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Using data from securities analysts, who are awarded status by the third-party organization Institutional Investor magazine, we examine the emergence of competition and articulate a model of competitive response among actors aware of the importance of status and some of the dimensions on which it may be gained. We predict analysts’ initiating or ceasing coverage of stocks in response to other analysts initiating coverage on stocks they cover. We find that competition can emerge because of status seeking rather than as a response to own capabilities or market needs, with compelling, and potentially negative, market implications for overt status seeking.

In M&A markets, acquirers face a hold-up problem of losing the value of investments they make in due diligence, negotiations, and post-acquisition planning if targets would pursue the options of waiting for better offers or selling to an alternative bidder. This chapter extends information economics to the literature on M&A contracting by arguing that such contracting problems are more likely to occur for targets with better outside options created by the information available on their resources and prospects. We also argue that acquirers address these contracting problems by using termination payment provisions to safeguard their investments. While previous research in corporate strategy and finance has suggested that certain factors can facilitate an acquisition by reducing a focal acquirer’s risk of adverse selection (e.g., signals, certifications), we note that these same factors can make the target attractive to other potential bidders and can exacerbate the risk of hold-up, thereby leading acquirers to use termination payment provisions as contractual safeguards.

We evaluate the performance of financial analysts versus naïve models in making long-term earnings forecasts. Long-term earnings forecasts are generally defined as third-, fourth-, and fifth-year earnings forecasts. We find that for the fourth and fifth years, analysts' forecasts are no more accurate than naïve random walk (RW) forecasts or naïve RW with economic growth forecasts. Furthermore, naïve model forecasts contain a large amount of incremental information over analysts' long-term forecasts in explaining future actual earnings. Tests based on subsamples show that the performance of analysts' long-term forecasts declines relative to naïve model forecasts for firms with high past earnings growth and low analyst coverage. Furthermore, a model that combines a naïve benchmark (last year's earnings) with the analyst long-term earnings growth forecast does not perform better than analysts' forecasts or naïve model forecasts. Our findings suggest that analysts' long-term earnings forecasts should be used with caution by researchers and practitioners. Also, when analysts' earnings forecasts are unavailable, naïve model earnings forecasts may be sufficient for measuring long-term earnings expectations.

Using initial public offering (IPO) involuntary delisting data, this chapter examines whether and how motivated institutional investors affect the survivability of IPO firms. The empirical evidence shows that the likelihood of future delisting is much lower for IPOs with more motivated institutional investors. This impact is more pronounced for firms with higher information asymmetry. The motivated institutional investors also facilitate better post-IPO operating performance. The results are consistent with the prediction of the limited attention theory.

In this study, we investigate whether higher institutional ownership is related to better internal controls and whether better internal control is associated with a higher quality of transparency.

The bankruptcy of Enron in December 2001 marked the beginning of broad awareness that American corporations had left behind the strategy of expanding through diversification that was the hallmark of the 1950s through the early 1980s. CEOs now made it job one to meet the earnings projections of securities analysts, such that by the year 2000 they were, in record numbers, “restating earnings” – admitting that they had cooked the books. Accounting shenanigans were the tip of the iceberg, and what lay under the water was a new approach to running the corporation to produce numbers that analysts and institutional investors would like. Three groups that stood to benefit from the new strategy spun it to investors as in the interest of all. Managers of hostile takeover firms defined their business as setting firms on the path to performing for shareholders. Institutional investors defined earnings management, rather than acquisitions management, as increasing shareholder value and focused management attention on earnings by popularizing stock options. Securities analysts hawked their own profit projections as the reigning metric of corporate performance, and favored easy-to-analyze single-industry firms through “buy” recommendations. These three groups changed the incentives executives faced, making accounting shenanigans in the pursuit of earnings management widely popular and enriching institutional investors, analysts, and executives in the process. Regulatory changes to end malfeasance have made it marginally more difficult to perform illegal accounting practices, but they have not changed the core corporate strategy that has emerged since the early 1980s. The changes illuminate the rise of groups of business professionals in the power structure, for it was not investors but different groups of business professionals who won the day. The changes illuminate, as well, the role of the social construction of interest in power relations among groups – it was by convincing executives and shareholders that a new corporate strategy was in their own interest, which these business professionals succeeded.

This chapter investigates the cost of public debt for firms using a comprehensive sample consisting of 17,368 industrial bond issues from 1970 to 2011. The empirical evidence shows that yield spreads for seasoned bond issues are significantly lower than those for initial bond issues. This seasoning effect is robust across different sample periods, subsamples, and model specifications. On average, the yield spreads for seasoned bond issues are around 50 bps lower than those for initial bond issues. This difference cannot be explained by other bond and firm characteristics. The seasoning effect is more pronounced for firms with higher levels of uncertainty, lower information disclosure quality, and longer time intervals between the first and subsequent issues. Our empirical findings provide supportive evidence for the extant theories that aim to rationalize the information role in determining the cost of capital.

Despite increasing interest in business model innovation (BMI), there is only limited scholarship that examines how business model (BM) innovators present and explain their innovations to various stakeholders. As BMI often involves the creation of a new ecosystem, understanding how innovators can gain support of future ecosystem members is important. Based on a longitudinal case study of Salesforce, a pioneer in cloud computing, the authors show how the innovator’s skillful framing to different audiences fosters the emergence of an ecosystem around the new BM. The authors suggest that effective framing constitutes an important strategic process that enables BM innovators to shape new ecosystems due to the performative power of words.

This study empirically examines the relationship between institutional ownership and innovation activity in the unique setting of the clinical trials for US biopharmaceutical companies. We used multiple statistical techniques in the period from 1990 through 2006 for firms in the biopharmaceutical industry to examine this relationship. Contrary to the widely believed relationship discussed in the literature, our findings suggest that institutional investors vary in their reactions to innovative progress. Specifically, we find that institutional investors with a long-term investment horizon (i.e., dedicated owners) increase their holdings of a firm’s equity as the number of the firm’s products increases in phases I and II of FDA clinical trials. These findings are robust for heteroskedasticity and autocorrelation as well as for different operationalizations of the change of institutional ownership.

Following the Supreme Court’s 1988 decision in Basic, securities class plaintiffs can invoke the “rebuttable presumption of reliance on public, material misrepresentations regarding securities traded in an efficient market” [the “fraud-on-the-market” doctrine] to prove classwide reliance. Although this requires plaintiffs to prove that the security traded in an informationally efficient market throughout the class period, Basic did not identify what constituted adequate proof of efficiency for reliance purposes.

Market efficiency cannot be presumed without proof because even large publicly traded stocks do not always trade in efficient markets, as documented in the economic literature that has grown significantly since Basic. For instance, during the recent global financial crisis, lack of liquidity limited arbitrage (the mechanism that renders markets efficient) and led to significant price distortions in many asset markets. Yet, lower courts following Basic have frequently granted class certification based on a mechanical review of some factors that are considered intuitive “proxies” of market efficiency (albeit incorrectly, according to recent studies and our own analysis). Such factors have little probative value and their review does not constitute the rigorous analysis demanded by the Supreme Court.

Instead, to invoke fraud-on-the-market, plaintiffs must first establish that the security traded in a weak-form efficient market (absent which a security cannot, as a logical matter, trade in a “semi-strong form” efficient market, the standard required for reliance purposes) using well-accepted tests. Only then do event study results, which are commonly used to demonstrate “cause and effect” (i.e., prove that the security’s price reacted quickly to news – a hallmark of a semi-strong form efficient market), have any merit. Even then, to claim classwide reliance, plaintiffs must prove such cause-and-effect relationship throughout the class period, not simply on selected disclosure dates identified in the complaint as plaintiffs often do.

These issues have policy implications because, once a class is certified, defendants frequently settle to avoid the magnified costs and risks associated with a trial, and the merits of the case (including the proper application of legal presumptions) are rarely examined at a trial.