Abstract We revisit Feldhutter and Schaefer (FS, 2018), who report evidence of a “credit spread puzzle” for high-yield but not investment-grade bonds. We show their results are reversed when their model is calibrated to market values of debt (as required by theory) rather than book values. We then demonstrate that using credit spreads rather than historical default rates to identify the default boundary provides the statistical power necessary to reject their assumption that firm dynamics follow geometric Brownian motion. A large market price of jump risk is required to match historical default rates, which generates a credit spread puzzle for investment-grade but not high-yield bonds.
{"title":"Is the Credit Spread Puzzle a Myth?","authors":"Jennie Bai, Robert S. Goldstein, Fan Yang","doi":"10.2139/ssrn.3262310","DOIUrl":"https://doi.org/10.2139/ssrn.3262310","url":null,"abstract":"Abstract We revisit Feldhutter and Schaefer (FS, 2018), who report evidence of a “credit spread puzzle” for high-yield but not investment-grade bonds. We show their results are reversed when their model is calibrated to market values of debt (as required by theory) rather than book values. We then demonstrate that using credit spreads rather than historical default rates to identify the default boundary provides the statistical power necessary to reject their assumption that firm dynamics follow geometric Brownian motion. A large market price of jump risk is required to match historical default rates, which generates a credit spread puzzle for investment-grade but not high-yield bonds.","PeriodicalId":322512,"journal":{"name":"Georgetown University McDonough School of Business Research Paper Series","volume":"21 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115411950","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}
In response to a request for comment from the Federal Trade Commission, this report is divided into three parts:
• The FTC’s continuing leadership in consumer protection for Internet access • Competition and consumer protection in a changing communications industry • Competition and consumer protection in a changing media industry
{"title":"Competition and Consumer Protection Issues in Communication, Information, and Media Technology Networks","authors":"Larry Downes","doi":"10.2139/ssrn.3335287","DOIUrl":"https://doi.org/10.2139/ssrn.3335287","url":null,"abstract":"In response to a request for comment from the Federal Trade Commission, this report is divided into three parts:<br><br>• The FTC’s continuing leadership in consumer protection for Internet access<br>• Competition and consumer protection in a changing communications industry<br>• Competition and consumer protection in a changing media industry","PeriodicalId":322512,"journal":{"name":"Georgetown University McDonough School of Business Research Paper Series","volume":"8 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-08-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117322963","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}
This study examines whether disclosure frequency induced myopia influences the types of firms that go public and their choice of listing exchanges if they decide to do so. We find that the incentive to stay private in order to avoid disclosure frequency induced myopia creates a downward kink in the relation between the length of the cash conversion cycle and the proportion of public firms at the industry level around the time frame that corresponds to the mandatory reporting interval. Second, at the firm level, public firms with longer cash conversion cycles relative to industry peers are more likely to list on exchanges that require less frequent mandatory disclosure to minimize disclosure frequency induced myopia. Furthermore, when the mandatory reporting frequency increased from semi-annual to quarterly, we observe a sharper decline in the percentage of public firms from industries whose cash conversion cycles are between one quarter and two quarters relative to those from other industries both in the United States and in the United Kingdom.
{"title":"Disclosure Frequency Induced Myopia and the Decision to be Public","authors":"K. C. Li, Vicki Wei Tang","doi":"10.2139/ssrn.2911412","DOIUrl":"https://doi.org/10.2139/ssrn.2911412","url":null,"abstract":"This study examines whether disclosure frequency induced myopia influences the types of firms that go public and their choice of listing exchanges if they decide to do so. We find that the incentive to stay private in order to avoid disclosure frequency induced myopia creates a downward kink in the relation between the length of the cash conversion cycle and the proportion of public firms at the industry level around the time frame that corresponds to the mandatory reporting interval. Second, at the firm level, public firms with longer cash conversion cycles relative to industry peers are more likely to list on exchanges that require less frequent mandatory disclosure to minimize disclosure frequency induced myopia. Furthermore, when the mandatory reporting frequency increased from semi-annual to quarterly, we observe a sharper decline in the percentage of public firms from industries whose cash conversion cycles are between one quarter and two quarters relative to those from other industries both in the United States and in the United Kingdom.","PeriodicalId":322512,"journal":{"name":"Georgetown University McDonough School of Business Research Paper Series","volume":"37 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124143929","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}
Morris A. Cohen, Shiliang Cui, R. Ernst, Arnd Huchzermeier, Panos Kouvelis, Hau L. Lee, Hirofumi Matsuo, M. Steuber, A. Tsay
This paper reports on the results of a global field study conducted in 2014 and 2015 among leading manufacturers from a wide range of industries. It provides insights on managerial practices that concern production sourcing and on the factors that drive such decisions. Exploratory factor analysis and logistic regression models that use survey response data yield seven key findings. (1) Companies are currently restructuring their global production footprints. (2) The majority of firms engage in offshoring; reshoring does occur but seldom for corrective reasons. (3) North America may be at the cusp of a manufacturing renaissance, but not because of reshoring. (4) China remains the most attractive site for production sourcing, followed by the developing economies in Eastern Europe and Southern Asia. (5) Manufacturing continues to decline in the developed economies of Japan and Western Europe. (6) Labor cost no longer drives decisions about manufacturing location; rather, firms decide based on complex trade-offs among a variety of factors. (7) Firms localize production in developed economies and use developing economies as production hubs.
{"title":"OM Forum -- Benchmarking Global Production Sourcing Decisions: Where and Why Firms Offshore and Reshore","authors":"Morris A. Cohen, Shiliang Cui, R. Ernst, Arnd Huchzermeier, Panos Kouvelis, Hau L. Lee, Hirofumi Matsuo, M. Steuber, A. Tsay","doi":"10.2139/ssrn.2791373","DOIUrl":"https://doi.org/10.2139/ssrn.2791373","url":null,"abstract":"This paper reports on the results of a global field study conducted in 2014 and 2015 among leading manufacturers from a wide range of industries. It provides insights on managerial practices that concern production sourcing and on the factors that drive such decisions. Exploratory factor analysis and logistic regression models that use survey response data yield seven key findings. (1) Companies are currently restructuring their global production footprints. (2) The majority of firms engage in offshoring; reshoring does occur but seldom for corrective reasons. (3) North America may be at the cusp of a manufacturing renaissance, but not because of reshoring. (4) China remains the most attractive site for production sourcing, followed by the developing economies in Eastern Europe and Southern Asia. (5) Manufacturing continues to decline in the developed economies of Japan and Western Europe. (6) Labor cost no longer drives decisions about manufacturing location; rather, firms decide based on complex trade-offs among a variety of factors. (7) Firms localize production in developed economies and use developing economies as production hubs.","PeriodicalId":322512,"journal":{"name":"Georgetown University McDonough School of Business Research Paper Series","volume":"8 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-07-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121230774","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 study initiatives for novel co-development projects, where it may be difficult a priori to specify contracts contingent on the project outcome. In such settings, firms often rely on simple contracts that specify the decision-making process by allocating decision rights. Our goal is to study the effectiveness and design of such governance structures in incentivizing co-operative efforts and maximizing the total value of the project. In our model, a seller and a buyer consider a menu of non-contingent contracts, each of which specify a quantity and an associated transfer payment. The contracts also specify decision rights to set the contract terms upfront (ex-ante) and to choose the quantity after the market potential is realized (ex-post). Our results bear several important implications for the optimal allocation of decision rights and the value of contracting: First, when a decision right is delegated to the seller, he exerts higher effort towards the project. However, the seller may exert lower effort when he has both the decision rights as opposed to when he only has the ex-post decision right. Second, when the buyer has low bargaining power, the ex-post decision right should be delegated to the seller, i.e., the party with lower exposure to the effort-contingent outcome. Otherwise, the ex-post decision right should be delegated to the buyer but the ex-ante right should be held by the seller. Finally, we show that simple contracts with decision rights outperform a spot contract when the ex-post bargaining power of one of the parties is substantially higher.
{"title":"The Role of Decision Rights in Co-Development Initiatives","authors":"Vishal V. Agrawal, Nektarios Oraiopoulos","doi":"10.2139/ssrn.2436507","DOIUrl":"https://doi.org/10.2139/ssrn.2436507","url":null,"abstract":"We study initiatives for novel co-development projects, where it may be difficult a priori to specify contracts contingent on the project outcome. In such settings, firms often rely on simple contracts that specify the decision-making process by allocating decision rights. Our goal is to study the effectiveness and design of such governance structures in incentivizing co-operative efforts and maximizing the total value of the project. In our model, a seller and a buyer consider a menu of non-contingent contracts, each of which specify a quantity and an associated transfer payment. The contracts also specify decision rights to set the contract terms upfront (ex-ante) and to choose the quantity after the market potential is realized (ex-post). Our results bear several important implications for the optimal allocation of decision rights and the value of contracting: First, when a decision right is delegated to the seller, he exerts higher effort towards the project. However, the seller may exert lower effort when he has both the decision rights as opposed to when he only has the ex-post decision right. Second, when the buyer has low bargaining power, the ex-post decision right should be delegated to the seller, i.e., the party with lower exposure to the effort-contingent outcome. Otherwise, the ex-post decision right should be delegated to the buyer but the ex-ante right should be held by the seller. Finally, we show that simple contracts with decision rights outperform a spot contract when the ex-post bargaining power of one of the parties is substantially higher.","PeriodicalId":322512,"journal":{"name":"Georgetown University McDonough School of Business Research Paper Series","volume":"87 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-05-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117297285","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}
Turan G. Bali, Stephen J. Brown, Scott Murray, Yi Tang
The low (high) abnormal returns of stocks with high (low) beta, which we refer to as the beta anomaly, is one of the most persistent anomalies in empirical asset pricing research. This article demonstrates that investors’ demand for lottery-like stocks is an important driver of the beta anomaly. The beta anomaly is no longer detected when beta-sorted portfolios are neutralized to lottery demand, regression specifications control for lottery demand, or factor models include a lottery demand factor. The beta anomaly is concentrated in stocks with low levels of institutional ownership and it exists only when the price impact of lottery demand is concentrated in high-beta stocks.
{"title":"A Lottery Demand-Based Explanation of the Beta Anomaly","authors":"Turan G. Bali, Stephen J. Brown, Scott Murray, Yi Tang","doi":"10.2139/SSRN.2408146","DOIUrl":"https://doi.org/10.2139/SSRN.2408146","url":null,"abstract":"The low (high) abnormal returns of stocks with high (low) beta, which we refer to as the beta anomaly, is one of the most persistent anomalies in empirical asset pricing research. This article demonstrates that investors’ demand for lottery-like stocks is an important driver of the beta anomaly. The beta anomaly is no longer detected when beta-sorted portfolios are neutralized to lottery demand, regression specifications control for lottery demand, or factor models include a lottery demand factor. The beta anomaly is concentrated in stocks with low levels of institutional ownership and it exists only when the price impact of lottery demand is concentrated in high-beta stocks.","PeriodicalId":322512,"journal":{"name":"Georgetown University McDonough School of Business Research Paper Series","volume":"140 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132867791","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}
Pub Date : 2016-08-29DOI: 10.1108/JBIM-12-2015-0245
R. Thomas
Purpose The purpose of this paper is to explore the possibility of identifying market segments in multistage markets and assessing whether their alignment could provide a useful managerial approach to find competitive advantage and better understand market opportunities. Design/methodology/approach Using data from a pilot project, need-based market segments from different market stages were identified and their potential alignment evaluated. The data were not designed to test hypotheses, nor were they originally intended to be used to align segments. Nevertheless, they provided a unique opportunity to explore multistage segmentation and segment alignment in a business-to-business (B2B) setting. Findings Overall, the findings of this exploratory study should encourage both academics and practitioners to continue to explore the possibility of studying and aligning multistage market segments. The possibility of aligning segments was demonstrated using visual alignment based on managerial judgment of data and alignment based on a combined cluster analysis of customers across the multistage markets. Research limitations/implications First, the market research was not specifically designed to formulate and test hypotheses about the feasibility of aligning segments in multistage markets – it is an exploratory study. The research was based on a pilot project, and the survey-derived databases were conveniently available for analysis. While sample sizes were small, they are typical of many B2B markets. Second, to more effectively study complex relationships in multistage markets, it would have been desirable to include a more comprehensive set of needs. Each market stage has not only a set of their own perceived needs but also a set of perceptions of the needs of other stages. Third, as in many B2B studies, the data used in this pilot project were based on single informants. Practical implications A common complaint among firms is that B2B market segmentation does not really work that well for them. An unexplored reason for this may be that true market segmentation does not stop with one’s direct customer, but should also include the customer’s customer and so on, in a multistage market segmentation structure. One implication of the research presented here suggests that better understanding the segmentation structure in a multistage market can enlighten the opportunities and risks of implementing such a strategy. Multistage market segmentation alignment may lead to innovative positioning and message levers for the sales force to use as an argument to gain advantage according to common and unique aligned segment needs. Social implications The process may be applied to social institutions in addition to commercial organizations. Originality/value While it is obvious that market segmentation can be applied to any single market of customers, the
{"title":"Multistage Market Segmentation: An Exploration of B2B Segment Alignment","authors":"R. Thomas","doi":"10.1108/JBIM-12-2015-0245","DOIUrl":"https://doi.org/10.1108/JBIM-12-2015-0245","url":null,"abstract":"Purpose \u0000 \u0000 \u0000 \u0000 \u0000The purpose of this paper is to explore the possibility of identifying market segments in multistage markets and assessing whether their alignment could provide a useful managerial approach to find competitive advantage and better understand market opportunities. \u0000 \u0000 \u0000 \u0000 \u0000Design/methodology/approach \u0000 \u0000 \u0000 \u0000 \u0000Using data from a pilot project, need-based market segments from different market stages were identified and their potential alignment evaluated. The data were not designed to test hypotheses, nor were they originally intended to be used to align segments. Nevertheless, they provided a unique opportunity to explore multistage segmentation and segment alignment in a business-to-business (B2B) setting. \u0000 \u0000 \u0000 \u0000 \u0000Findings \u0000 \u0000 \u0000 \u0000 \u0000Overall, the findings of this exploratory study should encourage both academics and practitioners to continue to explore the possibility of studying and aligning multistage market segments. The possibility of aligning segments was demonstrated using visual alignment based on managerial judgment of data and alignment based on a combined cluster analysis of customers across the multistage markets. \u0000 \u0000 \u0000 \u0000 \u0000Research limitations/implications \u0000 \u0000 \u0000 \u0000 \u0000First, the market research was not specifically designed to formulate and test hypotheses about the feasibility of aligning segments in multistage markets – it is an exploratory study. The research was based on a pilot project, and the survey-derived databases were conveniently available for analysis. While sample sizes were small, they are typical of many B2B markets. Second, to more effectively study complex relationships in multistage markets, it would have been desirable to include a more comprehensive set of needs. Each market stage has not only a set of their own perceived needs but also a set of perceptions of the needs of other stages. Third, as in many B2B studies, the data used in this pilot project were based on single informants. \u0000 \u0000 \u0000 \u0000 \u0000Practical implications \u0000 \u0000 \u0000 \u0000 \u0000A common complaint among firms is that B2B market segmentation does not really work that well for them. An unexplored reason for this may be that true market segmentation does not stop with one’s direct customer, but should also include the customer’s customer and so on, in a multistage market segmentation structure. One implication of the research presented here suggests that better understanding the segmentation structure in a multistage market can enlighten the opportunities and risks of implementing such a strategy. Multistage market segmentation alignment may lead to innovative positioning and message levers for the sales force to use as an argument to gain advantage according to common and unique aligned segment needs. \u0000 \u0000 \u0000 \u0000 \u0000Social implications \u0000 \u0000 \u0000 \u0000 \u0000The process may be applied to social institutions in addition to commercial organizations. \u0000 \u0000 \u0000 \u0000 \u0000Originality/value \u0000 \u0000 \u0000 \u0000 \u0000While it is obvious that market segmentation can be applied to any single market of customers, the","PeriodicalId":322512,"journal":{"name":"Georgetown University McDonough School of Business Research Paper Series","volume":"39 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-08-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132694532","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}
Problem definition: We study how extended producer responsibility (EPR) legislation implementations for durable products should differ from those for nondurable products. Academic/practical relevan...
{"title":"Extended Producer Responsibility for Durable Products","authors":"Isil Alev, Vishal V. Agrawal, A. Atasu","doi":"10.2139/ssrn.2477943","DOIUrl":"https://doi.org/10.2139/ssrn.2477943","url":null,"abstract":"Problem definition: We study how extended producer responsibility (EPR) legislation implementations for durable products should differ from those for nondurable products. Academic/practical relevan...","PeriodicalId":322512,"journal":{"name":"Georgetown University McDonough School of Business Research Paper Series","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121555904","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}
Christopher I. Rider, James B. Wade, A. Swaminathan, A. Schwab
Organizational leaders remain predominantly white despite increasing U.S. workforce diversity and efforts to increase racial minority representation in leadership. We propose that performance-reward bias (i.e., lesser rewards for equivalent performance) generates racial disparity in leadership by suppressing the rate at which minorities, relative to equally-performing whites, are promoted to positions considered prerequisite for organizational leadership. Career history analyses of over 1,200 National Football League coaches from 1985 to 2012 support this claim. Various fixed-effects specifications hold constant a coach’s initial and current position, enabling us to differentiate performance-reward bias from allocative mechanisms that match minorities, at hire and post-hire, to positions with inferior upward mobility prospects. We also examine racial disparity before and after implementation of a league-wide policy explicitly designed to increase the number of minorities interviewed for leadership positions. Although the disparity in head coach representation decreased after implementation, pre-implementation demographic trends prevent us from conclusively attributing this increase to the policy. Less equivocally, after implementation white assistant coaches continued to be promoted at higher rates than similarly-performing minority ones. Moreover, consistent with our arguments, this white advantage in promotion rates is specific to the transition from lower level positions to the one typically occupied prior to promotion to head coach (i.e., coordinators); no racial advantage is evident among occupants of this position. We conclude that racial disparity in organizational leadership is largely attributable to performance-reward bias in lower level positions.
{"title":"Racial Disparity in Leadership: Performance-Reward Bias in Promotions of National Football League Coaches","authors":"Christopher I. Rider, James B. Wade, A. Swaminathan, A. Schwab","doi":"10.2139/ssrn.2710398","DOIUrl":"https://doi.org/10.2139/ssrn.2710398","url":null,"abstract":"Organizational leaders remain predominantly white despite increasing U.S. workforce diversity and efforts to increase racial minority representation in leadership. We propose that performance-reward bias (i.e., lesser rewards for equivalent performance) generates racial disparity in leadership by suppressing the rate at which minorities, relative to equally-performing whites, are promoted to positions considered prerequisite for organizational leadership. Career history analyses of over 1,200 National Football League coaches from 1985 to 2012 support this claim. Various fixed-effects specifications hold constant a coach’s initial and current position, enabling us to differentiate performance-reward bias from allocative mechanisms that match minorities, at hire and post-hire, to positions with inferior upward mobility prospects. We also examine racial disparity before and after implementation of a league-wide policy explicitly designed to increase the number of minorities interviewed for leadership positions. Although the disparity in head coach representation decreased after implementation, pre-implementation demographic trends prevent us from conclusively attributing this increase to the policy. Less equivocally, after implementation white assistant coaches continued to be promoted at higher rates than similarly-performing minority ones. Moreover, consistent with our arguments, this white advantage in promotion rates is specific to the transition from lower level positions to the one typically occupied prior to promotion to head coach (i.e., coordinators); no racial advantage is evident among occupants of this position. We conclude that racial disparity in organizational leadership is largely attributable to performance-reward bias in lower level positions.","PeriodicalId":322512,"journal":{"name":"Georgetown University McDonough School of Business Research Paper Series","volume":"30 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-01-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125751844","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}
Prior research finds that taxable income is a more useful performance metric when book income quality is low (i.e., the “supplemental information role of taxable income”). We predict and find that taxable income’s supplemental information role for future earnings growth increases over time as book income quality declines over time. This time-series increase in the supplemental information role of taxable income is associated with temporal changes in the market pricing of book-tax differences. We find that mispricing disappears over time in firms where the supplemental information role of taxable income is less pronounced, but persists in firms where the supplemental information role of taxable income is more pronounced. Thus, the complexity of tax-based information and the time-series increase in the supplemental role of taxable income appear to be factors that limit investor learning. Investigating the increase in the supplemental information role of taxable income helps researchers and market participants better understand the time-series implications of two different performance metrics for predicting earnings growth and the equity valuation process as book income quality declines over time.
{"title":"Implications of the Time-Series Increase in the Relative Informativeness of Taxable Income for Future Earnings and Stock Returns","authors":"Sangwan Kim, Allison Koester, Steve C. Lim","doi":"10.2139/ssrn.2505739","DOIUrl":"https://doi.org/10.2139/ssrn.2505739","url":null,"abstract":"Prior research finds that taxable income is a more useful performance metric when book income quality is low (i.e., the “supplemental information role of taxable income”). We predict and find that taxable income’s supplemental information role for future earnings growth increases over time as book income quality declines over time. This time-series increase in the supplemental information role of taxable income is associated with temporal changes in the market pricing of book-tax differences. We find that mispricing disappears over time in firms where the supplemental information role of taxable income is less pronounced, but persists in firms where the supplemental information role of taxable income is more pronounced. Thus, the complexity of tax-based information and the time-series increase in the supplemental role of taxable income appear to be factors that limit investor learning. Investigating the increase in the supplemental information role of taxable income helps researchers and market participants better understand the time-series implications of two different performance metrics for predicting earnings growth and the equity valuation process as book income quality declines over time.","PeriodicalId":322512,"journal":{"name":"Georgetown University McDonough School of Business Research Paper Series","volume":"7 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-12-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124848445","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}
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