Forthcoming Articles

Does Industry Timing Ability of Hedge Funds Predict Their Future Performance, Survival, and Fund Flows?

Turan G. Bali, Stephen J. Brown, Mustafa O. Caglayan, and Umut Celiker

This paper investigates hedge funds’ ability to time industry-specific returns and shows that funds’ timing ability in the manufacturing industry improves their future performance, probability of survival, and ability to attract more capital. The results indicate that best industry-timing hedge funds in the manufacturing sector have the highest return exposure to earnings surprises. This, together with persistently sticky earnings surprises, transparent information environment in regards to earnings releases, and large post-earnings-announcement drift in the manufacturing industry, explain to a great extent why best-timing hedge funds can generate significantly larger future returns compared to worst-timing hedge funds.

Network Centrality and Managerial Market Timing Ability

Theodoros Evgeniou, Joel Peress, Theo Vermaelen, and Ling Yue

We document that long-run excess returns following announcements of share buyback authorizations and insider purchases are a U-shape function of firm centrality in the input-output trade flow network. These results conform to a model of investors endowed with a large but finite capacity for analyzing firms. Additional links weaken insiders’ informational advantage in peripheral firms (simple firms whose cash flows depend on few economic links) provided investors’ capacity is large enough, but eventually amplify that advantage in central firms (firms with many links) due to investors’ limited capacity. These findings shed light on the sources of managerial market timing ability.

Ex-Post Bargaining, Corporate Cash Holdings, and Executive Compensation

Yingmei Cheng, Jarrad Harford, Irena Hutton, and Stephan Shipe

We show that high cash holdings can be used by executives in the ex-post bargaining over their compensation. Cash holdings is positively associated with CEO compensation and is driven by non-salary components. In companies with weaker governance, this relation is more pronounced. Using exogenous shocks to the firms’ cash, we show that CEO compensation readily responds to increases in cash holdings, confirming that managers are able to derive personal benefits from excess cash holdings.

Do Funding Conditions Explain the Relation Between Cash Holdings and Stock Returns?

Tyler K. Jensen

Prior literature links cash holdings and returns (Simutin (2010), Palazzo (2012)). Using two signals of aggregate funding availability, we find that the positive association between cash and returns only exists during constrained funding environments. In unconstrained periods, there is no association between cash and returns. The relation in constrained environments does not appear related to capital expenditures, expected return or distress risk, but is more prevalent in firms undertaking R&D expenditures. This suggests that the association between cash and returns is more consistent with expanding (or maintaining) future growth opportunities, rather than attributed to differences in capital expenditures or risk.

The Fragility of Organization Capital

Oliver Boguth, David Newton, and Mikhail Simutin

Firms with high levels of organization capital, a firm-specific production factor provided by key employees, are known to be risky and earn high stock returns. We argue that fragility of organization capital – its sensitivity to disruptions – is an independently important dimension of this risk. We proxy for fragility by the size of the top management team and show that firms with small teams outperform by 5% annually. The return spread increases with organization capital and correlates with outside options of top executives. Further supporting our interpretation, shocks to team composition from unexpected CEO deaths cause larger losses in smaller teams.

Does Government Spending Crowd Out R&D Investment? Evidence from Government-Dependent Firms and Their Peers

Phong T. H. Ngo, and Jared Stanfield

We provide evidence that managerial incentives to manipulate real activities can influence the effectiveness of fiscal policy. Increases in federal spending lead government-dependent firms to expand R&D investment whereas industry-peer firms contract. The net result is a reduction in industry-level R&D investment. We find evidence of a novel mechanism for the crowding out of peer-firm investment: peer-firm managers respond to falling relative performance by cutting R&D to manage current earnings upward. We show that these differential responses manifest in firm value. These findings are robust to endogeneity and selection concerns as well as a battery of alternative explanations.

The Exploratory Mindset and Corporate Innovation

Zhaozhao He and David Hirshleifer

We propose that CEO exploratory mindset – inherent desire to search for novel ideas and long-term orientation – promotes innovation. Firms with PhD CEOs produce more exploratory patents with greater novelty, generality, and originality. PhD CEOs engage less in managing earnings and stock prices, invest more in R&D and alliances, generate higher long-term value of patents, and experience more positive market reactions to R&D alliances. Their firms achieve superior long-run operating performance. They tend to be hired by research-intensive firms with poor financial performance. Evidence from managerial incentive shocks and turnovers suggests that these effects do not derive solely from CEO-firm matching.

Cash Holdings, Capital Structure, and Financing Risk

Qi Sun and Junjie Xia

This paper quantifies a new motive of holding cash through the channel of financing risk. We show that if the access to future credit is risky, firms may issue long-term debt now and save funds in cash to secure the current credit capacity for the future. We structurally estimate the model and find that this motive explains about 24% to 30% of cash holdings in the data. Counterfactual experiments indicate that the value of holding cash is around 8% of shareholder value.

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