Research Lab

Hedge fund activism is a new form of investment strategy. Using a large handcollected data set from 2001 to 2006 we find that activist hedge funds in the U.S. propose strategic, operational, and financial remedies and attain success or partial success in two-thirds of the cases. The abnormal stock return upon announcement of activism is approximately seven percent, with no reversal during the subsequent year. Target firms experience increases in payout, operating performance, and higher CEO turnover after activism.

A basket default swap is a derivative security tied to an underlying basket of corporate bonds or other assets subject to credit risk. The value of the contract depends on the joint distribution of the default times of the underlying assets. Valuing a basket default swap often entails Monte Carlo simulation of these default times. For baskets of high-quality credits and for swaps that require multiple defaults to trigger payment, pricing the swap is a rare-event simulation problem.

The pressure to meet/beat analysts' expectations is often blamed for the recent onslaught of accounting scandals. We investigate changes in the meeting/beating phenomenon post-scandals and find that the stock market premium to meeting or just beating analyst estimates has disappeared while the premium to beating by a larger margin has diminished. In the post-scandals period, managers tend to meet or just beat analysts' forecasts less often. Further, managers rely less on income-increasing discretionary accruals and more on earnings guidance.

Consider an economy in which the underlying security returns follow a linear factor model with constant coeffcients. While portfolios that invest in these securities will, in general, have a linear factor structure, it will be one with time-varying coeffcients. However, under certain assumptions regarding the portfolio's investment strategy, it is possible to estimate these time-varying alphas and betas.

The Securities and Exchange Commission (SEC) recently issued a call for comment on a proposal to accept financial statements prepared in accordance with International Financial Reporting Standards (IFRS) without reconciliation to U.S. GAAP. Accounting researchers have attempted to assess the quality of IFRS using different methods and criteria. While we are skeptical of drawing direct conclusions about the SEC’s proposal based on this research, there is adequate evidence that both IFRS and U.S. GAAP provide useful information to investors and other users of financial statements.

We examine the association between CEO reputation (proxied by the extent of press coverage) and the quality of the firm's earnings (proxied by two accruals-based measures). We test three explanations for an association between these constructs: the efficient contracting hypothesis suggests that reputed CEOs are associated with good earnings quality, while the rent extraction and matching explanations argue that reputed CEOs are associated with poor earnings quality.

Our results are broadly consistent with the predictions of a benign view of the role of investment banks in advising acquisition targets. Fees to investment banks are correlated with attributes of transactions and target firms in ways that make sense if banks are being paid for processing information. The more contingent (and, therefore, risky) the fees, the higher they tend to be, all else held constant. Variation in acquisition premia also can be explained by fundamental deal attributes.

We analyze data on fees paid to investment bankers and acquisition premia paid for targets in cash tender offers. Our results are broadly consistent with the predictions of a benign view of the role of investment banks in advising acquisition targets. Fees to investment banks are correlated with attributes of transactions and target firms in ways that make sense if banks are being paid for processing information. The more contingent (and, therefore, risky) the fees, the higher they tend to be, all else held constant.

This paper aims to provide a theory of current account adjustment that generalizes the textbook version of the intertemporal approach to current account and places domestic labor market institutions at the center stage. In general, in response to a shock, an economy adjusts through a combination of a change in the composition of goods trade (i.e., intra-temporal trade channel) and a change in the current account (i.e., intertemporal trade channel). The more rigid the labor market, the slower the speed of adjustment of the current account towards its long-run equilibrium.