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Description
I show that firms' ability to adjust variable capital in response to productivity shocks has important implications for the interpretation of the widely documented investment-cash flow sensitivities. The variable capital adjustment is sufficient for firms to capture small variations in profitability, but when the revision in profitability is relatively large, limited substitutability between the factors of production may call for fixed capital investment. Hence, firms with lower substitutability are more likely to invest in both factors together and have larger sensitivities of fixed capital investment to cash flow. By building a frictionless capital markets model that allows firms to optimize over fixed capital and inventories as substitutable factors, I establish the significance of the substitutability channel in explaining cross-sectional differences in cash flow sensitivities. Moreover, incorporating variable capital into firms' investment decisions helps explain the sharp decrease in cash flow sensitivities over the past decades. Empirical evidence confirms the model's predictions.
ContributorsKim, Kirak (Author) / Bates, Thomas (Thesis advisor) / Babenko, Ilona (Thesis advisor) / Hertzel, Michael (Committee member) / Tserlukevich, Yuri (Committee member) / Arizona State University (Publisher)
Created2013
Description
I examine the determinants and implications of the level of director monitoring. I use the distance between directors' domiciles and firm headquarters as a proxy for the level of monitoring and the introduction of a new airline route between director domicile and firm HQ as an exogenous shock to the level of monitoring. I find a strong relation between distance and both board meeting attendance and director membership on strategic versus monitoring committees. Increased monitoring, as measured by a reduction in effective distance, by way of addition of a direct flight, is associated with a 3% reduction in firm value. A reduction in effective distance is also associated with less risk-taking, lower stock return volatility, lower accounting return volatility, lower R&D; spending, fewer acquisitions, and fewer patents.
ContributorsBennett, Benjamin (Author) / Coles, Jeffrey (Thesis advisor) / Hertzel, Michael (Committee member) / Babenka, Ilona (Committee member) / Custodio, Claudia (Committee member) / Arizona State University (Publisher)
Created2014
Description
This study investigates the impact of portfolio disclosure on hedge fund performance. Using a regression discontinuity design, I investigate the effect of the disclosure requirements that take effect when an investment company's assets exceed $100 million; when that occurs, a fund is required by the SEC to submit form 13F disclosing its portfolio holdings. Consistent with the argument that portfolio disclosure reveals "trade secrets" and also raises front running costs thus harms the funds that disclose, I find that there is a drop in fund performance (about 4% annually) after a fund begins filing form 13F, as well as an increase in return correlations with other hedge funds in the same investment style. The drop in performance cannot be explained by a change in the assets under management or a mean reversion in returns. Consistent with the idea that funds with illiquid holdings tend to employ sequential trading strategies, which increase the likelihood of being taken advantage of by free riders and front runners, the drop in performance is more dramatic for funds that have more illiquid holdings. In addition, I find that the incentive fees paid to fund managers are 1% higher when portfolio disclosure is required, which supports the hypothesis that investors' monitoring of portfolio holdings disciplines adverse risk-taking by fund managers and allows for higher convexity in the optimal compensation structure. Finally, there is a drop in flows into funds that file 13F, which suggests that hedge fund investors negatively value 13F disclosure. Overall, this study suggests that the cost of portfolio disclosure is economically large. It contributes to the policy debate over what constitutes optimal disclosure.
ContributorsShi, Zhen (Author) / Hertzel, Michael (Thesis advisor) / Aragon, Georges (Thesis advisor) / Coles, Jeffrey (Committee member) / Arizona State University (Publisher)
Created2011
Description
This dissertation analyzes the reliability of reported employee stock option (ESO) expense, the determination of expected life of ESOs, motivations to manipulate ESO expense, and the impact of noise in ESO expense on subsequent stock price returns. Based on unique data, this is the first paper to measure average historical ESO life for all employees of a broad set of firms. I find average life has a mean of 4.12 years. Average life is reduced by 0.38 years per 10 percentage point increase in volatility, and industry effects explain an additional 7% of the variation. Reported expected life increases 0.37 years per year of historical life and an additional 0.16 years per year of age of the outstanding options. Deviations of reported volatility and life from benchmarks have positive correlations with deviations from own reporting history. Using stated assumptions rather than benchmark assumptions drops (increases) ESO expense by 8.3% (17.6%) for the 25th (75th) percentile firm. The change in earnings per share decreases (increases) by $0.019 ($0.007) for the 25th (75th) percentile firm. Tests for motivations to manipulate stock option expense downward have mixed results. Absolute values of deviations from benchmarks have a positive relationship with subsequent stock price volatility suggesting noise in reported stock option expense results in stock price noise. Deviations from benchmarks and subsequent cumulative abnormal returns have statistically significant results but are difficult to interpret.
ContributorsYoung, Brian (Author) / Coles, Jeffrey (Thesis advisor) / Hertzel, Michael (Committee member) / Babenko, Ilona (Committee member) / Arizona State University (Publisher)
Created2011
Description
In this dissertation, I examine the source of some of the anomalous capital market outcomes that have been documented for firms with high accruals. Chapter 2 develops and implements a methodology that decomposes a firm's discretionary accruals into a firm-specific and an industry-specific component. I use this decomposition to investigate which component drives the subsequent negative returns associated with firms with high discretionary accruals. My results suggest that these abnormal returns are driven by the firm-specific component of discretionary accruals. Moreover, although industry-specific discretionary accruals do not directly contribute towards this anomaly, I find that it is precisely when industry-specific discretionary accruals are high that firms with high firm-specific discretionary accruals subsequently earn these negative returns. While consistent with irrational mispricing or a rational risk premium associated with high discretionary accruals, these findings also support a transactions-cost based explanation for the accruals anomaly whereby search costs associated with distinguishing between value-relevant and manipulative discretionary accruals can induce investors to overlook potential earnings manipulation. Chapter 3 extends the decomposition to examine the role of firm-specific and industry-specific discretionary accruals in explaining the subsequent market underperformance and negative analysts' forecast errors documented for firms issuing equity. I examine the post-issue market returns and analysts' forecast errors for a sample of seasoned equity issues between 1975 and 2004 and find that offering-year firm-specific discretionary accruals can partially explain these anomalous capital market outcomes. Nonetheless, I find this predictive power of firm-specific accruals to be more pronounced for issues that occur during 1975 - 1989 compared to issues taking place between 1990 and 2004. Additionally, I find no evidence that investors and analysts are more overoptimistic about the prospects of issuers that have both high firm-specific and industry-specific discretionary accruals (compared to firms with high discretionary accruals in general). The results indicate no role for industry-specific discretionary accruals in explaining overoptimistic expectations from seasoned equity issues and suggest the importance of firm-specific factors in inducing earnings manipulation surrounding equity issues.
ContributorsIkram, Atif (Author) / Coles, Jeffrey (Thesis advisor) / Hertzel, Michael (Committee member) / Tserlukevich, Yuri (Committee member) / Arizona State University (Publisher)
Created2011
Description
Mutual monitoring in a well-structured authority system can mitigate the agency problem. I empirically examine whether the number 2 executive in a firm, if given authority, incentive, and channels for communication and influence, is able to monitor and constrain the potentially self-interested CEO. I find strong evidence that: (1) measures of the presence and extent of mutual monitoring from the No. 2 executive are positively related to future firm value (Tobin's Q); (2) the beneficial effect is more pronounced for firms with weaker corporate governance or CEO incentive alignment, with stronger incentives for the No. 2 executives to monitor, and with higher information asymmetry between the boards and the CEOs; (3) such mutual monitoring reduces the CEO's ability to pursue the "quiet life" but has no effect on "empire building;" and (4) mutual monitoring is a substitute for other governance mechanisms. The results suggest that mutual monitoring by a No. 2 executive provides checks and balances on CEO power.
ContributorsLi, Zhichuan (Author) / Coles, Jeffrey (Thesis advisor) / Hertzel, Michael (Committee member) / Bharath, Sreedhar (Committee member) / Babenko, Ilona (Committee member) / Arizona State University (Publisher)
Created2012
Description
This paper investigates the role of top management and board interlocks between acquirers and targets. I hypothesize that an interlock may exacerbate agency problems due to conflicting interests and lead to value-decreasing acquisition. An interlock may also serve as a conduit of information and personal experience, and reduce the cost of information gathering for both firms. I find supporting evidence for these two non-mutually exclusive hypotheses. Consistent with the agency hypothesis, interlocked acquirers underperform non-interlocked acquirers by 2% during the announcement period. However, well-governed acquirers receive higher announcement returns and have better post-acquisition performance in interlocked deals. The proportional surplus accrued to an acquirer is positively correlated with the interlocking agent's ownership in the acquirer relative to her ownership in the target. Consistent with the information hypothesis, when the target's firm value is opaque, interlocks improve acquirer announcement returns and long-term performance. Interlocked acquirers are also more likely to use equity as payment, especially when the acquirer's stock value is opaque. Target announcement returns are not influenced by the existence of interlock. Finally, I find acquisitions are more likely to occur between two interlocked firms and such deals have a higher completion rate.
ContributorsWu, Qingqing (Author) / Bates, Thomas W. (Thesis advisor) / Hertzel, Michael (Committee member) / Lindsey, Laura (Committee member) / Arizona State University (Publisher)
Created2012
Description
The purpose of this paper is to understand how companies are finding high potential employees and if they are leaving top talent behind in their approach. Eugene Burke stated in 2014 that 55% of employees that are labeled as a High Potential Employee will turn over and move companies. Burke (2014) also states that the average high potential employee tenure is five years. The Corporate Leadership Council says that on average, 27% of a company's development budget is spent on its high potential program (CEB 2017). For a midsize company, the high potential development budget is almost a million dollars for only a handful of employees, only to see half of the investment walking out the door to another company . Furthermore, the Corporate Leadership Council said that a study done in 2005 revealed that 50% of high potential employees had significant problems within their job (Kotlyar and Karkowsky 2014). Are time and resources are being given to the wrong employees and the right employees are being overlooked? This paper exams how companies traditionally select high potential employees and where companies are potentially omitting employees who would be better suited for the program. This paper proposes that how a company discovers their top talent will correlate to the number of turnovers or struggles that a high potential employee has on their job. Future research direction and practical considerations are also presented in this paper.
ContributorsHarrison, Carrie (Author) / Mizzi, Philip (Thesis director) / Ruediger, Stefan (Committee member) / Department of Management and Entrepreneurship (Contributor) / School of Sustainability (Contributor) / Department of Supply Chain Management (Contributor) / Barrett, The Honors College (Contributor)
Created2018-05
Description
In which industry that has ever been profit generating, does a firm profit from their failure? The United States has a mass incarceration problem. With 25% of the world prison population residing in the US, spending on detention costs the US government $80 billion annually. Over 50% of the individuals incarcerated in America are of black or Latino descent. This massive growth in the incarcerated population of America began in the 1970s and with the passive support of American citizens has created an industry whose players profit from the detention of people. Currently, the privately run detention facilities in the United States hold 7% of state prisoners, 18% of federal prisoners, and nearly 75% of ICE's undocumented detainee population. The detention of people for profit is an idea rooted in the same profit motive that allowed the institution of slavery to flourish. However even after the 13th Amendment abolished slavery in the U.S., the oppressive forces behind slave-era economics have been perpetuated through legislation and policies that continued the stratification of society and reinforcement of the social order. With the help of corporate lobbyists, political action committees, and organizations such as the American Legislative Exchange Council, the corporate shareholders of private prisons, such as CoreCivic and The GEO Group, are able to directly align their profit-driven interests with those of federal and state legislators. By the incorporation of legislation and policy into state and federal law, the shareholders of private prisons are able to directly affect legislation as well as their own potential for profit. The justification for the usage of private prisons is thought to be seen in the price savings and flexibility that it provides for federal and state governments. However, due to the law enforcement contractor's exemption from public record laws, there is no clear evidence of where the cost savings occur, or even if there are cost savings at all. Is it ethical for a for-profit-prison corporation to be responsible for the care, security, and rehabilitation of an individual, when if they fail to rehabilitate the individual, it will add to the number of inmates under their control? The measure of a prison's failure to rehabilitate an inmate is considered the recidivism rate, and is affected when an inmate leaves a detention facility, commits another crime, then is arrested. This profit motive is causing our society to incarcerate increasing numbers of people in private prisons. For-profit prisons financially benefit from long-term incarceration and recidivism. The passive investments from public and private employees and institutions through investment corporations are the legs that allow the private prison industry to stand. Twenty-nine investment firms, such as The Vanguard Group and Fidelity Investments, own nearly two-thirds of the two largest players in the private prison industry. This includes the passive investments by public institutions such as the Arizona State University Foundation's $600 million endowment fund as well as the $500 million directly invested into CoreCivic and GEO Group from the University of Texas/ Texas A&M Investment Management Company. The goal of abolishing private prisons will require years of litigation against the giants of the industry as well as the governmental entities supporting them. However, we can start today by demanding divestiture by our school and similar institutions as well continuing to share the knowledge of the oppressive forces associated with the detention of individuals for profit.
ContributorsBayham, Michael (Author) / Gomez, Alan (Thesis director) / Dacey, John (Committee member) / W.P. Carey School of Business (Contributor) / Department of Supply Chain Management (Contributor) / Barrett, The Honors College (Contributor)
Created2018-05
Description
The purpose of this thesis is to explore how Blockchain technology can help solve problems large corporations commonly face. For example, it is a common problem for large businesses and organizations to manage sales contracts with thousands of items on them. Likewise, it can be difficult to accurately monitor complex payment histories with thousands of items on them. Another issue is the difficulty that is introduced when making periodic reconciliations based on separate recording systems. At a broader level, some organizations may hesitate to do business with new strange companies or oversea companies for the first time because they do not trust that the other organization can deliver what they promise. Such problems cost organizations a lot of money, effort, and time to solve. However, Blockchain technology, first developed in 2009, could revolutionize how the business community deals with these common problems. The shared and immutable ledger on Blockchain can help organizations to keep track on transactions, manage the contracts in a smarter way, ensure correct purchase history records, eliminate the periodically reconciliation processes, and provide visibility for real-time transactions.
ContributorsHuynh, Phu Thanh (Author) / Popova, Laura (Thesis director) / Pankaj, Sneha (Committee member) / Department of Supply Chain Management (Contributor) / Barrett, The Honors College (Contributor)
Created2018-05