Working Papers

The stock price reaction to investment news: New evidence from modeling optimal capex and capex guidance (Job market paper, June 2016)

Available (Click to open).

Extant literature documents a weak positive stock price reaction to announcements of new investments. The weak reaction is likely due to lack of identification for the optimal investment levels and omission of concurrent investment guidance. To address the lack of identification, I develop an accounting-variable-based model to proxy for optimal capital expenditures (capex) at firm-year level. To address the omission of concurrent investment guidance, I employ recently available data on capex guidance. I hypothesize and find that when a firm’s capex diverge from the estimated optimal level, its stock price declines. Given divergence, the stock price decline is more severe when the firm over-invests. Moreover, controlling for self-selection, there is a positive market reaction to the issuance of capex guidance. Lastly, I hypothesize that capex guidance reduces information asymmetry between management and investors. I find that the negative stock price reaction to divergence disappears when a firm issues capex guidance, consistent with that investors align their views on optimal capex level with a manager’s guidance.

Presentation history:

  • September 18th 2015 at NYU Accounting Department Faculty Seminar
  • November 6th at EAA Talent Workshop at IE Business School
  • December 5th at AAA Rookie Camp in Miami

Annual Earnings Guidance and the Smoothing of Analysts’ Multi-Period Forecasts (September 2015)

In collaboration with J. Ronen, R. Shalev and M. Tang. Available upon request.

This paper examines the effect of management annual earnings guidance on the volatility of sell side analysts’ multi-period earnings forecasts and on the volatility of subsequent reported earnings. We conjecture that, facing the pressure to meet and beat analysts’ forecasts and driven by the perceived capital market benefits of reporting a smooth earnings path, managers attempting to influence investors’ earnings expectations over a long horizon issue annual guidance to smooth the time-series path of analyst forecasts, a strategy we term as “expectation smoothing.” Our empirical results support our conjecture: the volatility in analysts’ multi-period forecasts is smoothed by annual guidance, which in turn results in smoother actual earnings and higher likelihood of meeting and beating analyst forecasts. We also find that issuing quarterly guidance does not affect the smoothness of analysts’ earnings expectations and that managers with longer horizons are more likely to issue annual guidance, consistent with the unique longer term effects of annual earnings guidance.

Presentation history:

  • January 17th 2014 at NYU Accounting Department Brown Bag Seminar
  • August 6th 2014 at AAA Annual Meeting in Atlanta

Asset Allocation across Operation and Defined Benefit Pension Plans (December 2012)

Available upon request.

I examine the correlation between firms’ returns from operations and from pension plan assets attributable to management. This correlation, which I refer to as Rho, is a proxy for the degree of hedging across assets under management. I find that firms in the financial industry and firms investing pension assets in their own equity/assets have higher Rho’s (less hedging). Additionally, my evidence indicates that firms with higher Rho’s have more volatile earning paths. My results also show that when pension plans are underfunded by 10% or less firms with higher Rho’s invest more in operation; however, this relationship brakes down when funding deficit exceeds 10%.

Presented on November 15th 2012 at NYU Accounting Department Brown Bag Seminar.

Last updated: December 29th 2015