Papers by Suresh Govindaraj
Supplemental material, JAAF916338_Supplemental for Depositor Characteristics and the Performance ... more Supplemental material, JAAF916338_Supplemental for Depositor Characteristics and the Performance of Islamic Banks by Amal AlAbbad, Divya Anantharaman and Suresh Govindaraj in Journal of Accounting, Auditing & Finance
Advances in Linguistics and Communication Studies
Finance and accounting research has recently focused on extracting the tone or sentiment of a doc... more Finance and accounting research has recently focused on extracting the tone or sentiment of a document (such as an earnings press release, cover story about a company, or management’s presentations to analysts) by using positive or negative words/phrases in the document. This chapter shows that signals based on tone or sentiment (extracted from qualitative data) can achieve abnormal returns, and in some studies, incremental abnormal returns beyond quantitative signals. In this chapter, the authors exploit the information content of qualitative data in addition to quantitative signals in selecting optimal portfolios. Using optimization techniques developed by Brandt, Santa-Clara, and Valkonov (2009), and later extended by Hand and Green (2011), the authors show that significantly higher returns can be obtained by combining quantitative and qualitative data obtained from firms’ Management Discussion and Analysis (MD&A) sections of their Form 10-Q (10-K) SEC filings than using quantita...
The British Accounting Review
Management’s tone change, post earnings
The authors gratefully acknowledge comments made by seminar participants at Rutgers University an... more The authors gratefully acknowledge comments made by seminar participants at Rutgers University and various colleagues at NYU.
SSRN Electronic Journal, 2021
This paper investigates stock and option market reactions to events in the United States Supreme ... more This paper investigates stock and option market reactions to events in the United States Supreme Court (SC) relating to cases where at least one party involved is a public firm. Typically, cases that reach the SC level would have passed through multiple lower courts. Consequently, much of the information content of these cases would be publicly known. If the financial market had perfectly anticipated that the SC would grant the writ of certiorari (a rare event of accepting a case for review), the tone of the subsequent legal arguments, and the final decision, then there should be no reaction to any of these events, as and when they unfold. Using a comprehensive dataset of more than 500 SC cases from 1948 to 2018, we find that the stock market reacts to both the grant of certiorari and to the announcement of the final decision, suggesting that the stock market could not anticipate the SC actions. We also find that case-specific characteristics, such as parties involved, the type of legal issue, and press coverage explain some of the cross-sectional variations in the stock returns across cases. Our tests also indicate that there is no information leakage prior to the events, and no stock price drift after the events. We also find some evidence that the option market anticipates the final decision as early as the date certiorari is granted, reinforcing the theory that smart money comes early to the option market.
Journal of Accounting, Auditing & Finance, 2020
We investigate the reasons for the growing demand for Islamic banking internationally, and examin... more We investigate the reasons for the growing demand for Islamic banking internationally, and examine the relative economic performance of Islamic banks compared with conventional banks in managing their capital buffers and liquidity. Using data for the period 2000–2012 for 104 Islamic and 619 conventional listed and non-listed banks spread across 22 countries with both these types of banks, and using standard statistical methodology for archival data analysis, we find that religious, political, and socio-legal factors, rather than economics alone, play key roles for Islamic banks in attracting depositors. Governed by Islamic ( Shariah) laws, these banks cannot lend money and charge interest. Depositors are not debt holders as in conventional banks, but investment partners that share in the risk, or profit-loss sharing (PLS), with the bank. As Islamic banks have no debt holders, and depositors self-select to bank with Islamic banks, economic theory suggests a reduced need for excessive...
Journal of Business Finance & Accounting, 2020
SSRN Electronic Journal, 2019
This paper investigates whether and how the initiation of Credit Default Swaps (CDS) trading affe... more This paper investigates whether and how the initiation of Credit Default Swaps (CDS) trading affects analyst optimism. First, we document that analyst forecasts become less optimistic after the initiation of CDS trading. Second, we find that the dampening effect of CDS on analyst optimism is stronger for firms with negative news and for firms with poorer financial performance or higher leverage, supporting a “correction effect” of CDS on non-strategic optimism. Moreover, we find that CDS also has a “disciplining effect” on strategic optimism that arises from incentives to cultivate relation with management or to please institutional investors. Overall, our evidence shows that the CDS market not only provides important information for analysts, but also alters analysts’ reporting incentives.
Journal of Accounting, Auditing & Finance, 1992
A new species of Colobanthus, C. c urtisiae, from the Ben Lomond and Midlands regions of Tasmania... more A new species of Colobanthus, C. c urtisiae, from the Ben Lomond and Midlands regions of Tasmania, is described and illustrated, and its affinities within the genus are discussed. C. curtisiae is an endangered species known only from two populations.
Journal of Accounting, Auditing & Finance, 2000
Journal of Accounting, Auditing & Finance, 2007
Our paper confirms and extends the central result of Acker and Duck (2007) on reference-day risk.... more Our paper confirms and extends the central result of Acker and Duck (2007) on reference-day risk. Using data from Datastream, they show substantial variations in the estimated monthly returns, variances, and betas across series beginning on different (reference) days of the same month. We show that the results are similar when we use data from the Center for Research in Security Prices daily files. We also show that reference-day risk extends to estimations based on daily returns. Finally, we find variations across series of daily returns computed using prices at different times of the day (reference-time risk). These findings carry potential implications for prior papers that rely on monthly or daily returns for analysis.
SSRN Electronic Journal, 2014
We provide evidence that an option implied volatility-based measure predicts future absolute exce... more We provide evidence that an option implied volatility-based measure predicts future absolute excess returns of the underlying stock around earnings announcements and annual meetings of shareholders, even after controlling for the realized stock return volatility shortly before these information events, and the volatility of excess stock returns around these two events in the past. Our results imply that option traders anticipate the change in uncertainty around these two scheduled events, and also trade on the expected volatility. In addition, we show that net straddle returns (after transaction costs) around earnings announcements and annual meetings of shareholders are significantly and negatively related to the predicted volatility of returns around the events. This suggests that the writers of call and put options expect to be compensated for the predicted volatility. Overall, we find that option traders anticipate and correctly incorporate the volatility induced by the information released in quarterly earnings announcements, and annual meetings of shareholders.
The Post-Earnings Announcement Drift (PEAD) anomaly refers to the tendency of stock prices to con... more The Post-Earnings Announcement Drift (PEAD) anomaly refers to the tendency of stock prices to continue drifting in the same direction as earnings surprises well through the subsequent earnings announcements; ignoring the autocorrelations in extreme earnings surprises across adjacent quarters. Currently, the two major competing theories to explain PEAD are: the risk premium hypothesis (RPH), which argues that the anomaly exists only because risk has been measured improperly; and, the under-reaction (behavioral) hypothesis (URH), which assumes investors do not completely utilize the auto-correlations of earnings surprises. We test the former (RPH) by using a finer metric for risk than used in prior research, namely, the change in implied volatilities obtained from options prices immediately before and after the earnings announcements. Inconsistent with the predictions of RPH: (1) we do not find a positive correlation between the implied volatility changes and earnings surprises; and (...
SSRN Electronic Journal, 2008
This study explores whether the Management Discussion and Analysis (MD&A) section of Form 10-Q an... more This study explores whether the Management Discussion and Analysis (MD&A) section of Form 10-Q and 10-K has incremental information content beyond financial measures such as earnings surprises, accruals and operating cash flows (OCF). It uses a well-established classification scheme of words into positive and negative categories to measure the tone change in a specific MD&A section as compared to those of the prior four filings. Our results indicate that short window market reactions around the SEC filing are significantly associated with the tone of the MD&A section, even after controlling for accruals, OCF and earnings surprises. We also show that the tone of the MD&A section adds significantly to portfolio drift returns in the window of two days after the SEC filing date through one day after the subsequent quarter's preliminary earnings announcement, beyond financial information conveyed by accruals, OCF and earnings surprises. The incremental information of tone change is larger the weaker is the firm's information environment.
SSRN Electronic Journal, 2015
ABSTRACT
We study optimal incentive contracts in a continuous time principal-agent setting with hidden act... more We study optimal incentive contracts in a continuous time principal-agent setting with hidden actions. The agent, whose effort controls the output, has a concave utility function which is non-separable in wealth and monetary cost of effort. The principal is risk neutral and optimally selects the effort to be induced and the contract design. Output follows a mean-reverting process with random
SSRN Electronic Journal, 2000
Accounting measures such as levels and changes in residual earnings are widely used for performan... more Accounting measures such as levels and changes in residual earnings are widely used for performance evaluation and executive compensation (Healy, 1985). Quite often, these compensation contracts are of the linear form. In a multiperiod agency setting with hidden actions, where the agent's effort influences the random evolution of a general model of residual earnings, we show that linear compensation contracts based on weighted sum of the levels and changes of residual earnings are indeed optimal. We characterize the contract explicitly and show that the weights are determined by the earnings persistence parameter. Residual earnings are known to be important for valuation too (Ohlson, 1995; Easton and Harris, 1991). In our setting, we demonstrate that residual earnings are also sufficient for valuation. This implies that residual earnings can be used to align incentive goals with valuation objectives. In essence, our paper provides the theoretical underpinnings for linear contracts based on residual earnings and their implications for valuation.
SSRN Electronic Journal, 2012
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Papers by Suresh Govindaraj