This paper examines whether stock‐option grants explain missed earnings targets, including reported losses, earnings declines, and missed analysts' forecasts. Anecdotal evidence and surveys suggest that managers believe that missing an earnings target can cause stock‐price drops (Graham et al. 2006). Empirical studies corroborate this notion (Skinner and Sloan 2002; Lopez and Rees 2002). Thus, a missed target could benefit an executive via lower strike price on subsequent option grants. Prior option grant studies explore only general downward earnings management (Balsam et al. 2003; Baker et al. 2003), but our study is the first to explore whether option grants encourage missed earnings targets. Indeed, if missed targets drive the prior results, then the literature has failed to document an important negative outcome of stock‐option incentives. We use quarterly and annual data for fixed‐date options granted after firms announce they have missed earnings targets. We find that firms that miss earnings targe...
本文考察了股票期权授予是否解释了错过的盈利目标,包括报告的亏损、盈利下降和错过的分析师预测。轶事证据和调查表明,经理们认为,未能达到盈利目标会导致股价下跌(Graham et al. 2006)。实证研究证实了这一观点(Skinner and Sloan 2002;Lopez and Rees 2002)。因此,未能实现目标的高管可以通过降低后续期权授予的执行价格而受益。先前期权授予研究只探讨了一般的向下盈余管理(Balsam et al. 2003;Baker et al. 2003),但我们的研究首次探讨了期权授予是否会鼓励未能实现盈利目标。事实上,如果未实现的目标驱动了先前的结果,那么文献就未能记录股票期权激励的重要负面结果。我们使用季度和年度数据来计算在公司宣布未能实现盈利目标后授予的固定日期期权。我们发现,未能达到盈利目标的公司……
{"title":"Executive Stock Options, Missed Earnings Targets and Earnings Management","authors":"M. McAnally, Anup Srivastava, C. Weaver","doi":"10.2139/ssrn.925584","DOIUrl":"https://doi.org/10.2139/ssrn.925584","url":null,"abstract":"This paper examines whether stock‐option grants explain missed earnings targets, including reported losses, earnings declines, and missed analysts' forecasts. Anecdotal evidence and surveys suggest that managers believe that missing an earnings target can cause stock‐price drops (Graham et al. 2006). Empirical studies corroborate this notion (Skinner and Sloan 2002; Lopez and Rees 2002). Thus, a missed target could benefit an executive via lower strike price on subsequent option grants. Prior option grant studies explore only general downward earnings management (Balsam et al. 2003; Baker et al. 2003), but our study is the first to explore whether option grants encourage missed earnings targets. Indeed, if missed targets drive the prior results, then the literature has failed to document an important negative outcome of stock‐option incentives. We use quarterly and annual data for fixed‐date options granted after firms announce they have missed earnings targets. We find that firms that miss earnings targe...","PeriodicalId":247168,"journal":{"name":"FARS Midyear Meeting Concurrent Research Sessions","volume":"83 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-05-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132260721","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
ABSTRACT: We propose a methodology to incorporate risk measures based on economic fundamentals directly into the valuation model. Fundamentals‐based risk adjustment in the residual income valuation model is captured by the covariance of ROE with market‐wide factors. We demonstrate a method of estimating covariance risk out of sample based on the accounting beta and betas of size and book‐to‐market factors in earnings. We show how the covariance risk estimate can be transformed to obtain the fundamentals‐based cost of equity. Our empirical analysis shows that value estimates based on fundamental risk adjustment produce significantly smaller deviations from price relative to the CAPM or the Fama‐French three‐factor model. We further find that our single‐factor risk measure, based on the accounting beta alone, captures aspects of risk that are indicated by the book‐to‐market factor, largely accounting for the “mispricing” of value and growth stocks. Our study highlights the usefulness of accounting numbers i...
{"title":"Fundamentals-Based Risk Measurement in Valuation","authors":"Alexander Nekrasov, Pervin K. Shroff","doi":"10.2139/ssrn.930729","DOIUrl":"https://doi.org/10.2139/ssrn.930729","url":null,"abstract":"ABSTRACT: We propose a methodology to incorporate risk measures based on economic fundamentals directly into the valuation model. Fundamentals‐based risk adjustment in the residual income valuation model is captured by the covariance of ROE with market‐wide factors. We demonstrate a method of estimating covariance risk out of sample based on the accounting beta and betas of size and book‐to‐market factors in earnings. We show how the covariance risk estimate can be transformed to obtain the fundamentals‐based cost of equity. Our empirical analysis shows that value estimates based on fundamental risk adjustment produce significantly smaller deviations from price relative to the CAPM or the Fama‐French three‐factor model. We further find that our single‐factor risk measure, based on the accounting beta alone, captures aspects of risk that are indicated by the book‐to‐market factor, largely accounting for the “mispricing” of value and growth stocks. Our study highlights the usefulness of accounting numbers i...","PeriodicalId":247168,"journal":{"name":"FARS Midyear Meeting Concurrent Research Sessions","volume":"273 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125833527","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We investigate the monitoring role performed by institutional investors in corporate restructurings. We hypothesize that institutional monitoring will (1) influence a firm's decision to restructure and (2) encourage restructurings that stop poor performance before it becomes too severe (i.e. pre-emptive restructurings) and that fix performance problems more completely (i.e. thorough restructurings). Consistent with these hypotheses, we document that the level of institutional ownership (changes in transient institutional holdings) is (are) increasing (decreasing) in the probability that a firm restructures. This result holds after controlling for other determinants of the restructuring choice, including existing internal corporate governance mechanisms. The association between institutional ownership and restructuring decisions is also robust after controlling for the possible endogeniety problem using a simultaneous equations approach. Among firms that restructure, we find the level of institutional ownership increases the probability that the firm's restructuring is pre-emptive (proxied by positive or negative prior growth in ROE). We also find that institutional holdings increase the probability that a firm undergoes a restructuring that is thorough (proxied by above or below the median value of scaled restructuring charges). As a whole, the results suggest that institutional investors play an important monitoring role in encouraging managers to make value maximizing restructuring decisions.
{"title":"Institutional Monitoring and Corporate Restructurings","authors":"R. Atiase, William J. Mayew, Y. Xue","doi":"10.2139/ssrn.930156","DOIUrl":"https://doi.org/10.2139/ssrn.930156","url":null,"abstract":"We investigate the monitoring role performed by institutional investors in corporate restructurings. We hypothesize that institutional monitoring will (1) influence a firm's decision to restructure and (2) encourage restructurings that stop poor performance before it becomes too severe (i.e. pre-emptive restructurings) and that fix performance problems more completely (i.e. thorough restructurings). Consistent with these hypotheses, we document that the level of institutional ownership (changes in transient institutional holdings) is (are) increasing (decreasing) in the probability that a firm restructures. This result holds after controlling for other determinants of the restructuring choice, including existing internal corporate governance mechanisms. The association between institutional ownership and restructuring decisions is also robust after controlling for the possible endogeniety problem using a simultaneous equations approach. Among firms that restructure, we find the level of institutional ownership increases the probability that the firm's restructuring is pre-emptive (proxied by positive or negative prior growth in ROE). We also find that institutional holdings increase the probability that a firm undergoes a restructuring that is thorough (proxied by above or below the median value of scaled restructuring charges). As a whole, the results suggest that institutional investors play an important monitoring role in encouraging managers to make value maximizing restructuring decisions.","PeriodicalId":247168,"journal":{"name":"FARS Midyear Meeting Concurrent Research Sessions","volume":"67 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2006-09-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117214271","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}