Do Managers exploit private information of their investor base? (JMP, coming soon)

Warren Buffett talks about "Stock Watch" firms during a CNBC interview

I investigate whether managers obtain and exploit private information about who is buying and selling their firm’s stock. To do so, I examine insider trading prior to activist investors’ disclosure of Schedule 13Ds. Schedule 13Ds are required when investors have acquired more than 5% of a firm’s shares, and they cause a significant price jump of approximately 6% upon disclosure. I find that insider purchases (sales) are abnormally high (low) in the days prior to the disclosure of Schedule 13Ds. These pre-disclosure insider purchases are higher when activist investors make larger trades since they are more likely to be detected by insiders. The stock market fails to recognize that insiders trade ahead of the Schedule 13D filings, as reflected by the fact that pre-disclosure insider trading does not facilitate price discovery in the underlying firms. Furthermore, I find that the pre-disclosure insider trading is predictive of the firm’ future stock and operating performance, consistent with managers exploiting private information when they expect it to generate greater profits. Taken together, my results suggest that managers obtain private information concerning their firm’s investor base and exploit it for personal gain.

On the capital market consequences of alternative data: Evidence from outer space (with Zsolt Katona, Marcus Painter, Panos Patatoukas)

  • In preparation for submission
  • Presentations: SEC (Aug 2019), Financial Management Association (2019), 9th Miami Behavioral Finance Conference Doctoral Poster Session, the Future of Financial Information conference (Stockholm, 2019)
  • Media mentions: The Atlantic; Quartz; Canadian Investment Review; Haas Newsroom

We study the emergence of satellite imagery of parking lot traffic across major U.S. retailers as a source of alternative data in capital markets. We find that while measures of parking lot traffic from outer space embed timely value-relevant information, stock prices do not incorporate this information prior to the public disclosure of retailer performance for the quarter. This creates opportunities for sophisticated investors, who can afford to incur the costs of acquiring and processing satellite imagery data, to formulate profitable trading strategies at the expense of individual investors, who tend to be on the other side of the trade. Our evidence suggests that unequal access to alternative data increases information asymmetry among market participants without necessarily facilitating stock price discovery.

  • Forthcoming, Accounting Horizon

We propose a new set of citation metrics for evaluating the relative impact of scholarly research in accounting. Our metrics are based on current practices in bibliometrics and normalize citations by both field (accounting) and year of publication. We show that our normalized citation metrics dominate other commonly used metrics in accounting when predicting the long-term citation impact of recently published research. We conduct our analysis using citations from the Social Science Citation Index for the top six general interest accounting journals. More generally, our metrics can be readily constructed using any citation database and for any subfield of accounting. The metrics simply require the total citation counts for a benchmark set of papers published in the same calendar year. The use of these metrics should enable more informed performance evaluations of junior accounting researchers.

What Drives Acquisition Premiums and Why do Targets Reject Offers? Evidence from Failed Acquisition Offers (with David Aboody, Omri Even-Tov)

  • Revise & Resubmit, Journal of Corporate Finance

Using a hand-collected sample of 1,248 failed acquisition offers from 1979 to 2016, we investigate whether acquisition premiums are driven by the market’s revaluation of the target (the information hypothesis) or potential synergies (the synergy hypothesis). Partitioning the sample into acquisition offers that fail due to the target’s rejection (rejection group) and those that fail due to other reasons (non-rejection group), we find that the information hypothesis applies to both groups, reversing the interpretation of prior studies. Overall, our paper shows that identifying the failure reason is of prominent importance for research in mergers and acquisitions.

On the Origins of Forecast Walk-Downs (with Panos N. Patatoukas, Ari Yezegel)

  • In preparation for submission
  • Presentation: Hawaii Accounting Research Conference (2019), Bentley University (2018)

Are strategic incentives for bias among forecasters a necessary condition for forecast walk-downs? We identify the group of professional macro forecasters affiliated with the Federal Reserve System as a setting where forecasters are free from strategic incentives to cater to management. Unlike sell-side analysts, who have incentives to curry favor with management when forecasting corporate earnings, this group of macro forecasters faces strong incentives to produce unbiased projections of the U.S. economy. Remarkably, we document a walk-down in their macro growth forecasts. Whereas most prior explanations for forecast walk-downs are conditioned on strategic incentives for bias, we find that asymmetrically high forecasting difficulty in downturns relative to upturns of the U.S. economy can explain the macro walk-down, even in the absence of such incentives. Our paper contests the traditional view of forecast walk-downs as de facto evidence of preexisting strategic incentives for forecast bias. One overarching implication is that research on sell-side forecasts should consider strategic incentives for bias alongside information about the state of the U.S. economy and heterogeneity in the cyclical exposure of individual firms to macro fluctuations.