 Home | Stanford Faculty Bio | Vita | Research | Courses | Contact | |||
|
|
| Home | Stanford Faculty Bio | Vita | Research | Courses | Contact | |||
|
|
Publications
SEC Rule 10b5-1 and Insiders' Strategic Trade
Management Science, forthcoming
Abstract: The SEC enacted Rule 10b5-1 to deter insiders from trading with private information, yet also protect insiders' preplanned, non-information-based trades from litigation. Despite its requirement that insiders plan trades when not privately informed, the Rule appears to enable strategic trade. Participating insiders' sales systematically follow positive and precede negative firm performance, generating abnormal forward-looking returns larger than those earned by non-participating colleagues. The observed association does not appear to be explained by market transaction disclosure response, “predictable” reversion following positive performance, or general periodic price declines. There is evidence, however, that a substantive proportion of randomly drawn plan initiations are associated with pending adverse news disclosures. There is also evidence that early sales plan terminations are associated with pending positive performance shifts, reducing the likelihood that insiders' sales execute at low prices. Collectively, this suggests that, on average, trading within the Rule does not solely reflect uninformed diversification.
An Analysis of Insiders' Use of Prepaid Variable Forward Transactions
(with Steve Matsunaga and Eric Yeung)Journal of Accounting Research, December 2007
Abstract:
This study examines firm performance surrounding insiders' Prepaid Variable Forward (PVF) transactions to infer insiders' information when they enter these off-market contracts. PVFs allow insiders to hedge downside risk, share performance gains, and obtain immediate large-sum cash payments for investment or consumption. On average, PVF transactions cover 30% of a sample insider's firm-specific wealth ($22 million), which is substantially larger than a typical open-market sale. PVFs systematically follow strong firm performance and precede degraded stock and earnings performance. PVFs also precede periods of negative abnormal returns relative to potential alternative investments. The documented association between PVFs and performance declines does not appear to result from the market's response to transaction disclosure, participant self-selection, or general price reversals. Thus, evidence suggests that insiders use PVFs to diversify firm-specific holdings in anticipation of performance declines.
Working Papers
Market Reaction to the Adoption of IFRS in Europe
(with Christopher Armstrong, Mary Barth, and Edward Riedl)
Abstract: This study examines the European stock market reaction to sixteen events associated with the adoption of International Financial Reporting Standards (IFRS) in Europe. European IFRS adoption represented a major milestone towards financial reporting convergence yet spurred controversy reaching the highest levels of government. We find that investors reacted positively to events that increased the likelihood of IFRS adoption and negatively to events that decreased it. We also find that investor reaction was more positive for firms with lower quality pre-adoption information environments, with higher pre-adoption information asymmetry, and domiciled in common law countries. Tests comparing investor reaction for banks and non-banks suggest that the market reaction we document reflects implications of IFRS adoption generally, not just those associated with the controversial International Accounting Standard 39. The findings also suggest that European equity investors expect net benefits from IFRS adoption associated with convergence and increased information quality.
Timing of Employee Stock Option Exercises and the Cost of Stock Option Grants
(with Christopher Armstrong and David Larcker)
Abstract:
This study examines how employees' option exercise behavior affects firms' cost estimates of their employee stock option grants. Prior research suggests that utility-based models of early option exercise do not yield different cost estimates than those produced by simple adjustments of the exercise time within the Black-Scholes option pricing model. This study shows, however, that the accuracy of option exercise timing estimates is significantly improved when exercise rates are modeled as a function of behavioral and economic factors such as attainment of performance benchmarks, recent vesting, the portfolio value of existing options, and employee rank. In addition, estimates of the cost of stock option grants that account for these factors are both statistically and economically different than cost estimates computed from commonly used models outlined in present regulatory guidance for financial reporting.
Chief Executive Officer Equity Incentives and Accounting Irregularities
(with Christopher Armstrong and David Larcker)
Abstract:
This study examines whether Chief Executive Officer (CEO) equity holdings and equity compensation provide incentives for CEOs to manipulate accounting reports. While several prior studies have examined this important question, the empirical evidence is mixed and the existence of a link between CEO equity incentives and accounting irregularities remains an open question. We examine this research question using a much broader sample to improve power and with refined econometric methods to enhance the validity of our inferences. In contrast to most prior research, we do not find evidence of a positive association between CEOs' equity incentives and accounting irregularities. In fact, we find some evidence that accounting irregularities occur less frequently at firms where CEOs have relatively higher levels of equity incentives. This suggests that, with respect to financial reporting, equity incentives align managers' interests with those of shareholders.
(with M. Todd Henderson and Karl Muller)
Abstract:
This study examines implications of “scienter disclosure” through an analysis of voluntary disclosures regarding insiders’ Rule 10b5-1 trading plans. Prior theory suggests that disclosing informed traders’ intent to trade is not strategically advantageous, but this theory does not account for litigation risk reduction resulting from disclosure. Legal precedent regarding Rule 10b5-1 affords legal risk reduction to disclosure, therefore voluntary disclosure offers an interesting theoretical test. Evidence indicates that Rule 10b5-1 disclosure increases with firm litigation risk and insider strategic trade potential. Evidence also indicates that Rule 10b5-1 disclosure is associated with greater abnormal returns to insiders’ trades, especially for firms disclosing specific plan details. This evidence suggests that legal risk can compel firms to depart from a non-disclosure strategy and that disclosure might enhance strategic trade. Evidence also suggests that non-disclosing firms are least associated with strategic trade; therefore proposed mandatory Rule 10b5-1 disclosure might not mitigate strategic behavior.
|
Terms of Use
| Online Privacy Policy | Help
| Stanford University | GSB Home
|
