One stream of my research examines the impact of corporate disclosures on capital markets and seeks to inform stockholders and the leadership of public companies. Specifically, the disclosures I study are companies’ announcements of strategic alternatives and, separately, managerial estimates of asset values contained in financial reports. I study how these disclosures are associated with firm performance and valuation.
To highlight some of my research in this realm, I document the stock price effects and costs and benefits following from companies’ announcements that they are evaluating strategic alternatives, i.e., evaluating a potential sale or merger. On one hand, the public dissemination of information results in a greater number of and more diverse set of bidders. On the other hand, public knowledge and perception of an imminent sale disrupts business operations and relationships with customers and employees. These announcements lead to positive stock returns immediately but long-run future returns diverge, depending on whether an eventual transaction is consummated. However, for the group, on average, the long-run returns are negative and statistically significant, which suggest overreaction and mispricing, at least partially, by investors.
A second stream of my research defines and evaluates measures of accruals. Accruals represent the non-cash changes in a company’s assets and liabilities. Unusually extreme accruals may reveal a company’s poor or nefarious accounting, which in turn distorts earnings’ ability to reflect firm performance.
To highlight my research in this stream, my work has proposed a regression-based model to estimate how aggressively a firm is recognizing revenues, using abnormal revenue-related accruals. It can detect accelerated timing of revenue recognition involving deferred revenues and channel-stuffing and fictitious sales booked on account. My research also evaluates various methods of establishing the overall quality of a company’s earnings, where having high quality earnings is more desirable and more informative to investors and creditors. Another study organizes the various types of accruals and provides a comprehensive decomposition of total accruals. For example, accruals can result from financing transactions such as issuing debt and preferred equity, or accruals can result from operating transactions such as purchasing inventory and making certain acquisitions or other investments. Understanding these different types of accruals are important because they have different economic magnitudes and relations with future firm performance.