Inferring Bad News from Insider Sales
Journal of Business, Finance, and Accounting (2020)
Irene Karamanou, Grace Pownall, and Rachna Prakash
February 8, 2023
Due to the paucity of sources of negative firm-specific information, US capital markets have more difficulty identifying and incorporating bad news into stock prices than they do good news. Even though insider selling is a potentially important proxy for undisclosed bad news, researchers have difficulty ex ante identifying information-based sales due to an inability to separate liquidity-motivated from information-based insider trades. We hypothesize that when insiders in multiple firms sell shares of one firm in which they are insiders and at the same time buy shares of other insider portfolio firms, the sale is more likely to be information-based, since the proceeds are reinvested. Conversely, when an insider sells one firm without purchasing others or sells multiple insider firms the sale is likely liquidity-motivated. We find that insider sales identified as information-based using this algorithm are followed by significant negative abnormal returns. Information-based sales are also more likely to be associated with delistings, earnings declines and earnings restatements. Analysts are also more likely to revise their earnings forecasts downwards for these firms. It is thus possible to ex ante identify insider sales with information content. Our results will be of interest to investors and also to regulators designing insider trading rules.
Deviations from the Mandatory Adoption of IFRS in the European Union: Implementation, Enforcement, Incentives, and Compliance
Contemporary Accounting Research (2018)
Grace Pownall and Maria Wieczynska
February 8, 2023
In this paper, we evaluate the common assumption that EU firms began using IFRS in 2005 when the EU formally adopted IFRS. Although the incidence of firms using local (or some other) GAAP declined between 2005 and 2012, it is still nontrivial. By 2012 the incidence of non-IFRS financial statements was still in excess of 17% (87% of which were fully consolidated). We estimate a model of the non-adoption of IFRS as a function of implementation features of the IFRS regulation, country-specific enforcement, and firm-specific reporting incentives. As expected, being specifically required by EU-wide and country-specific rules to adopt IFRS is positively associated with IFRS adoption but does not constitute a complete explanation. Proxies for enforcement are significantly associated with non-adoption, but the marginal effects of the enforcement variables are weak. We find that larger firms, firms with foreign operations and more analyst following, and firms that issue new debt and equity were more likely to adopt IFRS, both when the regulation was initially imposed and in subsequent years. We conclude that many EU firms do not use IFRS; that some firms exploited definitions, exemptions, and deferrals to avoid adopting IFRS while some firms simply failed to comply with the regulation; and that firms responded to their incentives in deciding whether to adopt IFRS.
Avoiding China's Capital Markets: Evidence from P-chips and Red-chips Listed in Hong Kong
Journal of International Accounting Research (2018)
Weishi Jia, Grace Pownall, and Jingran Zhao
February 8, 2023
The purpose of this paper is to explore the puzzle of why so many Chinese firms eschew listings in China. Hundreds of firms founded in China have reorganized themselves as overseas corporations and listed on the Hong Kong Stock Exchange. These firms are called Red-chips if they are state-owned enterprises (SOEs) and P-chips if they are not state-owned (Non-SOEs). To examine the rationale behind the listing decisions of P-chips and Red-chips, we compare the characteristics of Red-chips (P-chips) with SOEs (Non-SOEs) listed on China stock exchanges. We find that SOEs are more likely to list in China. Moreover, while we do not observe any significant difference between the performance of Hong Kong-listed and Mainland-listed SOEs, we find Non-SOEs that are listed in Hong Kong are significantly more profitable than those listed in China. We then explore three possible explanations for why Chinese firms, especially Non-SOEs, may prefer to be listed in Hong Kong: (a) to facilitate personal wealth transfers out of China; (b) to increase access to debt capital; and (c) to facilitate more efficient stock price formation. We find that all three of these explanations have statistical support.
The Creation and Segmentation of the Euronext Stock Exchange: A Solution to the Inadequacy of National Securities Regulators?
Accounting Horizons (2015)
Grace Pownall, Maria Vulcheva, and Xue Wang
February 8, 2023
We investigate whether cross-border stock exchange segmentation is a viable solution to persisting national institutional differences. To do so we examine the effect of exchange segmentation accompanying the Euronext merger on the liquidity and reporting quality of firms listed on the four exchanges (Amsterdam, Brussels, Paris, and Lisbon) participating in the merger. Euronext integrated the four trading platforms and started clearing all trades through one system. While trading, clearance and settlement became common for all Euronext firms, these firms continued to be regulated by the regulatory agencies of their own home exchanges, and the strength of enforcement differed considerably across the four exchanges. At the same time, Euronext required higher, uniform disclosure for firms choosing to list on its two named segments, which could lead to increased liquidity if the segments successfully circumvented national limitations on regulation. We document significant increases in liquidity and accounting quality for segment relative to non-segment firms, in particular for those segment firms that complied more fully with the provisions of their pre-commitments. Taken together, our findings suggest that exchange segmentation at the time of cross-border exchange merger might circumvent the inadequacy of national security regulators.
February 8, 2023
This paper examines the effects on equity home bias of two mechanisms adopted by Euronext when it was formed by the merger of four European countries' stock exchanges in 2002. The two structural mechanisms are the integration of trading platforms across the four predecessor exchanges and the creation of named segments of the integrated exchange on which firms could voluntarily list by precommitting to enhanced disclosure and transparency. Employing a difference-in-differences research design using other European Union companies as a control group, we document that the integration of the Euronext market was associated with a reduction in home bias for firms listed on the named segments of the Euronext exchange, but not for the nonsegment Euronext firms. Our results suggest that the reduction in transaction costs from the integration of the trading platforms did not make the nonsegment Euronext firms more attractive to the specific investors for whom the transaction costs were reduced. On the other hand, the decrease in information costs due to the precommitments to enhanced transparency made the segment firms more attractive to all categories of foreign investors, consistent with the information costs hypothesis.