and decrease their exposure to domestic firms. Using a 20 year dataset of all publicly listed US firms spanning 1995 to 2014 we find the opposite. We find that investors favour domestic firms to MNCs in declining markets. We analyse share ownership data and propose that the diverging investment preferences of institutional and retail investors may be driving our results.

Agency costs, executive incentives and corporate financial decisions

This paper investigates the roles of executive incentive structures in creating and mitigating investment-related agency costs. A model is developed which shows that underinvestment and overpayment of dividends are always expected to prevail when managers are offered short-term incentives, while overinvestment and underpayment of dividends are likely to exist when managers are offered long-term incentives. Using a large sample of non-financial US-listed firms over the period 1992–2009, it is found that managers underinvest and overpay dividends when offered vested stocks, but overinvest and underpay dividends when offered option incentives. An increase in these incentives, however, mitigates these problems. The results also suggest that, if properly constructed, long-term incentives might be superior to short-term incentives, and should be used alone in designing the optimal incentive package under certain conditions.

Profit persistence and stock returns

ABSTRACTThis article attempts to assemble further empirical evidence on the relationship between the product and the financial market. Drawing back on work in industrial organization, we analyse the relationship between profit persistence and factor-adjusted stock returns looking at about 2000 listed US firms over the last 34 years. While the relationship between (current, lagged and unexpected) profits/earnings and returns has been extensively analysed before, to our knowledge this is the first study to look at the relationship between stock returns and profit persistence. We interpret profit persistence as a result of market competition and innovation of the firm. It is shown that firm-specific long-run profit persistence after correction for other additional economic fundamentals of the firm has a positive impact on four-factor adjusted returns and a negative impact on their volatility.

The Information Content and Investor Reaction to SEC Disclosures by Foreign Firms

SEC rules only obligate US-listed foreign firms to supply ongoing disclosures via SEC Form 6-K if it is mandated by their home country exchange or laws. Heterogeneity in transparency and reporting requirements across countries yields significant variation in the discretion firms have to publicly supply information. We show that foreign firms from weaker reporting regimes, and those whose shares trade exclusively on a US exchange, experience greater investor interest and larger market reactions around these filings, but these firms provide significantly fewer disclosures. Moreover, firms supplying more 6-Ks exhibit lower residual uncertainty when reporting annual earnings and have lower overall information asymmetry. Our paper highlights that listing in the US does not subject foreign firms to strict regulatory Our paper highlights that listing in the US does not subject foreign firms to strict regulatory disclosure requirements, but evidence on investor information acquisition and trading behavior suggests market-based incentives encourage firms to provide timely and value-relevant information flows.

The effects of institutional ownership on the value and risk of diversified firms

We study the link between institutional ownership and firms' diversification strategy, value and risk. Our sample includes US-listed firms with segment data from 1998 to 2012. We find that not all kinds of diversification are value-destroying; unlike industrially-diversified firms, global single-segment firms are trading at a premium relative to their imputed value. The presence of institutional investors and the stability of their shareholdings positively influence the likelihood that a firm is diversified. The proportion (volatility) of institutional ownership is higher (lower) among diversified firms compared to domestic single-segment firms. More importantly, the higher the proportions of institutional shareholdings, the higher the excess value of the diversified firm and the lower the firm idiosyncratic risk. Institutional ownership volatility, on the other hand, is inversely related to a firm excess value but positively related to its idiosyncratic risk. Thus, the presence of long-term stable institutional investors enhances the value of diversified firms. Our findings remain robust to various model specifications and estimation techniques.

Compliance and determinants of US-listed foreign firms’ 20-F filings under the new Securities and Exchange Commission accelerated deadline

Purpose – The purpose of this paper is to investigate the impact of the US Securities and Exchange Commission (SEC) accelerated deadline on foreign firms, and the 20-F filing practices and factors relating to the filing lags. Design/methodology/approach – The authors identified 338 firms that file 20-F reports with the SEC during the period of 2010 and 2011. The authors then used multivariate regressions to examine the effects of the shortened deadline on foreign firms’ filing practices and the factors associated with these practices. In the regression models, the authors also control for other firm characteristics that have shown to affect the filing lags of US firms such as firm performance, size, mergers and restructures, audit firm, compliance with internal control requirements under Sarbanes Oxley Act, internal control weaknesses, going concern audit opinion and operating complexity. Findings – Based on a sample of 338 US-listed foreign firms, the results indicate that there is a significant reduction in the filing lags and a change in their distribution for fiscal year 2011, as compared to the preceding year, and as intended by the SEC. The authors also find that 20-F filing lags are negatively related to the use of International Financial Reporting Standards (IFRS) or US-GAAP in 20-F reports and use of the English language in foreign firms’ home countries. Practical implications – The findings of this paper are of interest to accounting regulatory bodies including the SEC, US Financial Accounting Standards Board and the International Accounting Standards Board by showing that registrants respond positively to regulations intending to promote timeliness of accounting disclosures and reporting, although many firms may oppose them in the due process stage. Originality/value – The authors contribute to the extant literature by providing new evidence that 20-F filing lags are negatively related to the use of IFRS or US-GAAP in 20-F reports, and the use of English language in foreign firms’ home countries.

Accrual-based and real activity earnings management at the back door: Evidence from Chinese reverse mergers

We examine how Chinese reverse merger (RM) firms trade off and conduct income-increasing earnings management through accrual-based and real activities manipulation strategies. We find that Chinese RM firms engage in both real activities and accrual-based manipulation at higher levels than non-Chinese RM firms, regular US firms and other Chinese US-listed firms. Further analysis suggests that Chinese RM firms use real activities and accrual-based manipulation as substitutes and tend to transition to real activities management in the years after a reverse takeover. Big 4 auditors can effectively constrain both real activities and accrual-based earnings management in Chinese RM firms. We also find that accruals manipulation is more costly relative to real activities management in the short term because it predicts changes in post-acquisition operating performance in Chinese RM firms. Overall, the results provide practical implications to regulators, investors and auditors on the channels through which Chinese RM firms manipulate earnings and the economic consequence of those manipulations.

SEARCHING FOR LANDMINES IN EQUITY MARKETS

Distressed firms in equity markets are like landmines in the battlefields due to their undetectability and devastating effects. This paper is concerned with distressed firms forecasting by the distance-to-default (DTD) and rare event logit (REL) models via public available data. Comparing these two models by cumulative accuracy profiles (CAP) and receiver operating characteristic (ROC) curves, we conclude that the REL model performs better than the DTD model. The data contains US-listed firms on the S&P 500 for the period January 1986 to December 2012, including 2138 companies and 271,912 firm months, with 444 distressed firms. We set the dynamic thresholds as the last 6% of firms based on the historical cross-section distress rates. Upon Bayesian posterior probability examination, the REL model shows about 40–60% affinity with S&P Domestic Long Term Issuer Credit Rating records on average, and the rate increases to 70% in some situations. We conclude that the REL model can be a good warning indicator of distress in firms at least three years ahead.

Does Patent Litigation Reduce Corporate R&D? An Analysis of US Public Firms

This study investigates if firms' involvement in patent litigation as alleged infringers hinders their innovation. I develop a simple model that predicts a decrease in innovation following patent litigation. I investigate the model's implications in a sample of publicly listed US firms, using a combination of propensity score matching and difference-in-differences estimation. I find a negative impact of patent litigation on corporate R&D intensity - in the range of 2.6-4.7%-points - in small firms (with less than 500 employees), that are involved in extensive patent lawsuits (captured by the number of legal documents filed).

The Role of the Director Social Networks in Spreading Misconduct: The Case of Reverse Mergers

After 2000, a growing number of foreign firms list in the United States through reverse merger, a non-IPO listing technique that requires less information disclosure. Are the US regulations rigorous enough to deter the listing attempts of weak foreign firms? Using a unique data set, this paper presents the widespread misconduct of Chinese firms that are listed on US exchanges. The firms tend to be US-incorporated reverse mergers that are headquartered in small cities, are audited by small firms, and that change their auditors frequently. Using a social network analysis, I find that the firms are assisted by Western professionals to help them circumvent the US regulations, and they commit fraud and benefit from fast stock sales after listing. Further, I find that the social network of the linked directors facilitates the spread of their misconduct. During the wrongdoers’ listings, the investors in these firms lost at least $811 million. However, the penalties charged to the wrongdoers only accounted for 4.19% of this loss. I also find that the US-listed Chinese firms have a lower average Tobin’s q compared to the China-listed firms, in contrast to the prior research’s findings. These findings contradict the concurrent research that uses the reverse mergers’ financial data, which proves to be unreliable.

A parsimonious model to forecast financial distress, based on audit evidence

This paper provides evidence that audit reports convey relevant evidence for inferring the existence of underlying, unrevealed, financial imbalances. Unlike previous works, which studied US listed-firms bankruptcy, our research deals with Spanish non-financial SMEs under financial stress. Our results indicate that the audit of distressed SMEs has several distinctive features: higher auditor rotation, more qualified reports, and non-compliance with deadlines to approve and file the annual financial statements. We use this evidence to build and test a parsimonious and reliable forecast model. Several implications for auditors’ independence, information quality, and failure forecast are discussed.

Are company founders underpaid?

This article examines the relation between founder status and CEO compensation in publicly listed US firms. The results suggest that CEO/founders receive lower cash pay and total compensation compared to professional managers. In contrast, CEOs who are relatives of the founders receive similar cash pay and total compensation to that of professional managers. Different compensation levels also emerge in terms of stock option awards. The findings underline the importance of distinguishing among these three CEO types when examining the determinants of executive compensation.

Local Institutions, Audit Quality, and Financial Fraud of US-Listed Foreign Firms

Using data on shareholder-initiated class action lawsuits in the US, I investigate the corporate scandals of US-listed foreign firms. The shareholders of scandal firms suffer considerable loss in both the short term and the long term. I document that firms domiciled in countries with weak institutions are more likely to be embroiled corporate scandals, but such a relation can be moderated by the presence of Big 4 auditors. Investors automatically adjust for undiscovered misconduct when valuing the stocks of non-scandal firms (i.e. the spillover effect). Investors rely on the audit quality to form their expectations about the severity of undiscovered misconduct, and thus impose less negative spillovers on firms with Big 4 auditors, especially when the firms are from countries with weak institutions. Taken together, my results suggest that listing on US exchanges does not fully compensate for weak local institutions; voluntarily bonding to a more stringent audit process has an incremental effect on protecting shareholder interests and enhances the confidence of investors in firms’ financial integrity.

Market Concentration, Corporate Governance and Innovation: Partial and Combined Effects in US-Listed Firms

Existing research on the relationship between market concentration and innovation has produced conflicting findings. In addition, the emerging literature on the relationship between corporate governance and innovation tends to focus only on partial effects of corporate governance on innovation. We aim to contribute to the debate by investigating both partial and combined effects of corporate governance and market concentration on innovation. Utilising a dataset for 1,400 non-financial US-listed companies and two-way cluster-robust estimation methodology, we report several findings. First, the relationship between market concentration and innovation is non-linear. Secondly, the relationship has a U-shape in the case of input measure of innovation (research and development – RD but it has an inverted-U shape when net book-value of brands and patents is used as output measure of innovation. Third, corporate governance indicators such as anti-takeover defences and insider control tend to have a negative partial effect on R&D expenditures but a positive partial effect on net book-value of brands and patents. Finally, when interacted with market concentration, anti-takeover defences and insider control act as complements to market concentration. Hence, firms with strong anti-take-over defences and under insider control tend to spend more on R&D but are less able to generate valuable brands and patents as market concentration increases. These results are based on two-way cluster-robust estimation, which takes account of both serial and cross-sectional dependence in the error terms.

Are Foreign Companies Listed in the US Really Worth More? Information Asymmetry and Cross-listing Discount of China Concepts Stocks

A widely accepted theory is challenged in this paper. Foreign firms’ pricing premium from listing in the US was considered as a result of better regulation and protection of minority shareholders of the listed companies. This paper raises another viewpoint that the regulation clauses may not have been implemented as well as people used to think. The information asymmetry between the US regulators and the overseas firms creates the possibility that illegal activities such as forging documents and faking financial reports may not be discovered in time, especially when listing is through a non-IPO way like reverse merger transactions. As a result, the de facto poorly performed foreign companies also have a chance to list in the US exchanges by exaggerating their business performance in balance sheets and profit from selling stocks to American investors in the secondary market as long as their improper behaviors are not perceived by the regulators before listing. Therefore in contrast to what the existing literature has assumed, there are two types of foreign firms traded on the NYSE, Nasdaq and Amex: good firms with growth opportunities and bad firms which cheat the investors. As investors realize the existence of the bad firms, the problem becomes similar to the market of lemons. Price of the foreign stocks from countries with more information asymmetry, poorer legal enforcement and corporate governance could go down and the cross-listing premium may disappear. This paper uses firm-level accounting data of the Chinese stocks listed in the US exchanges and listed in the four stock markets in mainland China to prove the above hypothesis. Cross-listing discount, instead of premium, is found. Tobin’s q premium from listing in the US has been decreasing from year 2006 when the Chinese firms’ accounting fraud was first reported and finally turned to be negative. The widely reported financial fraud of the US-listed Chinese firms after 2010 proves the correctness of the aforementioned two-type-firm theory. Accordingly, the US-listed Chinese firms with more information disclosure are higher valuated, including firms listed via IPO rather than reverse merger, firms from large Chinese cities with better legal enforcement and easier verification of information authenticity, and large firms which are covered by more analysts and media. As for the hypothesis that bad companies prefer exaggerating their performance in financial reports, the historical data does show that the already delisted companies reported a much higher 12-month trailing EPS before their delisting. Moreover, when there is less information asymmetry and more information disclosure, price of the US-listed Chinese stocks goes up.

US-Listed Chinese Firms in Credibility Crisis: Who are They? Where are They?

Chinese economy has been growing fast in the past 30 years and there have emerged a great number of enterprises in China. In the first decade of the 21st century, more and more Chinese firms started being listed overseas, especially in the US markets, including the NYSE, Amex and Nasdaq. Those stocks were popular among investors as they were naturally connected with the fast growing industry and business in China and they were called ”China concepts stocks”. However, since year 2006 an increasing number of US-listed Chinese firms have been found out forging documents and making fraudulent financial reports. American investors and regulators including the Securities and Exchange Commission (SEC) were cheated before the scandals were public. Then various investigations were started toward those China concepts stocks by short sellers and professionals. Whenever there was evidence that a firm was exaggerating its performance in balance sheets, its stocks were shorted. After the confirmation of the fraudulent behaviors, those dishonest firms were forced to be delisted. In this paper I identify 263 stocks listed in the US exchanges with Chinese background and analyze their characteristics like headquarters, incorporation countries, auditing firms, listing method and delisting situation. Data analysis reveals interesting results that companies headquartered in small Chinese cities, audited by smaller auditing firms and listed via reverse merger transactions have a higher probability of being delisted. ∗Department of Economics, Columbia University. Address: 10th Floor, International Affairs Building, 420 West 118th Street, New York, NY 10027. Email: zw2160@columbia.edu. The author thanks Tri Vi Dang, Joseph Stiglitz and Shang-jin Wei for helpful discussion. All errors are mine.

Market concentration, corporate governance and innovation: Partial and combined effects in US-listed firms

Existing research on the relationship between market concentration and innovation has produced conflicting findings. In addition, the emerging literature on the relationship between corporate governance and innovation tends to focus only on partial effects of corporate governance on innovation. We aim to contribute to the debate by investigating both partial and combined effects of corporate governance and market concentration on innovation. Utilising a dataset for 1,400 non-financial US-listed companies and two-way cluster-robust estimation methodology, we report several findings. First, the relationship between market concentration and innovation is non-linear. Secondly, the relationship has a U-shape in the case of input measure of innovation (research and development - R&D – expenditures); but it has an inverted-U shape when net book-value of brands and patents is used as output measure of innovation. Third, corporate governance indicators such as anti-takeover defences and insider control tend to have a negative partial effect on R&D expenditures but a positive partial effect on net book-value of brands and patents. Finally, when interacted with market concentration, anti-takeover defences and insider control act as complements to market concentration. Hence, firms with strong anti-take-over defences and under insider control tend to spend more on R&D but are less able to generate valuable brands and patents as market concentration increases. These results are based on two-way cluster-robust estimation, which takes account of both serial and cross-sectional dependence in the error terms.

Are Company Founders Underpaid?

This paper examines the relation between founder status and CEO compensation in publicly listed US firms. The results suggest that CEO/founders receive lower cash pay and total compensation compared to professional managers. In contrast, CEOs who are relatives of the founders receive similar cash pay and total compensation to that of professional managers. Different compensation levels also emerge in terms of stock option awards. The findings underline the importance of distinguishing among these three CEO types when examining the determinants of executive compensation.