This paper investigates the relationship between managerial tone in management discussion and analysis (MD&A) disclosures and stock price crash risk. We make a distinction between two types of tone—concave and convex—based on how managers’ tone changes according to whether performance is good or bad. Tone is classified as ‘concave’ (‘convex’) when managers overstate (understate) bad news and understate (overstate) good news. Using data on Chinese listed firms from 2013 to 2018, we find that convex tone is positively associated with stock price crash risk, and negatively associated with future performance. The positive relationship between convex tone and stock price crash risk is more pronounced for firms with high free cash flow, opaque financial reporting, and non-stated-owned enterprises. These results suggest that the use of a convex tone in MD&A may have a negative impact on the capital market.
Category Archives: Original Article
Foreign institutional investors’ certification and domestic minority shareholders’ mistrust
Abstract
Using hand-collected data from China's split share structure reform (SSSR) program, we show that foreign institutional investors’ certification mitigates domestic minority shareholders’ mistrust of controlling shareholders’ reform plans and facilitates the implementation of the SSSR. Domestic minority shareholders cast fewer dissenting votes, complete the SSSR more quickly but with lower compensation, and achieve higher stock return reactions in reforming firms with higher foreign institutional ownership. Foreign institutional investors’ prestige is a key factor in aligning domestic minority shareholders toward seeking long-term payoffs. Our work reveals the positive role of foreign institutional investors’ certification in a salient reform of corporate governance.
Temperature trend and corporate cash holdings
Abstract
We examine the causal impact of climate uncertainty on companies’ cash holdings using local temperature trends. We find a notable increase in cash reserves among companies in response to rising climate-related risks. We also identify two significant channels through which climate uncertainty influences firms’ cash management: heightened environmental enforcement risk and increased physical risk. Furthermore, we observe that the positive effect of temperature trends on cash holdings is more pronounced for financially constrained firms and those with a lower level of environmental protection awareness. External financing through equity and debt issuance, as well as cost reduction strategies involving research and development and selling, general, and administrative activities, represent viable avenues for firms to bolster their cash reserves. However, financially constrained firms are less inclined to build up cash reserves through debt financing. Our findings underscore the precautionary nature of corporate cash policies and shed light on how temperature fluctuations can significantly shape corporate behavior.
Is One Head Better Than Two? Dual Leadership and Firm Performance During the COVID‐19 Crisis
We provide novel evidence on the value of combined CEO and board chair positions (CEO duality) for firms during the COVID-19 pandemic in 2020. Based on 4,840 firm-quarter observations from 1,210 unique firms in the US, we show that CEO duality firms outperformed non-duality firms by a 0.58% margin in quarterly return on assets in 2020, which is equivalent to an incremental annual net profit of US$164 million. A difference-in-difference estimation confirms that the benefit of CEO duality is observed only in the COVID-19 crisis period. Our main finding is robust to potential endogeneity concerns and alternative performance measures. Additional analyses show that the positive impact of CEO duality stems from the mechanisms of operating cost savings and working capital optimization during the crisis. Our finding underscores the benefit of CEO duality when economic uncertainty is high and a speedy decision is important.
Committed Actors, Institutional Complexity, and Pathways to Compromise: The Emergence of Islamic Banking in Germany
Abstract
The formation of the first Islamic bank in Germany in 2015 came with considerable tensions at the interface of the religious logic, on the one hand, and the state logic, on the other. With the Islamic religious logic being novel to the German field of banking and finance, innovative templates were established to deal effectively with the resulting tensions and conflicts. Drawing on qualitative data, we investigate how the bank, with its strong commitment to Islam, navigated such novel institutional complexity and the challenges stemming from the jurisdictional overlap. We identify four distinct compromise mechanisms in this institutionally complex situation, in which a committed actor prioritizes one logic over another: explaining, convincing, conceding and suspending. Importantly, as options, these mechanisms are situated in a cascading order of preference for the focal actor. More generally, our research posits that in any encounter between institutional logics in which the specific instantiation of a logic stems from a foreign interinstitutional system, the resulting novel institutional complexity may necessitate the development of innovative templates which, at the same time, may imply ‘stretching’ an institutional logic and, in consequence, impact the compatibility of its jurisdictional claims.
The AI of the Beholder: Intra‐Professional Sensemaking of an Epistemic Technology
Abstract
New technologies are equivocal, triggering sensemaking responses from the individuals who encounter them. As an ‘epistemic technology’ AI poses new challenges to the expertise and jurisdictions of professionals. Such challenges may be interpreted quite differently, however, depending on the specialized role identities which develop within the wider professional domain. We explore the sensemaking responses of these intra-professional groupings to the challenges posed by AI through an empirical study of professionals playing different roles (front-line, hybrid and field-level) in the field of radiology within NHS England. We found that these intra-professional groupings sought to make sense of AI through a triadic view focused on the interplay of professional, client and technology. This sensemaking, arising from different jurisdictional contexts, led individual professionals to perceive that their agency was diminished, complemented or enhanced as a result of the introduction of AI. Our findings contribute to the literature on professions and AI by showing how intra-professional differences affect sensemaking responses to AI as a jurisdictional contestant.
Unraveling the impact of female CEOs on corporate bond markets
Abstract
Little is known about how executive gender shapes the inherent conflict of interest between shareholders and bondholders. Using a sample of almost 100,000 unique bond-year observations, this study investigates how the appointment of female chief executive officers (CEOs) lowers the default outlook. Our evidence indicates that bond yield and bond volatility are significantly lower after a female takes the helm at a firm. This executive gender effect remains highly statistically and economically significant across various robustness checks and after addressing endogeneity concerns. Female CEOs lower the default risk component of the bond yield but have no material impact on the liquidity component. Subsample analysis substantiates the conditional effect of female CEOs on bond yield and bond volatility. Our evidence indicates that female CEOs’ risk-averse attributes pass through the credit risk and information asymmetry channels.
How do New Ventures Thrive in Ecosystem Venturing: The Impacts of Alliance Strategy and Technology Interdependence
Abstract
New ventures in an innovation ecosystem can not only receive benefits, but also face challenges. It is important to examine defence mechanisms that new ventures can employ for their healthy development in the innovation ecosystem. Based on resource dependence theory, combining with arguments from innovation ecosystems literature, this paper proposes that new ventures’ technological alliances with core competitors of ecosystem investors can be used as a social defence in ecosystem venturing. Furthermore, we investigate the moderator effects of technological interdependence – technological similarity and technological complementarity on the impacts of such a defence mechanism. Using longitudinal information of 4903 investor-investee dyads in ecosystem venturing, we find that (1) technological alliances with core competitors of the ecosystem investor has a positive relationship to venture performance, and (2) such relationship is negatively moderated by technological complementarity. Our findings provide important implications for research on innovation ecosystems and resource dependence theory.
Does hedge fund managers’ industry experience matter for hedge fund activism?
Abstract
We study whether fund managers’ industry experience is an important source of value creation in hedge fund activism. We find that the targets of industry-expert fund managers realize higher activism announcement returns and better operating performance, particularly when fund managers’ industry expertise is more valuable for targets. These targets also engage in more focused acquisition and divestiture activities in industries where fund managers have experience, allocate more employees to these industries, and cut investments more in the postacquisition period. The superior performance of targets of industry-expert fund managers is robust to controlling for the endogeneity concern and the attrition bias.
Financial debt contracting and managerial agency problems
Abstract
This paper analyzes if lenders resolve managerial agency problems in loan contracts using sweep covenants. Sweeps require a (partial) prepayment when triggered and are included in many contracts. Exploiting exogenous reductions in analyst coverage due to brokerage house mergers and closures, we find that increased borrower opacity significantly increases sweep use. The effect is strongest for borrowers with higher levels of managerial entrenchment and if lenders hold both debt and equity in the firm. Overall, our results suggest that lenders implement sweep covenants to mitigate managerial agency problems by limiting contingencies of wealth expropriation.