The-Information-Conveyed課件

1、DRAFTCONFIDENTIALCHAPTER 9The Information Conveyed by Financial Decisions9.1 Information Asymmetry in CorporationsTop managers may have proprietary information that outside investors do not have.There are varieties of reasons why managers cannot disclose the private information to the marketThe info

2、rmation may be valuable to the firms competitors.Firms run the risk of being sued by investors if they make forecasts that later turn out to be inaccurate.Managers may prefer not to disclose unfavorable information.The information may be difficult to quantify or substantiate.These information enable

3、 them to derive more accurate internal valuations of their companies than the investor valuations determined in the market.Information Asymmetry in CorporationsIf direct disclosures provide imperfect and incomplete information, investors will incorporate indirect evidence into their evaluations.Inve

4、stors will attempt to decipher the information content of observable management decisions related to the firms,Capital expenditureFinancing choicesDividendsStock splitsManagers decisions to acquire or sell shares for their personal accountThese decisions could be viewed as signals, because they reve

5、als managers opinions (information) about the companies.9.2 Management Incentives When Managers Have Better Information Than ShareholdersInformation structure and the value of firms,There are two types of firm value:Intrinsic Value (fundamental value): the actual value of a company based on an under

6、lying perception ofits true value Market Value: the value of a company, which is traded in the market.The market value may not be necessarily equal to the intrinsic value.A firm is under (over) -valued if the market value is lower (higher) than the intrinsic value.Given the information structure, it

7、 is reasonable to assume that managers know the intrinsic value better than the outside investors.Short-Term and Long-Term Share Price MaximizationIf the intrinsic value and market value are different, managers objective to maximize firm value needs further elaboration, even if they act exactly in t

8、he interest of shareholders.In this case the goal of value maximization depends on whether shareholders are long-term investors or short-term investors.Long-Term Investor: shareholders who plan to hold onto their shares for a long time will capture the intrinsic value. Hence long-term shareholders p

9、refer managers to make decisions that maximize the intrinsic value of the shares.Short-Term Investors: shareholders who plan to sell their shares in the near future prefer managers to take actions that improve the firms current share price.Management IncentivesIf managers hold stock and options in t

10、he firm for a long period, he or she is likely to want to maximize the firms intrinsic value.But most managers also are concerned about the firms current stock price for several reasons,Managers may plan to issue additional equity or sell some of their own stock in the near future.Managers may be co

11、ncerned about the acquisition of the firm by an outsider at a price that is less than the firms intrinsic value.Managerial compensation may be directly or indirectly tied to the current stock price of the firm.The ability to attract customers and other outside stakeholders may be related to outsider

12、s perceptions of the firms value.Managers objective could be viewed as maximizing a weighted average of the firms current stock price and intrinsic value.Conflicting Incentives That Motivate ManagementManagement decisionsIncentive to increase current stock pricesIncentive to increase the intrinsic v

13、alue of the firmCompensation considerationsPressure from short-term stockholdersConcern about unwanted takeover bidsPressure from long-term stockholdersExample: The Trade-Off between Current Value and Intrinsic ValueJohn Jones, CEO of Tremont Corporation, has just exercised 10,000 stock options and

14、now owns 20,000 shares of Tremont stock. He plans on selling the 10,000 shares within the next month and will hold the remaining 10,000 shares indefinitely. Assuming that his salary is fixed and that Mr. Jones is entrenched in his job and is unconcerned about outside takeover threats, describe how J

15、oness objective function would weight current value and intrinsic value.Jones would weight current value and intrinsic value equally. In other words, he would be willing to make a decision that reduces Tremonts intrinsic stock price by $1 per share if it increased its current stock price by more tha

16、n $1 per share.9.3 Earnings ManipulationManagers sometimes manipulate the earnings numbers of their firms in ways that increase reported income in the current year at the expense of reporting lower earnings in the future.The discretion of managers over firms accounting methods allows them to shift r

17、eported income from the future to the current year.The choice of depreciation methodsThe choice of inventory valuation methodsThe choice of service lives and estimation of salvage values of depreciable assets.The choice of the lives of intangiblesThe estimation of uncollectible rate on account recei

18、vableInformation Conveyed by EarningsThe earnings announcement itself reveals information to the investors.When the reported earnings exceeds the market expectation (average earnings forecast by financial analysts), the stock usually experience positive abnormal return.When the reported earnings is

19、less than the market expectation, the stock usually experience negative abnormal return.The unexpected earnings conveys information about the unexpected profitability of the firm.Incentives to Increase or Decrease Accounting EarningsThe tendency to artificially inflate accounting earnings are the gr

20、eatest when managers have the most to gain from increasing share prices.Teoh, Welch, and Wong (1998a, 1998b) found that firms make discretionary accounting choices that temporarily increase reported earnings before both initial and seasoned public offerings of equity.Occasionally, managers also mani

21、pulate their earnings downward.Liberty and Zimmerman (1986) found that some firms manipulated their earnings downward before union negotiations.Jones (1991) found that managers manipulate their companys earnings downward prior to appealing to the government for help against foreign competitors.9.4 S

22、hortsighted Investment ChoiceThe incentive of managers to generate short-term stock price performance makes managers reluctant to take on long-term projects that generate low initial cash flows.Managers have an incentive to falsely claim that their investment projects have substantial payoffs severa

23、l years down the road.Investors have no way of knowing whether the managers are telling the truth about future payoffs or whether they are simply making long-term promises to cover up their current poor performance.The market price of a firms stock tends to react negatively to poor performance in th

24、e current period.Managers who have incentives to keep their current share prices high are less willing to take a long-term project.Example: The Incentive to Choose Projects That Pay Off More QuicklyMicro Industries has two long-term investment strategies and a short-term strategy available to it. Th

25、e cash flows, which are retained in the firm, and their present values (assuming a discount rate of zero) are described in the table. The company will not choose the third strategy because it has the lowest present value. But given the information asymmetry and the existence of third strategy, the c

26、ompany has the incentive not to choose the best strategy.Cash Flows (in $ millions)Year 1Years 2 11(annual cash flow)Present Value1. Good long term strategy40808402. Short term strategy60505603. Bad long term strategy4040440Example: The Incentive to Choose Projects That Pay Off More QuicklyAssume fo

27、r some reasons investors are not so sure about the existence of strategy 1The company does not want to release the information.It cannot convince the investors the existence of the strategy.If the company choose strategy 1, company will have a market value of 440, as long as a cash flow of 40 is obs

28、erved at year 1, because the investors do not believe the existence of strategy 1.But the investors will adjust their valuation to the intrinsic value of 840, once they observe a cash flow of 80 at year 2.If the company choose strategy 2, the company will always have the same market value and intrin

29、sic value, 560.Example: The Incentive to Choose Projects That Pay Off More QuicklyIf the management is concerned only with maximizing the firms intrinsic value, it should select the good long-term strategy.However, if managers place sufficient weight on having a high stock price in year 1, they shou

30、ld take the short-term strategy because the market price after one year will then be $560 rather than $440.Given the information asymmetry, managers may select projects that pay off quickly over possibly higher NPV projects that pay out over longer periods if they place significant weight on increas

31、ing their firms short term stock price.What Determines a Managers Incentive to Be ShortsightedThe tendency of managers to implement strategies with better long-term payoffs increases as the weight that managers place on maximizing the current or near-term stock price declines.If in the previous exam

32、ple the management places a 75 percent weight on the year 1 value of the firm and a 25 percent weight on its intrinsic value, the weighted average payoff from the long-term strategy is,0.75*440+0.25*840=540 560 (strategy 2)9.5 The Information Content of Dividend and Share Repurchase AnnouncementEmpi

33、rical Evidence on Stock Returns at the Time of Dividend AnnouncementWhen firms announce dividend increases, their stock prices generally increase about 2 percent Aharony and Swary (1980).Announcements of the initiation of quarterly dividend payouts by firms that previously paid no dividends generate

34、 even higher stock price reactions Asquith and Mullins (1983).Stock prices generally experience similar declines when firms announce dividend decreases Healy and Palepu (1998).Stock prices fall about 9.5 percent on average at the announcement of an omission Healy and Palepu (1998).A Dividend Signali

35、ng ModelThe sources and uses of funds equation for an all-equity-financed firmOperating cash flow = investment expenditures change in equity + dividendsInformation observed by investorsInvestors cannot observe the operating cash flows perhaps because managers can manipulate the relevant accounting n

36、umbers.Outside investors cannot observe all the items that constitute the firms investment expenditures, such as equipment maintenance.Information content of a dividend changeThe dividends and changes in outstanding equity provide investors with information about the firms operating cash flows as we

37、ll as the level of investment expenditures.Example: The Information Content of Dividend PayoutAnalysts observe that Johnson Trucking, an all-equity firm, has not issued or repurchased shares over the past year. They also have observed that Johnson has paid out $10 million in dividends over the past

38、year and they believe that the firm has invested $15 million of its operating cash flow back into the business. From this information, what do the analysts infer about the firms operating cash flows?If the investors believe that the managers will maximize the intrinsic value of the firm, they will c

39、hoose the optimal investment level $20 million. The analysts will infer that the operating cash flows were $25 million.This example also suggests that an increase in dividends from $10 million to $15 million would imply that Johnson Truckings operating cash flow increased from $25 million to $30 mil

40、lion.Thus as dividend change may convey information to shareholders even if managers are not explicitly trying to use it as a signaling tool.Dividend Signaling and UnderinvestmentWhen managers have an incentive to increase current stock price,If a manager is interested solely in maximizing the intri

41、nsic value of the firm, he or she would choose the optimal level of investment.But if the manager has an incentive to temporarily boost stock prices may want to cut back on unobserved investment and use the proceeds to increase the distribution to shareholdersHence, an incentive to convey favorable

42、information to shareholders may lead to observable payouts that are too high and unobservable investment that are too low.Example: Dividend Signaling and UnderinvestmentJohnson Trucking is deciding whether to pay out $10 million (option 1), $15 million (option 2), or $20 million (option 3) in divide

43、nds. A $10 million dividend, which allows investment of $15 million, will maximize the intrinsic value of the stock. Higher dividends will result in an immediate share price increase but will reduce the firms intrinsic value. The table provides firms intrinsic values and current market values associ

44、ated with the different dividend alternatives. If managers want to maximize an equally weighted average of the firms current market value and intrinsic value, what are they likely to decide?Option 2 is the best choice if managers weight current market value and intrinsic value equally.Option 1$10 mi

45、llion dividend$15 million investedOption 2$15 million dividend$10 million investedOption 3$20 million dividend$5 million investedIntrinsic Value220210200Current Value190210215Example: Dividend Signaling and UnderinvestmentJohnson Truckings market value and intrinsic values are equal when the firm pa

46、ys out $15 million in dividends (option 2)This means that the market correctly inferred that the firm would invest only $10 million and correctly price the stock.The $15 million dividends correctly signal the firm value.Consider if market view managers as having little incentive to increase the firm

47、s current stock price at the expense of its intrinsic value when, in reality, their incentive to increase the stock price is large,In this case a large dividend would be incorrectly interpreted as evidence of increased operating cash flow when, in reality, the cash for the dividend is generated by d

48、ecreasing investment.Do Positive Stock Price Responses Imply Value CreationIn the previous example, higher dividends (option 3) use funds that would have been used more productively within the firm.However market (financial analysts) still view the higher dividend payments as good news because they

49、reveal that the firm has more cash than they had previously believed.In this case the stock price will react favorably to a dividend increase because of the information it conveys, even though it is a bad decision.Similarly stock prices may react unfavorably to a dividend cut, even if the cut raises

50、 funds for good investment opportunities.Favorable (unfavorable) stock prices react do not necessarily mean value creation (destruction).Share Repurchase versus DividendsIn the absence of taxes and transaction costs, a share repurchase should also convey the same information as a dividend.Repurchase

51、 through tender offer:On average, firms that repurchase shares with tender offers experience about a 16 percent return on the announcement date Dann (1981) .In his sample, the tender offers were made at a premium that averaged about 22 percent above the stock price just before the offer.The number o

52、f shares repurchased averaged about 15 percent of the outstanding shares.Share Repurchase versus DividendsRepurchase through open market transaction:When firms want to repurchase smaller amounts of their stock (for example, 3 7 percent of total shares outstanding), they usually buy the shares on the

53、 open market.The stock returns at the time of the announcements of open market repurchase announcements are about 3 percent.Why investors respond to open market repurchase and tender offer differentlyThe announcement of an intention to repurchase a quantity of shares on the open market is not a firm

54、 commitment. In a tender offer, management offers to repurchase shares at a price substantially above the prevailing stock price, which provides an additional signal about the firm value.Dividend Policy and Investment IncentivesThe dividend related announcements signal firms operating cash flow if,T

55、he investors can observe the investment expenditureThe investors can infer firms investment opportunities, and know the incentives of managers to invest, if the investment expenditure cannot be observed.But in the reality both investment expenditure and opportunities are difficult to observe. The di

56、vidend change signals the investment opportunities, managers incentives to invest as well as the profitability of the firm.Dividend Policy and Investment IncentivesThus the signals dividend policy send should depend on the investment opportunities of the firms.A dividend cuts could signal a good new

57、s if the investors believe the increased investment associated with dividend change is motivated by improved prospect.However, if the investors believe that managers will make negative net present value investments , they will interpret a dividend cut as bad news.Empirical EvidenceLang and Litzenber

58、ger (1989) examined the stock price reactions to announced dividend increases and decreases for stocks that differed according to the relation between their market values (MV) and their book values (BV).Their sample is divided into four groups,Firms with MV BV with dividend increases.Firms with MV B

59、V with dividend decreases.Firms with MV BV with dividend increases.Firms with MV BV).A dividend decrease generated only a slight stock price decrease for these firms.Dividend increases and decreases resulted in much larger stock price responses for firms believed to have unfavorable investment oppor

60、tunities (MV BV0.003-0.003MV BV0.008-0.027Difference (Row 2 1)0.005-0.024Alternative Interpretation of the Observed DifferenceDenis, Denis, and Sarin (1994) provided an alternative interpretation of the observed differences in the previous table.They pointed out that high MV/BV firms generally have