1. Wealth Destruction Effects of Annual Management Forecasts: Evidence from Natural Experiments (Click here for SSRN link)
Presentations: 1. TADC, LBS 2016 2. Temple University Conference, 2016
Abstract: Exploiting staggered exogenous shocks to management guidance, I provide evidence that the practice of providing numerical annual earnings forecasts leads to shareholder wealth destruction by (1) exacerbating managerial short-termism and (2) causing a more opaque information environment for the firm. Specifically, I find that firms cut long-term investments in an attempt to meet earnings target set by their own forecasts. In addition, numerical annual forecasts lead to a reduction in analyst coverage and a deterioration in stock market liquidity. These adverse consequences manifest in a loss of shareholder value and a gradual decline in firm growth. The findings are robust to controlling for alternative explanations and a battery of falsification tests. Collectively, the evidence casts doubt on the desirability of numerical annual earnings guidance as a value-enhancing corporate practice.
2. Do Conservative Auditors Induce Myopic Underinvestment in R&D? (With Ole-Kristian Hope) (Click here for SSRN link)
Abstract: In this study, we examine whether and how an increase in auditor litigation risk affects client innovation. Exploiting multiple state-level and staggered exogenous shocks that both increase and decrease legal liability for audit failures as a means of identification, we provide evidence that increased auditor legal liability has a detrimental effect on innovation as measured by patent-based metrics. The findings highlight a potential negative externality of increased auditor legal liability and provide insights about how regulation could potentially distort managerial incentives and firm investments.
3. Growth Opportunities, Leverage and Financial Contracting: Evidence from Exogenous Shocks to Public Spending (With Jeffrey Callen) (Click here for SSRN link)
Presentations: 1. CFEA 2016