The journal of finance , tập 67, số 1, 2012 2

jofi_67_1_cover 1/5/12 4:39 AM Page VOL 67, No Vol 67 CONTENTS for FEBRUARY 2012 No Vol 67 CONTENTS for FEBRUARY 2012 No ARTICLES WILLIAM J MAYEW and MOHAN VENKATACHALAM The Power of Voice: Managerial Affective States and Future Firm Performance BRANDON JULIO and YOUNGSUK YOOK Political Uncertainty and Corporate Investment Cycles PATRICK BOLTON, XAVIER FREIXAS, and JOEL SHAPIRO The Credit Ratings Game DION BONGAERTS, K J MARTIJN CREMERS, and WILLIAM N GOETZMANN Tiebreaker: Certification and Multiple Credit Ratings CESARE FRACASSI and GEOFFREY TATE External Networking and Internal Firm Governance BENJAMIN E HERMALIN and MICHAEL S WEISBACH Information Disclosure and Corporate Governance CHITRU S FERNANDO, ANTHONY D MAY, and WILLIAM L MEGGINSON The Value of Investment Banking Relationships: Evidence from the Collapse of Lehman Brothers FEBRUARY 2012 • PAGES 1–389 ANDREY GOLUBOV, DIMITRIS PETMEZAS, and NICKOLAOS G TRAVLOS When It Pays to Pay Your Investment Banker: New Evidence on the Role of Financial Advisors in M&As R DAVID MCLEAN, TIANYU ZHANG, and MENGXIN ZHAO Why Does the Law Matter? Investor Protection and Its Effects on Investment, Finance, and Growth RONALD C ANDERSON, DAVID M REEB, and WANLI ZHAO Family-Controlled Firms and Informed Trading: Evidence from Short Sales MISCELLANEA jofi_67_3_cover 5/15/12 9:41 AM Page THE AMERICAN FINANCE ASSOCIATION Founded in 1940 Presidents of The American Finance Association OFFICERS President President Elect Vice President Executive Secretary and Treasurer Editor of the Journal of Finance SHERIDAN TITMAN, University of Texas, Austin ROBERT STAMBAUGH, University of Pennsylvania LUIGI ZINGALES, University of Chicago DAVID H PYLE, University of California, Berkeley CAMPBELL R HARVEY, Duke University BOARD OF DIRECTORS NICHOLAS BARBERIS MARKUS BRUNNERMEIER JOHN COCHRANE ROBERT MCDONALD LASSE PEDERSEN PAOLA SAPIENZA ANTOINETTE SCHOAR RAMAN UPPAL DIMITRI VAYANOS ANNETTE VISSING-JORGENSEN Yale University Princeton University University of Chicago Northwestern University New York University Northwestern University Massachusetts Institute of Technology London Business School London School of Economics Northwestern University THE JOURNAL OF FINANCE® Articles for The Journal of Finance must be submitted through our on-line submission system A link to the submission site can be found at http://www.afajof.org/journal/submission.asp Queries about the Journal are welcome through email (editor@jfinance.org) Style instructions for preparing manuscripts can be found in each issue of the Journal on one of the back pages and on the submission site A submission fee of $70 (for AFA members) and $140 (for non-members) must be paid by Visa or MasterCard upon submission The submission fee will be refunded if the editorial decision on a submission is rendered more than 100 days after receipt of the submission at the submission site Membership in the Association is available online at www.afajof.org Disclaimer: The Publisher, the American Finance Association and Editors cannot be held responsible for errors or any consequences arising from the use of information contained in this journal; the views and opinions expressed not necessarily reflect those of the Publisher, the American Finance Association and Editors, neither does the publication of advertisements constitute any endorsement by the Publisher, the American Finance Association and Editors of the products advertised Copyright and Photocopying: © 2012 the American Finance Association All rights reserved No part of this publication may be reproduced, stored or transmitted in any form or by any means without the prior permission in writing from the copyright holder Authorization to photocopy items for internal and personal use is granted by the copyright holder for libraries and other users registered with their local Reproduction Rights Organisation (RRO), e.g Copyright Clearance Center (CCC), 222 Rosewood Drive, Danvers, MA 01923, USA (www.copyright.com), provided the appropriate fee is paid directly to the RRO This consent does not extend to other kinds of copying such as copying for general distribution, for advertising or promotional purposes, for creating new collective works or for resale Special requests should be addressed to: journalsrights@wiley.com Information for Subscribers: The Journal of Finance is published in six issues per year Institutional subscription prices for 2012 are: Print & Online FTE Small: US$418 (US), US$418 (Rest of World), €318 (Europe), £268 (UK) Print & Online FTE Medium: US$515 (US), US$515 (Rest of World), €388 (Europe), £331 (UK) Print & Online FTE Large: US$613 (US), US$613 (Rest of World), €461 (Europe), £393 (UK) Prices are exclusive of tax Asia-Pacific GST, Canadian GST and European VAT will be applied at the appropriate rates For more information on current tax rates, please go to www3.interscience.wiley.com/ aboutus/journal_ordering_and_payment.html#Tax The price includes online access to the current and all online back files to January 1st 1997, where available For other pricing options, including access information and terms and conditions, please visit www.interscience.wiley.com/journal-info Delivery Terms and Legal Title: Prices include delivery of print journals to the recipient’s address Delivery terms are Delivered Duty Unpaid (DDU); the recipient is responsible for paying any import duty or taxes Legal title passes to the customer on despatch by our distributors Back Issues: Single issues from current and recent volumes are available at the current single issue price from cs-journals@wiley.com Earlier issues may be obtained from Swets Backsets Service, P.O Box 810, 2160 SZ Lisse, The Netherlands, Tel: (+31) (0) 252 435 111, Fax: (+31) (0) 252 415 888, http://www.swets.nl/backsets Journal of Finance (ISSN 0022-1082), is published bimonthly on behalf of the American Finance Association by Wiley Subscription Services, Inc., a Wiley Company, 111 River St., Hoboken, NJ 07030-5774 Periodical Postage Paid at Hoboken, NJ and additional offices Postmaster: Send all 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www.interscience.wiley.com/support Visit our Online Customer Self-Help available in six languages at www.interscience.wiley.com/support Access to this journal is available free online within institutions in the developing world through the AGORA initiative with the FAO, the HINARI initiative with the WHO and the OARE initiative with UNEP For information, visit www.aginternetwork.org, www.healthinternetwork.org, www.oarescience.org Imprint Details: Printed in USA by The Sheridan Press Wiley’s Corporate Citizenship initiative seeks to address the environmental, social, economic, and ethical challenges faced in our business and which are important to our diverse stakeholder groups We have made a long-term commitment to standardize and improve our efforts around the world to reduce our carbon footprint Follow our progress at www.wiley.com/go/citizenship Aims and Scope: The Journal of Finance publishes leading research across all the major fields of financial research It is one of the most widely cited academic journals in finance and one of the most widely cited journals in all of economics as well Each issue of the journal reaches over 8,000 academics, finance professionals, libraries, government and financial institutions around the world Published six times a year, the Journal is the official publication of the American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics Address for Association Business: David Pyle, Journal of Finance, American Finance Association, University of California, Berkeley—Haas School of Business, 545 Student Services Building, Berkeley, CA 94720-1900 Email: pyle@haas.berkeley.edu Abstracting and Indexing Services: The Journal is indexed by ABI/Inform Global; Accounting Articles; Accounting and Tax Database; Expanded Academic ASAP; Business ASAP; Business Periodical Index; Business Source: Corporate; Business Source Elite; Business Source Plus; Business Source Premier; CatchWord; Corporate ResourceNet; Current Contents/Social & Behavioral Science; Current Contents Collections/ Business; e-jel; EBSCO Online; EconLit; Emerald Management Reviews; Environmental Sciences & Pollution Management; General Business File ASAP; Health and Safety Science Abstracts; InfoTrac College Edition; InfoTrac OneFile; Ingenta; International Bibliography of the Social Sciences; Journal of Economic Literature; JCR Social Sciences Edition; JSTOR; MAS Ultra/ Public Library Edition; OmniFile Full Text Mega Edition; ProQuest Accounting and Tax Database; Public Affairs Information Service International; Risk Abstracts; Safety Science & Risk Abstracts; Social Sciences Citation Index; Wilson Business Abstracts; Wilson Business Abstracts FullText; and Wilson OmniFile V Production Editor: Beetna Kim-Schissler (email: jofi@wiley.com) Advertising: For advertising information, please visit the journal’s website or contact the Journals Advertising Sales Representative, Kristin McCarthy, at kmccarthy@wiley.com ISSN 0022-1082 (Print) ISSN 1540-6261 (Online) Name Kenneth Field Chelcie C Bosland Charles L Prather John D Clark Inactive Inactive Harry G Guthmann Lewis A Froman Benjamin H Beckhart Neil H Jacoby Howard R Bowen Raymond J Saulnier Edward E Edwards Roland I Robinson Garfield V Cox Norris O Johnson Miller Upton Marshall D Ketchum Lester V Chandler James J O’Leary Paul M Van Arsdell Arthur M.Weimer Bion B Howard George T Conklin, Jr Roger F Murray George Garvy J Fred Weston Robert V Rossa Harry C Sauvain Walter E Hoadley Lawrence S Ritter Joseph Pechman Irwin Friend Sherman Maisel John Lintner Myron J Gordon Merton H Miller Term Affiliation Name 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 Carnegie Institute of Technology Brown University University of Texas University of Nebraska Northwestern University Russell Sage College Columbia University University of California, Los Angeles University of Illinois National Bureau of Economic Research Indiana University Northwestern University University of Chicago First National City Bank of New York Beloit College University of Chicago Princeton University Life Insurance Association of America University of Illinois Indiana University Northwestern University Guardian Life Ins Co of America Columbia University Federal Reserve Bank of New York University of California, Los Angeles Brown Brothers Harriman & Company Indiana University Bank of America New York University Brookings Institution University of Pennsylvania University of California, Berkeley Harvard University University of Toronto University of Chicago Alexander A Robichek Burton Malkiel Edward Kane William F Sharpe Franco Modigliani Harry Markowitz Stewart Myers James C Van Horne Fischer Black Robert Merton Richard Roll Stephen A Ross Michael J Brennan Myron S Scholes Robert H Litzenberger Michael C Jensen Mark E Rubinstein Sanford J Grossman Martin J Gruber Edwaurdo S Schwartz Hayne E Leland Edwin J Elton Hans R Stoll Franklin Allen George M Constantinides Maureen O’Hara Douglas W Diamond René M Stulz John Y Campbell Richard C Green Kenneth R French Jeremy Stein Darrell Duffie John Cochrane Raguram Rajan Sheridan Titman Term 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Affiliation Stanford University Princeton University The Ohio State University Stanford University Massachusetts Institute of Technology IBM Corporation Massachusetts Institute of Technology Stanford University Goldman Sachs & Company Massachusetts Institute of Technology University of California, Los Angeles Yale University University of California, Los Angeles Stanford University University of Pennsylvania Harvard University University of California, Berkeley University of Pennsylvania New York University University of California, Los Angeles University of California, Berkeley New York University Vanderbilt University University of Pennsylvania University of Chicago Cornell University University of Chicago The Ohio State University Harvard University Carnegie Mellon University Dartmouth College Harvard University Stanford University University of Chicago University of Chicago University of Texas, Austin Editors of The Journal of Finance Name Term Kenneth Field Marshall D Ketchum Harold G Fraine Joel E Segall Harold G Fraine Lawrence S Ritter Dudley G Luckett Alexander A Robichek Jack M Guttentag Marshall E Blume Michael J Brennan Edwin J Elton and Martin J Gruber René M Stulz Richard C Green Robert F Stambaugh Campbell R Harvey 1942 August 1946–December 1955 January 1956–December 1958 January 1959–December 1960 January 1961–December 1963 January 1964–December 1966 January 1967–December 1970 January 1971–December 1973 January 1974–December 1976 January 1977–December 1979 January 1980–March 1983 March 1983–March 1988 March 1988–February 2000 March 2000–May 2003 June 2003–June 2006 July 2006– Affiliation Carnegie Institute of Technology University of Chicago University of Wisconsin University of Chicago University of Wisconsin New York University Iowa State University Stanford University University of Pennsylvania University of Pennsylvania University of British Columbia New York University The Ohio State University Carnegie Mellon University University of Pennsylvania Duke University jofi_67_3_cover 5/15/12 9:41 AM Page THE AMERICAN FINANCE ASSOCIATION Founded in 1940 Presidents of The American Finance Association OFFICERS President President Elect Vice President Executive Secretary and Treasurer Editor of the Journal of Finance SHERIDAN TITMAN, University of Texas, Austin ROBERT STAMBAUGH, University of Pennsylvania LUIGI ZINGALES, University of Chicago DAVID H PYLE, University of California, Berkeley CAMPBELL R HARVEY, Duke University BOARD OF DIRECTORS NICHOLAS BARBERIS MARKUS BRUNNERMEIER JOHN COCHRANE ROBERT MCDONALD LASSE PEDERSEN PAOLA SAPIENZA ANTOINETTE SCHOAR RAMAN UPPAL DIMITRI VAYANOS ANNETTE VISSING-JORGENSEN Yale University Princeton University University of Chicago Northwestern University New York University Northwestern University Massachusetts Institute of Technology London Business School London School of Economics Northwestern University THE JOURNAL OF FINANCE® Articles for The Journal of Finance must be submitted through our on-line submission system A link to the submission site can be found at http://www.afajof.org/journal/submission.asp Queries about the Journal are welcome through email (editor@jfinance.org) Style instructions for preparing manuscripts can be found in each issue of the Journal on one of the back pages and on the submission site A submission fee of $70 (for AFA members) and $140 (for non-members) must be paid by Visa or MasterCard upon submission The submission fee will be refunded if the editorial decision on a submission is rendered more than 100 days after receipt of the submission at the submission site Membership in the Association is available online at www.afajof.org Disclaimer: The Publisher, the American Finance Association and Editors cannot be held responsible for errors or any consequences arising from the use of information contained in this journal; the views and opinions expressed not necessarily reflect those of the Publisher, the American Finance Association and Editors, neither does the publication of advertisements constitute any endorsement by the Publisher, the American Finance Association and Editors of the products advertised Copyright and Photocopying: © 2012 the American Finance Association All rights reserved No part of this publication may be reproduced, stored or transmitted in any form or by any means without the prior permission in writing from the copyright holder Authorization to photocopy items for internal and personal use is granted by the copyright holder for libraries and other users registered with their local Reproduction Rights Organisation (RRO), e.g Copyright Clearance Center (CCC), 222 Rosewood Drive, Danvers, MA 01923, USA (www.copyright.com), provided the appropriate fee is paid directly to the RRO This consent does not extend to other kinds of copying such as copying for general distribution, for advertising or promotional purposes, for creating new collective works or for resale Special requests should be addressed to: journalsrights@wiley.com Information for Subscribers: The Journal of Finance is published in six issues per year Institutional subscription prices for 2012 are: Print & Online FTE Small: US$418 (US), US$418 (Rest of World), €318 (Europe), £268 (UK) Print & Online FTE Medium: US$515 (US), US$515 (Rest of World), €388 (Europe), £331 (UK) Print & Online FTE Large: US$613 (US), US$613 (Rest of World), €461 (Europe), £393 (UK) Prices are exclusive of tax Asia-Pacific GST, Canadian GST and European VAT will be applied at the appropriate rates For more information on current tax rates, please go to www3.interscience.wiley.com/ aboutus/journal_ordering_and_payment.html#Tax The price includes online access to the current and all online back files to January 1st 1997, where available For other pricing options, including access information and terms and conditions, please visit www.interscience.wiley.com/journal-info Delivery Terms and Legal Title: Prices include delivery of print journals to the recipient’s address Delivery terms are Delivered Duty Unpaid (DDU); the recipient is responsible for paying any import duty or taxes Legal title passes to the customer on despatch by our distributors Back Issues: Single issues from current and recent volumes are available at the current single issue price from cs-journals@wiley.com Earlier issues may be obtained from Swets Backsets Service, P.O Box 810, 2160 SZ Lisse, The Netherlands, Tel: (+31) (0) 252 435 111, Fax: (+31) (0) 252 415 888, http://www.swets.nl/backsets Journal of Finance (ISSN 0022-1082), is published bimonthly on behalf of the American Finance Association by Wiley Subscription Services, Inc., a Wiley Company, 111 River St., Hoboken, NJ 07030-5774 Periodical Postage Paid at Hoboken, NJ and additional offices Postmaster: Send all address changes to Journal of Finance, Journal Customer Services, John Wiley & Sons Inc., 350 Main St., Malden, MA 02148-5020 Publisher: The Journal of Finance is published by Wiley Periodicals, Inc., Commerce Place, 350 Main Street, Malden, MA 02148; Tel: (781)388-8200; Fax: (781) 388-8210 Wiley Periodicals, Inc is now part of John Wiley & Sons Journal Customer Services: For ordering information, claims and any enquiry concerning your journal subscription please go to interscience.wiley.com/support or contact your nearest office Americas: Email: cs-journals@wiley.com; Tel: +1 781 388 8598 or +1 800 835 6770 (toll free in the USA & Canada) Europe, Middle East and Africa: Email: cs-journals@wiley.com; Tel: +44 (0) 1865 778315 Asia Pacific: Email: cs-journals@wiley.com; Tel: +65 6511 8000 Japan: For Japanese speaking support, Email: cs-japan@wiley.com; Tel: +65 6511 8010 or Tel (toll-free): 005 316 50 480 Further Japanese customer support is also available at www.interscience.wiley.com/support Visit our Online Customer Self-Help available in six languages at www.interscience.wiley.com/support Access to this journal is available free online within institutions in the developing world through the AGORA initiative with the FAO, the HINARI initiative with the WHO and the OARE initiative with UNEP For information, visit www.aginternetwork.org, www.healthinternetwork.org, www.oarescience.org Imprint Details: Printed in USA by The Sheridan Press Wiley’s Corporate Citizenship initiative seeks to address the environmental, social, economic, and ethical challenges faced in our business and which are important to our diverse stakeholder groups We have made a long-term commitment to standardize and improve our efforts around the world to reduce our carbon footprint Follow our progress at www.wiley.com/go/citizenship Aims and Scope: The Journal of Finance publishes leading research across all the major fields of financial research It is one of the most widely cited academic journals in finance and one of the most widely cited journals in all of economics as well Each issue of the journal reaches over 8,000 academics, finance professionals, libraries, government and financial institutions around the world Published six times a year, the Journal is the official publication of the American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics Address for Association Business: David Pyle, Journal of Finance, American Finance Association, University of California, Berkeley—Haas School of Business, 545 Student Services Building, Berkeley, CA 94720-1900 Email: pyle@haas.berkeley.edu Abstracting and Indexing Services: The Journal is indexed by ABI/Inform Global; Accounting Articles; Accounting and Tax Database; Expanded Academic ASAP; Business ASAP; Business Periodical Index; Business Source: Corporate; Business Source Elite; Business Source Plus; Business Source Premier; CatchWord; Corporate ResourceNet; Current Contents/Social & Behavioral Science; Current Contents Collections/ Business; e-jel; EBSCO Online; EconLit; Emerald Management Reviews; Environmental Sciences & Pollution Management; General Business File ASAP; Health and Safety Science Abstracts; InfoTrac College Edition; InfoTrac OneFile; Ingenta; International Bibliography of the Social Sciences; Journal of Economic Literature; JCR Social Sciences Edition; JSTOR; MAS Ultra/ Public Library Edition; OmniFile Full Text Mega Edition; ProQuest Accounting and Tax Database; Public Affairs Information Service International; Risk Abstracts; Safety Science & Risk Abstracts; Social Sciences Citation Index; Wilson Business Abstracts; Wilson Business Abstracts FullText; and Wilson OmniFile V Production Editor: Beetna Kim-Schissler (email: jofi@wiley.com) Advertising: For advertising information, please visit the journal’s website or contact the Journals Advertising Sales Representative, Kristin McCarthy, at kmccarthy@wiley.com ISSN 0022-1082 (Print) ISSN 1540-6261 (Online) Name Kenneth Field Chelcie C Bosland Charles L Prather John D Clark Inactive Inactive Harry G Guthmann Lewis A Froman Benjamin H Beckhart Neil H Jacoby Howard R Bowen Raymond J Saulnier Edward E Edwards Roland I Robinson Garfield V Cox Norris O Johnson Miller Upton Marshall D Ketchum Lester V Chandler James J O’Leary Paul M Van Arsdell Arthur M.Weimer Bion B Howard George T Conklin, Jr Roger F Murray George Garvy J Fred Weston Robert V Rossa Harry C Sauvain Walter E Hoadley Lawrence S Ritter Joseph Pechman Irwin Friend Sherman Maisel John Lintner Myron J Gordon Merton H Miller Term Affiliation Name 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 Carnegie Institute of Technology Brown University University of Texas University of Nebraska Northwestern University Russell Sage College Columbia University University of California, Los Angeles University of Illinois National Bureau of Economic Research Indiana University Northwestern University University of Chicago First National City Bank of New York Beloit College University of Chicago Princeton University Life Insurance Association of America University of Illinois Indiana University Northwestern University Guardian Life Ins Co of America Columbia University Federal Reserve Bank of New York University of California, Los Angeles Brown Brothers Harriman & Company Indiana University Bank of America New York University Brookings Institution University of Pennsylvania University of California, Berkeley Harvard University University of Toronto University of Chicago Alexander A Robichek Burton Malkiel Edward Kane William F Sharpe Franco Modigliani Harry Markowitz Stewart Myers James C Van Horne Fischer Black Robert Merton Richard Roll Stephen A Ross Michael J Brennan Myron S Scholes Robert H Litzenberger Michael C Jensen Mark E Rubinstein Sanford J Grossman Martin J Gruber Edwaurdo S Schwartz Hayne E Leland Edwin J Elton Hans R Stoll Franklin Allen George M Constantinides Maureen O’Hara Douglas W Diamond René M Stulz John Y Campbell Richard C Green Kenneth R French Jeremy Stein Darrell Duffie John Cochrane Raguram Rajan Sheridan Titman Term 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Affiliation Stanford University Princeton University The Ohio State University Stanford University Massachusetts Institute of Technology IBM Corporation Massachusetts Institute of Technology Stanford University Goldman Sachs & Company Massachusetts Institute of Technology University of California, Los Angeles Yale University University of California, Los Angeles Stanford University University of Pennsylvania Harvard University University of California, Berkeley University of Pennsylvania New York University University of California, Los Angeles University of California, Berkeley New York University Vanderbilt University University of Pennsylvania University of Chicago Cornell University University of Chicago The Ohio State University Harvard University Carnegie Mellon University Dartmouth College Harvard University Stanford University University of Chicago University of Chicago University of Texas, Austin Editors of The Journal of Finance Name Term Kenneth Field Marshall D Ketchum Harold G Fraine Joel E Segall Harold G Fraine Lawrence S Ritter Dudley G Luckett Alexander A Robichek Jack M Guttentag Marshall E Blume Michael J Brennan Edwin J Elton and Martin J Gruber René M Stulz Richard C Green Robert F Stambaugh Campbell R Harvey 1942 August 1946–December 1955 January 1956–December 1958 January 1959–December 1960 January 1961–December 1963 January 1964–December 1966 January 1967–December 1970 January 1971–December 1973 January 1974–December 1976 January 1977–December 1979 January 1980–March 1983 March 1983–March 1988 March 1988–February 2000 March 2000–May 2003 June 2003–June 2006 July 2006– Affiliation Carnegie Institute of Technology University of Chicago University of Wisconsin University of Chicago University of Wisconsin New York University Iowa State University Stanford University University of Pennsylvania University of Pennsylvania University of British Columbia New York University The Ohio State University Carnegie Mellon University University of Pennsylvania Duke University Vol 67 February 2012 No Editor Co-Editor CAMPBELL R HARVEY Duke University JOHN GRAHAM Duke University Associate Editors VIRAL ACHARYA New York University HANNO LUSTIG University of California, Los Angeles ANAT R ADMATI Stanford University ANDREW METRICK Yale University ANDREW ANG Columbia University TOBIAS J MOSKOWITZ University of Chicago KERRY BACK Rice University MALCOLM BAKER Harvard University NICHOLAS C BARBERIS Yale University NITTAI K BERGMAN Massachusetts Institute of Technology HENDRIK BESSEMBINDER University of Utah MICHAEL W BRANDT Duke University ALON BRAV Duke University MARKUS K BRUNNERMEIER Princeton University DAVID K MUSTO University of Pennsylvania STEFAN NAGEL Stanford University TERRANCE ODEAN University of California, Berkeley CHRISTINE A PARLOUR University of California, Berkeley ´ L˘ UBOS˘ PASTOR University of Chicago LASSE H PEDERSEN New York University MITCHELL A PETERSEN Northwestern University DAVID A CHAPMAN Boston College MANJU PURI Duke University MIKHAIL CHERNOV London School of Economics RAGHURAM RAJAN University of Chicago JENNIFER S CONRAD University of North Carolina JOSHUA RAUH Northwestern University FRANCESCA CORNELLI London Business School MICHAEL R ROBERTS University of Pennsylvania BERNARD DUMAS INSEAD ANTOINETTE SCHOAR Massachusetts Institute of Technology BURTON HOLLIFIELD Carnegie Mellon University HARRISON HONG Princeton University NARASIMHAN JEGADEESH Emory University WEI JIANG Columbia University STEVEN N KAPLAN University of Chicago JONATHAN M KARPOFF University of Washington ARVIND KRISHNAMURTHY Northwestern University MICHAEL LEMMON University of Utah FRANCIS A LONGSTAFF University of California, Los Angeles HENRI SERVAES London Business School ANIL SHIVDASANI University of North Carolina RICHARD STANTON University of California, Berkeley ANNETTE VISSING-JORGENSEN Northwestern University ANDREW WINTON University of Minnesota Business Manager DAVID H PYLE University of California, Berkeley Assistant Editor WENDY WASHBURN HELP DESK The Latest Information Our World Wide Web Site For the latest information about the journal, about our annual meeting, or about other announcements of interest to our membership, consult our web site at http://www.afajof.org Subscription Questions or Problems Address Changes Journal Customer Services: For ordering information, claims and any enquiry concerning your journal subscription please go to www.wileycustomerhelp.com/ask or contact your nearest office Americas: Email: cs-journals@wiley.com; Tel: +1 781 388 8598 or +1 800 835 6770 (toll free in the USA & Canada) Europe, Middle East and Africa: Email: cs-journals@wiley.com; Tel: +44 (0) 1865 778315 Asia Pacific: Email: cs-journals@wiley.com; Tel: +65 6511 8000 Japan: For Japanese speaking support, Email: cs-japan@wiley.com; Tel: +65 6511 8010 or Tel (toll-free): 005 316 50 480 Visit our Online Customer Get-Help available in languages at www wileycustomerhelp.com Permissions to Reprint Materials from the Journal of Finance C 2012 The American Finance Association All rights reserved With the exception of fair dealing for the purposes of research or private study, or criticism or review, no part of this publication may be reproduced, stored or transmitted in any form or by any means without the prior permission in writing from the copyright holder Authorization to photocopy items for internal and personal use is granted by the copyright holder for libraries and other users of the Copyright Clearance Center (CCC), 222 Rosewood Drive, Danvers, MA 01923, USA (www.copyright.com), provided the appropriate fee is paid directly to the CCC This consent does not extend to other kinds of copying, such as copying for general distribution for advertising or promotional purposes, for creating new collective works, or for resale For information regarding reproduction for classroom use, please see the AFA policy statement in the back of this issue Advertising in the Journal For advertising information, please visit the journal’s web site at www.afajof.org or contact the Academic and Science, Advertising Sales Coordinator, at corporatesalesusa@wiley.com 350 Main St Malden, MA 02148 Phone: 781.388.8532, Fax: 781.338.8532 Association Business Those having business with the American Finance Association, or members wishing to volunteer their service or ideas that the association might develop, should contact the Executive Secretary and Treasurer: Prof David Pyle, American Finance Association, University of California, Berkeley—Haas School of Business, 545 Student Services Building, Berkeley, CA 94720-1900 Telephone and Fax: (510) 642-2397; email: pyle@haas.berkeley.edu Volume 67 CONTENTS for FEBRUARY 2012 No ARTICLES The Power of Voice: Managerial Affective States and Future Firm Performance WILLIAM J MAYEW and MOHAN VENKATACHALAM Political Uncertainty and Corporate Investment Cycles BRANDON JULIO and YOUNGSUK YOOK 45 The Credit Ratings Game PATRICK BOLTON, XAVIER FREIXAS, and JOEL SHAPIRO 85 Tiebreaker: Certification and Multiple Credit Ratings DION BONGAERTS, K J MARTIJN CREMERS, and WILLIAM N GOETZMANN 113 External Networking and Internal Firm Governance CESARE FRACASSI and GEOFFREY TATE 153 Information Disclosure and Corporate Governance BENJAMIN E HERMALIN and MICHAEL S WEISBACH 195 The Value of Investment Banking Relationships: Evidence from the Collapse of Lehman Brothers CHITRU S FERNANDO, ANTHONY D MAY, and WILLIAM L MEGGINSON 235 When It Pays to Pay Your Investment Banker: New Evidence on the Role of Financial Advisors in M&As ANDREY GOLUBOV, DIMITRIS PETMEZAS, and NICKOLAOS G TRAVLOS 271 Why Does the Law Matter? Investor Protection and Its Effects on Investment, Finance, and Growth R DAVID MCLEAN, TIANYU ZHANG, and MENGXIN ZHAO 313 Family-Controlled Firms and Informed Trading: Evidence from Short Sales RONALD C ANDERSON, DAVID M REEB, and WANLI ZHAO 351 MISCELLANEA 387 THE JOURNAL OF FINANCE • VOL LXVII, NO • FEBRUARY 2012 The Power of Voice: Managerial Affective States and Future Firm Performance WILLIAM J MAYEW and MOHAN VENKATACHALAM∗ ABSTRACT We measure managerial affective states during earnings conference calls by analyzing conference call audio files using vocal emotion analysis software We hypothesize and find that, when managers are scrutinized by analysts during conference calls, positive and negative affects displayed by managers are informative about the firm’s financial future Analysts not incorporate this information when forecasting near-term earnings When making stock recommendation changes, however, analysts incorporate positive but not negative affect This study presents new evidence that managerial vocal cues contain useful information about a firm’s fundamentals, incremental to both quantitative earnings information and qualitative “soft” information conveyed by linguistic content It is not what you say that matters but the manner in which you say it; there lies the secret of the ages —William Carlos Williams MANAGERS DISSEMINATE AN ABUNDANT amount of quantitative and qualitative information about their actions and firm performance on both a voluntary and a mandatory basis through several avenues, including press releases, quarterly and annual reports, shareholder meetings, and earnings conference calls Prior literature is replete with studies that evaluate the extent to which capital market participants react to quantitative information contained in these disclosures Only recently have researchers begun to explore the capital market implications of qualitative verbal communication via financial news ∗ Mayew and Venkatachalam are with the Fuqua School of Business, Duke University Acting Editor: David Hirshleifer We acknowledge helpful comments and suggestions from two anonymous referees, Dan Ariely, Jim Bettman, Lauren Cohen, Patricia Dechow, Lisa Koonce, Feng Li, Mary Frances Luce, Greg Miller, Chris Moorman, Chris Parsons, Eddie Riedl, Katherine Schipper, Shyam Sunder, Paul Tetlock, T.J Wong, and workshop participants at Barclays Global Investors, University of California at Berkeley, Chinese University of Hong Kong, University of Connecticut, Cornell University, Duke Finance Brown Bag, Financial Research Association 2008 conference, Fuqua Summer Brown Bag, Journal of Accounting Auditing and Finance 2008 Conference, Massachusetts Institute of Technology, University of Miami, Penn State University, Queens University, Rice University, University of Toronto, and Vanderbilt University We also thank Amir Liberman and Albert De Vries of Nemesysco for helpful discussions and for assistance in extracting the LVA metrics into machine readable format for our academic use Excellent research assistance was provided by Daniel Ames, Erin Ames, Jacob Ames, Patrick Badolato, Zhenhua Chen, Ankit Gupta, Sophia Li, Mark Uh, and Yifung Zhou The Journal of Finance R stories (Tetlock (2007), Tetlock, Saar-Tsechansky, and Macskassy (2008)), annual reports (Feldman et al (2010), Loughran and McDonald (2011)), conference presentations (Bushee, Jung, and Miller (2011)), and earnings press releases (Davis, Piger, and Sedor (2011), Demers and Vega (2010)) In general, the findings support the hypothesis that qualitative verbal communication by managers is incrementally useful to quantitative information in predicting future firm fundamentals and stock returns This paper extends this line of inquiry by focusing on how one important type of nonverbal communication, vocal cues from executives during conference calls, can inform investors about a firm’s future profitability and stock returns Using a sample of conference call audio files and commercially available Layered Voice Analysis (LVA) software, we analyze managerial vocal cues to measure positive and negative dimensions of a manager’s affective or emotional state Research in linguistics and social psychology has long recognized that the human voice conveys considerable information over and above the literal meaning contained in verbal content (Caffi and Janney (1994)) Vocal cues or expressions are considered important in drawing inferences about both positive affective states (e.g., happiness, excitement, and enjoyment) and negative affective states (e.g., fear, tension, and anxiety) The appraisal theory of emotion suggests that affective states arise from an individual’s cognitive evaluation of a situation or stimulus and its attendant implications for personal well-being In other words, affective states are responses to interpretation and evaluation of events and stimuli and hence reveal useful information The extent of the emotional response will be a function of the strength of the stimulus or elicitor In the context of conference calls, the external stimulus that is likely to produce affective states is the questioning by analysts during the conference call Further, the affective state is likely to be more prominent when the analysts’ questions are more pointed and scrutinizing Consequently, affective states elicited from analysts’ probing during the conference call are likely to contain useful information about the firm’s economic activities and performance Survey evidence by Graham, Harvey, and Rajgopal (2005) suggests that managers who miss analysts’ earnings expectations face extensive questioning during the conference call We therefore posit that affective states are most likely to be elicited during the question and answer portion of the conference call, and, in particular, when firms have missed earnings expectations and are subject to intense scrutiny by analysts If affective states exhibited by managers during conference calls contain new information about firm fundamentals, we expect investors to incorporate this information into stock prices Consistent with this prediction, we find—even after controlling for the linguistic content in the conference calls—that both positive and negative affects exhibited by managers during the question and answer portion of earnings conference calls are associated with contemporaneous stock returns Moreover, the stock market’s response to the information contained in the affective state is more pronounced when managers are “interrogated” and subject to more scrutiny during the conference calls The Power of Voice While investors react to affective states as if they carry value relevant information, analysts not react in a similar fashion when forecasting near-term earnings That is, we are unable to document a relation between affective states and forecast revision magnitudes of one-quarter-ahead earnings following the conference call This result is open to two interpretations Either analysts fail to appreciate the valuation implications of nonverbal cues or analysts consider this information but incorporate it as part of the “soft” information in determining long-term forecasts that underpin stock recommendations Our evidence is consistent with the latter interpretation We find a positive association between positive affect and changes in stock recommendations immediately following the call However, we find no association between negative affect and recommendation changes, a finding that is perhaps consistent with analyst incentives to delay incorporating bad news into their stock recommendations (McNichols and O’Brien (1997), O’Brien, McNichols, and Lin (2005)) Next, we examine whether the stock market reaction around the earnings call is consistent with future firm-specific information about fundamentals We find that both positive and negative affects are associated with future unexpected earnings (based on analyst expectations) measured over the two subsequent quarters We also examine firm-issued press releases from news wires over the 180 days following the conference call We classify news releases as good or bad depending on the market reaction surrounding the press release and compute the proportion of bad news releases following the conference call Our findings suggest that managers who exhibit positive affect issue a lower proportion of bad news press releases in the future Finally, we examine whether market participants reflect managerial affect for future performance with any delay We find that negative affect is related to cumulative abnormal returns over the subsequent 180 trading days following the earnings conference call We cannot identify for certain why market participants fail to incorporate negative affect completely One plausible explanation is that market participants follow analysts’ recommendations, which not completely take into account the information in negative affect Additional analyses reveal that, when analysts observe negative affect, they are less likely to revise their outstanding earnings forecasts Together, our evidence is not consistent with analysts’ failure to incorporate negative affect; rather, it is more consistent with analysts’ reluctance to revise forecasts and recommendations when faced with “soft” negative information about a firm’s future prospects (McNichols and O’Brien (1997), O’Brien et al (2005)) Regardless, we caution the reader that this apparent underreaction does not imply a plausible trading strategy as transaction costs could eliminate any potential trading profits This study makes the following contributions First, to our knowledge, this is the first paper to provide evidence on the role of nonverbal communication in a capital market setting We apply findings in social psychology research that provide unequivocal support for vocal expressions as one particular type of nonverbal communication that is influential when communicating messages over and above their verbal content (Mehrabian and Weiner (1967), Scherer, London, and Wolf (1973), Scherer (2003)) Our findings confirm that important The Journal of Finance R information can be gleaned from vocal cues in the capital market setting by showing that managers’ emotional state is associated with stock returns and future firm performance, after we control for quantitative information and qualitative verbal content Future research in both economics and psychology can explore vocal cues in other settings For example, examining information about the affective states of economic leaders like the Federal Reserve Chairman can perhaps be informative about broader changes in economic fundamentals Second, our results provide new insights into how conference calls can provide information to financial markets Prior research documents that conference calls provide significant information to market participants above and beyond that contained in the earnings press release (Frankel, Johnson, and Skinner (1999)) As conference call audio broadcasts are commonplace for many firms and open to public access subsequent to Regulation FD, our findings suggest that investors can and use vocal cues during such communication to learn about a manager’s affective state and in turn about the firm’s financial future Our study is subject to the following caveat Although our evidence is consistent with the LVA software generating useful proxies for managerial affect in the capital market setting, the generalizability of our results largely depends on the validity of the LVA-based measures We offer some preliminary evidence on the construct validity of the LVA measures that we use in this paper, but certainly more empirical validation of this software’s reliability is warranted We view our empirical results as complementary to recent experimental investigations of the construct validity of LVA metrics in various settings (Elkins (2010), Elkins and Burgoon (2010), Han and Nunes (2010), Hobson, Mayew, and Venkatachalam (2011)) The paper proceeds as follows In Section I, we review related literature and develop our hypotheses Section II discusses the nonverbal measures used in the study In Section III, we outline our sample selection, define our variables of interest, and provide descriptive statistics Sections IV and V discuss our empirical results and additional analyses, and in Section VI we offer concluding remarks I Related Research and Hypothesis Development A Related Research Social psychology research suggests that nonverbal cues such as vocal and facial expressions influence how a message is interpreted Communication experts generally agree that in face-to-face conversations, only a small fraction of the message regarding emotional state is contained in the verbal content (Mehrabian (1971)) A significant component of the message is contained in vocal attributes such as voice intonation, accent, speed, volume, and inflection Kinesics—that is, facial expressions, postures, and gestures—also plays a large role in communication However, we not study these traits in this paper and therefore not elaborate further on the role of kinesics We instead focus Table V Low−High High Low 0.024 (2.81) 0.021 (1.90) 0.016 (1.44) 0.010 (0.86) 0.003 (2.87) 0.021 (3.67) α factor 0.024 (2.80) 0.020 (1.72) 0.015 (1.03) 0.010 (0.87) 0.004 (2.55) 0.020 (3.57) α factor Founder CEO (n = 117,332) 0.028 (2.45) 0.025 (1.92) 0.022 (1.67) 0.015 (0.90) 0.002 (2.66) 0.026 (3.45) α factor 0.029 (2.34) 0.025 (1.77) 0.021 (1.80) 0.015 (1.02) 0.002 (2.55) 0.027 (3.33) α factor Descendant CEO (n = 60,328) 0.026 (2.65) 0.019 (2.31) 0.030 (4.44) 0.033 (4.32) 0.027 (3.87) −0.001 (4.34) α factor 0.020 (2.64) 0.015 (2.29) 0.031 (4.44) 0.029 (4.33) 0.028 (3.88) −0.008 (4.56) α factor Professional CEO (n = 124,060) 0.008 (3.77) 0.005 (2.55) −0.002 (0.56) −0.003 (1.99) −0.010 (3.01) 0.018 (3.93) α factor 0.008 (3.75) 0.005 (2.56) −0.002 (0.56) −0.003 (2.00) −0.009 (3.00) 0.017 (3.89) α factor Family Holds [...]... CAR( 0,1 ) CAR( 2, 1 80) UEt UEt+1 UEt +2 UEt+1,t +2 LNMVE MOM BM VOL N Mean Std Dev Median Min Max 1,6 47 1,6 47 1,6 47 1,6 47 1,6 47 1,6 47 1,6 47 1,6 47 1,6 47 1,6 47 1,6 47 1,6 47 1,6 47 1,6 47 1,1 46 1,1 46 1,6 47 1,6 47 1,6 47 1,6 47 0.1086 0.1758 0.0041 0.0148 7,6 58 0.0087 0.00 92 −0.0016 0.0017 0.0344 −0.0 023 −0.06 12 −0.0008 −0.0016 −0.0 020 −0.0 028 7 .27 62 −0.0035 0.4404 0. 021 2 0. 024 5 0.07 02 0.0455 0. 023 7 2 1,4 41 0 .22 43 0 .26 65... Retail:Restaurant N 30 23 6 59 21 8 23 117 51 110 28 20 8 9 30 28 124 93 19 % 1. 82 14.33 3.58 13 .24 1.40 7.10 3.10 6.68 1.70 1 .21 0.49 0.55 1. 82 1.70 7.53 5.65 1.15 All Compustat Firms N 411 2, 9 08 904 3,0 50 401 2, 3 06 767 1,0 62 544 473 21 4 371 340 622 900 933 28 6 % 1. 82 12. 85 3.99 13.48 1.77 10.19 3.39 4.69 2. 40 2. 09 0.95 1.64 1.50 2. 75 3.98 4. 12 1 .26 (continued) 18 The Journal of Finance R Table II—Continued... design, more recent research by Adler (20 09) using sex offender speech samples also finds LVA to predict deception at rates similar to the polygraph 11 See, for example, Harnsberger et al (20 09 ), Damphousse et al (20 07 ), Sommers et al (20 07 ), Sommers (20 06 ), Gamer et al (20 06 ), Hollien and Harnsberger (20 06 ), and Brown, Senter, and Ryan (20 03)  12 The Journal of Finance R Nunes (20 10) conclude that the. .. RECREV (2) Intercept ? 0.0 022 ∗ PAFF HS + NAFF HS − PAFF LS + NAFF LS − UEt + CAR( 0,1 ) + LNMVE ? MOM ? BM ? VOL ? LAGREC − POSWORDS + NEGWORDS − −0 .27 23∗∗∗ (0.0568) 0. 420 0∗∗ (0 .22 66) −0.0 121 (0.1 025 ) 0.1056 (0.1861) 0.08 62 (0.07 32) 0.9383∗∗ (0.4967) 0. 522 4∗∗∗ (0.08 52) −0.0016 (0.0035) 0.0715∗∗∗ (0. 022 3) −0.0014 (0. 021 2) 0 .25 70 (0.6596) −0.1073∗∗∗ (0.0 126 ) −0.0148 (0. 021 8) −0.0194 (0. 027 1) 1,6 47 12. 06%... abnormally high levels of excitement Thus, the higher the emotion level, the larger the positive affect (hereafter, PAFF).8 Our decision to use LVA-based software results from a careful cost–benefit analysis on many dimensions The trade-offs we consider are the parameters provided by the software, the monetary cost of the software, and, most important, the construct validity of the parameters We employ... (0.0008) 0.0 123 ∗∗∗ (0.0047) −0. 021 1∗∗∗ (0.0061) −0.3334∗ (0.1949) −0.0 028 (0.0 026 ) −0.0 022 (0.0053) 1,1 46 20 .25 % (0.0068) 0.0690∗∗ (0.0338) −0.0307∗∗ (0.0185) 0. 020 7 (0. 022 3) −0.0 121 (0.0114) 0.4 424 ∗∗∗ (0.1531) 0 .28 56 (0 .26 63) −0.0447∗ (0. 029 5) −0.0006 (0.0005) 0.00 92 ∗∗ (0.0031) −0.0144∗∗∗ (0.0039) −0.3 020 ∗∗ (0.1465) −0.0 022 (0.0018) −0.0030 (0.0038) 1,1 46 17. 12% cue measures in the high-scrutiny condition... 0 .20 06 0.0519 0.0787 0. 421 8 0.0 129 0.0177 0. 021 0 0.03 12 1.5544 0 .24 04 0 .28 54 0.0086 0.1064 0.1 721 0.0104 0.0063 1 ,2 27 0.0108 0.0105 −0.00 02 0.0000 0. 020 0 −0.0019 −0. 021 0 0.0004 0.0004 0.0004 0.0009 7.1 625 0.0035 0.39 42 0.0198 0.0199 0.0000 −0 .20 59 0.0001 29 −1.0100 −1 .20 00 −0.0344 2. 0000 0.0000 −0.4983 −3.6617 −0.0903 −0.1344 −0.1719 −0.3063 3.9519 −0.7190 −0.11 32 0.0078 0 .23 91 0.4570 0.1156 0.1 523 ... −0.0 027 (0.0 129 ) 0.0107 (0.0151) −0.0056 (0.0053) 0.4767∗∗∗ (0.1104) 0. 429 8∗∗ (0.1878) −0.0357∗∗ (0.0163) −0.0003 (0.0003) 0.0078∗∗∗ (0.0 028 ) −0.0074∗∗∗ (0.0 023 ) −0.1355 (0.0977) −0.0 020 (0.0015) 0.0013 (0.0 021 ) 1,6 47 28 .80% 0.0157∗∗ 0. 022 4∗∗ (0.0106) 0.0753∗ (0.0510) −0.0431∗ (0. 029 4) 0. 021 5 (0. 029 1) −0.01 92 (0.0118) 0.74 72 ∗∗ (0 .24 29) 0.5811∗ (0.3 921 ) −0.0 824 ∗ (0.0 521 ) −0.0007 (0.0008) 0.0 123 ∗∗∗... (VOL,NAFF) = 0.1 1, 15 The presence of some emotion during the presentation portion of the conference is not surprising Managers rationally anticipate some of the questions analysts will likely ask when preparing the presentation portion of the conference call, thereby endogenizing some the emotional effects that would otherwise be present during the Q&A period of the conference call The Power of Voice 17... quintiles of the presentaiton portion of the conference call and the four quintiles of the Q&A session Panel C reports how NAFF evolves over the course of the conference call for CEOs NAFF is calculated as in Panel A, except that it is calculated only for the CEO, and is measured at eight intervals: the four quintiles of the presentation portion of the conference call and the four quintiles of the Q&A