Roni Michaely

Cornell University | CU

Washington policy research analysts (WAs) monitor political developments and produce research to interpret the impact of these events. We find institutional clients channel more commissions to brokerages providing policy research and commission-allocating institutional clients generate superior returns on their politically sensitive trades. We find...

This study investigates whether investors can reap economic benefits from analyzing differences in analyst quality. Although high-quality analysts’ average forecast is more accurate than the consensus forecast for firms with a large analyst following, the benefits of using high-quality analysts’ average forecasts are not economically significant. I...

We examine how cultural differences among agents influence the aggregate outcome of a common forecasting task. Using both exogenous shocks to sell-side analyst diversity and panel regression methods, we find that increases in analyst cultural diversity positively affect the quality of the consensus earnings forecast. We further provide evidence on...

We analyze communications between the SEC and firms prior to IPOs using LDA analysis and KL divergence. The SEC’s concerns closely map onto the regulator’s stated mandate: companies increase prospectus disclosures on precise topics of SEC concern. Revenue recognition is the dominant topic of SEC concern, and it is not independently discovered by in...

Portfolio diversification of firms’ controlling owners influences their firms’ capital investment. Empirically, the effect of owners’ portfolio diversification on their firms’ investment levels is positive for publicly traded firms and tends to be negative for privately held ones. These findings are consistent with predictions of a model in which a...

We examine the nature of information contained in insider trades prior to corporate events. Insiders' net buying increases before open market share repurchase announcements and decreases before seasoned equity offers. Higher insider net buying is associated with better post-event operating performance, a reduction in undervaluation, and, for repurc...

Since the late 1990s, over 75% of US industries have experienced an increase in concentration levels. We find that firms in industries with the largest increases in product market concentration show higher profit margins and more profitable mergers and acquisitions deals. At the same time, we find no evidence for a significant increase in operation...

We use a proprietary data set to test the implications of several asymmetric information models on how short-lived private information affects trading strategies and liquidity provision. Our identification rests on information acquisition before analyst recommendations are publicly announced. We provide the first empirical evidence supporting theor...

We examine changes in the scope of the sell-side analyst industry and whether these changes impact information dissemination and the quality of analysts' reports. Our findings suggest that changes in the number of analysts covering an industry impact analyst competition and have significant spillover effects on other analysts' forecast accuracy, bi...

It is widely documented that managers strive to maintain smooth dividends. Yet, it is not clear if this behavior reflects investors’ preferences. In this paper, we study whether investors indeed value dividend-smoothing stocks differently by exploring the implications of dividend smoothing for firms’ investor clientele, stock prices, and cost of ca...

We use the Sarbanes–Oxley Act of 2002 (SOX) as a quasi-natural experiment to examine the link between product market competition and internal governance mechanisms. Consistent with the notion that competition plays an important role in aligning incentives within the firm, SOX has led to a larger improvement in the operation of firms in concentrated...

We report reduced market response to Friday announcements of dividend changes, seasoned equity offerings, share repurchases, earnings, and mergers, which is seemingly consistent with the notion of investor inattention on Fridays. However, we show that these findings are an outcome of selection bias. Firms that make announcements on Fridays experien...

Sell-side analysts change their stock recommendations when their valuations differ from the market’s. These valuation differences can arise from either differences in earnings estimates or the nonearnings components of valuation methodologies. We find that recommendation changes motivated by earnings estimate revisions have a greater initial price...

Using combinations of weekdays and times of day (before, during, and after trading hours) of earnings announcements, we examine whether managers attempt to strategically time these announcements. We document that the worst earnings news is announced on Friday evening and find robust evidence that only Friday evening announcements represent managers...

We examine complementarities between information contained in open market share repurchase and seasoned equity offering (SEO) announcements and information contained in insider trading before these events, using a comprehensive sample of over 4,300 repurchase and nearly 1,800 SEO announcements. First, insiders’ net buying increases before share rep...

There has been a systematic decline in the number of publicly-traded firms over the last two decades. Half of the U.S. industries lost over 50% of their publicly traded peers. The decline has increased industry concentration, as the void left by public firms has not been filled by an increase in the number of private businesses or by greater presen...

This paper examines determinants of changes in the size of the sell-side analyst industry and whether such changes impact the aggregate bias and accuracy of analyst reports as well as how analyst information is impounded into prices. We first document changes in the total number of analysts and the factors related to these changes. We find that the...

We examine theoretically and empirically potential determinants of investment and operating strategies of public and private firms that are controlled by imperfectly diversified owners. In particular, we demonstrate theoretically and confirm empirically that due to arguably more severe financial constraints that private firms face, the effects on t...

This paper empirically investigates the relationship between institutional holdings and capital structure. Institutions may affect capital structure through their monitoring and information-gathering roles. At the same time, institutions may gravitate toward firms with specific capital structures, forming leverage-based investment clienteles. Using...

DellaVigna and Pollet (2009) argue that the documented underreaction to Friday earnings announcements can be attributed to investors’ inattention on Friday relative to other days of the week. Using four approaches, we examine the impact of firm heterogeneity on the immediate reaction and drift for Friday earnings announcements. First, we identify t...

We use the Sarbanes Oxley Act (SOX) as a natural experiment of a shock to internal governance to examine the link between product market competition and internal governance mechanisms. Consistent with the notion that product market competition is a close substitute for internal governance, we find that firms in concentrated industries experienced a...

We use the Sarbanes Oxley Act (SOX) as a natural experiment of a shock to internal governance to examine the link between product market competition and internal governance mechanisms. Consistent with the notion that product market competition is a close substitute for internal governance, we find that firms in concentrated industries experienced a...

It is almost an article of faith that managers have a preference for smooth dividends. Yet, it is not clear why. Is dividend smoothing associated with a lower cost of capital? Do managers’ preferences reflect investors’ preferences? In this paper, we study whether investors indeed value dividend smoothing stocks differently by exploring the implica...

A milestone for any company is the issuance of publicly traded stock. While the motivations for an initial public offering are straightforward, the mechanism for doing so is complex. In this paper, we outline the process by which companies are brought to market in an initial public offering. Our goals here are to delineate the specific steps that a...

Using comprehensive time stamp data on earnings announcements collected from newswires, we show that earnings news announced within trading hours results in approximately 50% smaller immediate reaction compared to similar earnings announced outside trading hours. Negative news tends to be announced during trading hours, which, together with the red...

We compare the dividend policies of publicly and privately held firms in order to help identify the forces shaping corporate dividends, and shed light on the behavior of privately held companies. We show that private firms smooth dividends significantly less than their public counterparts, suggesting that the scrutiny of public capital markets play...

We document the cross-sectional properties of corporate dividend-smoothing policies and relate them to extant theories. We find that younger, smaller firms, firms with low dividend yields and more volatile earnings and returns, and firms with fewer and more disperse analyst forecasts smooth less. Firms that are cash cows, with low growth prospects,...

An analyst changes his recommendation of a stock to indicate to investors that his valuation of the stock differs from the market's valuation. Explicitly or implicitly, the difference in valuation ultimately arises from disagreement about earnings estimates and/or discount rate estimates. We argue that recommendation changes that are based on chang...

We study analysts' industry recommendations. We find that the distribution of industry recommendations is quite balanced. Analysts show more optimism towards industries with high levels of R&D, past profitability and past returns, as well as industries in which they are active as underwriters. Industry recommendations possess investment value as po...

Do the low long-run average returns of equity issuers reflect underperformance due to mispricing or the risk characteristics of the issuing firms? We shed new light on this question by examining how institutional lenders price loans of equity issuing firms. Accounting for standard risk factors, we find that equity issuing firms' expected debt retur...

The average nominal share prices of common stocks traded on the New York Stock Exchange have remained constant at approximately $35 per share since the Great Depression as a result of stock splits. It is surprising that U.S. firms actively maintained constant nominal prices for their shares while general prices in the economy went up more than tenf...

While dividend smoothing is taken as an article of faith, little is known about the cross-sectional properties of smoothing policies. Why do some firms smooth more than others? We examine firms' dividend smoothing behavior across a wide spectrum of publicly traded firms in the U.S. We find that larger firms, firms with more tangible assets, and fir...

We analyze the impact of the May 2003 dividend tax cut on corporate dividend policy. First, we find that while there was a temporary increase in dividend initiations, this increase was not long-lasting. While dividend payments were increased right after the tax change, there was a larger and more pronounced increase in repurchases during the same t...

"We survey 328 financial executives to determine the effects of the May 2003 dividend tax cut. We find that the tax cut led to initiations and dividend increases at some firms. However, executives say that among the factors that affect dividend policy, the tax rate reduction is less important than the stability of future cash flows, cash holdings,...

We investigate the empirical implications of using various measures of payout yield rather than dividend yield for asset pricing models. We find statistically and economically significant predictability in the time series when payout (dividends plus repurchases) and net payout (dividends plus repurchases minus issuances) yields are used instead of...

Do the low long-run average returns of equity issuers reflect Do the low long-run average returns of equity issuers reflect underperformance due to mispricing or the risk characteristics of the issuing firms? We shed new light on this question by examining how institutional lenders price loans of equity-issuing firms. We find that equity-issuing fi...

This paper investigates whether product market competition affects managers' decision to distribute cash to shareholders. Using a large sample of manufacturing firms, we find that firms in less competitive industries have significantly lower payout ratios than firms in more competitive markets. Further, we find that this negative relation between i...

Nominal prices of common stocks have remained constant at around $30 per share since the Great Depression as a result of firms splitting their stocks. It is surprising that firms actively maintained constant nominal price for their shares while general prices in the economy went up more than ten fold. This is especially puzzling given that commissi...

Abstract This paper presents a rationale for systematic liquidity and links time variation in the risk premium to liquidity. The driving force behind endogenous liquidity in the model is uncer- tainty about the preferences and endowments of investors. Learning about the risk premium gives rise to the price impact of trades because the order flow is...

We compare the dividend policies of publicly-and privately-held firms in order to examine Lintner's (1956) model of dividends, as wells as more recent agency and information-based theories. Our findings suggest that the scrutiny of public capital markets, in conjunction with traditional financing frictions, induce public firms to smooth dividends o...

We construct a comprehensive measure of overall investment banking competitiveness for follow-on offerings that aggregates the various dimensions of competition such as fees, pricing accuracy, analyst recommendations, distributional abilities, market making prowess, debt offering capabilities, and overall reputation. The measure allows us to incorp...

We would like to thank Alon Brav, Yaniv Grinstein, Yael Hochberg, Vinay Nair, Mitchell Peterson, and seminar participants at Northwestern University, the Wharton School, and the University of Utah for comments and suggestions. Roberts gratefully acknowledges financial support from a Rodney L White Grant and an NYSE Research Fellowship. Michaely: (6...

In early 2002, we surveyed 384 financial executives, to determine the factors that drive dividend and share repurchase decisions. Our survey was supplemented by in-depth interviews with an additional 23 executives. The survey consisted of 11 main questions, most with subparts - over 100 questions in total. Although the survey was anonymous, we also...

One of the most important predictions of the dividend‐signaling hypothesis is that dividend changes are positively correlated with future changes in profitability and earnings. Contrary to this prediction, we show that, after controlling for the well‐known nonlinear patterns in the behavior of earnings, dividend changes contain no information about...

Asset pricing models generate predictions relating assets’ expected rates of return and their risk attributes. Most tests of these models have employed realized rates of return as a proxy for expected return. We use analysts’ expected rates of return to examine the relation between these expectations and firm attributes. By assuming that analysts’...

We survey 384 financial executives and conduct in depth interviews with an additional 23 to determine the factors that drive dividend and share repurchase decisions. Our findings indicate that maintaining the dividend level is on par with investment decisions, while repurchases are made out of the residual cash flow after investment spending. Perce...

We examine the relation between institutional holdings and payout policy in U.S. public firms. We find that payout policy affects institutional holdings. Institutions avoid firms that do not pay dividends. However, among dividend-paying firms they prefer firms that pay fewer dividends. Our evidence indicates that institutions prefer firms that repu...

This article uses two experiments to assess whether security characteristics are associated with returns because investors believe they affect risk, or because investors believe they reflect mispricing. We examine how beta, market-to-book ratios, and firm size affect the returns Wall Street professionals expect, and how those factors affect perceiv...

Previous research showed that the dividend price ratio process changed remarkably during the 1980's and 1990's, but that the total payout ratio (dividends plus repurchases over price) changed very little. We investigate implications of this difference for asset pricing models. In particular, the widely documented decline in the predictive power of...

We survey 384 financial executives and conduct in depth interviews with an additional 23 to determine the factors that drive dividend and share repurchase decisions. Avoiding dividend cuts is a primary corporate objective, on par with investment decisions. While dividends are still smoothed as in Lintner (1956), fifty years later we find that the l...

Contrary to the implications of many payout theories, we find that announcements of open-market share repurchase programs are not followed by an increase in operating performance. However, we find that repurchasing firms experience a significant reduction in systematic risk and cost of capital relative to non-repurchasing firms. Further, consistent...

The tax-related literature on dividends explores the implications of differential taxes on dividends and capital gains on stocks’ valuation and firms’ propensity to pay out cash in the form of dividends. The issues investigated in this literature are of central importance to corporate finance and asset pricing. It is important to understand the deg...

By the end of January 2001, all NYSE stocks had converted their price quotations from 1/8s and 1/16s to decimals. This study examines the effect of this change in price quotations on ex-dividend day activity. We find that abnormal ex-dividend day returns increase in the 1/16 and decimal pricing eras, relative to the 1/8 era, which is inconsistent w...

This paper provides an analysis of the nature and evolution of a dealer market for Nasdaq stocks. Despite size differences in sample stocks, there is a surprising consistency to their trading. One dealer tends to dominate trading in a stock. Markets are concentrated and spreads are increasing in the volume and market share of the dominant dealer. E...

We examine the dynamic relation between return and volume of individual stocks. Using a simple model in which investors trade to share risk or speculate on private information, we show that returns generated by risk-sharing trades tend to reverse themselves, while returns generated by speculative trades tend to continue themselves. We test this the...

Firms that increase (decrease) dividends experience a significant decline (increase) in their systematic risk. The dividend-increasing firms do not increase their capital expenditure and experience a decline in profitability in the years after the dividend change. The positive market reaction to a dividend increase is significantly related to the s...

We show that repurchases have not only became an important form of payout for U.S. corporations, but also that firms finance their share repurchases with funds that otherwise would have been used to increase dividends. We find that young firms have a higher propensity to pay cash through repurchases than they did in the past and that repurchases ha...

Recent studies argue that the spread-adjusted Taylor rule (STR), which includes a response to the credit spread, replicates monetary policy in the United State. We show (1) STR is a theoretically optimal monetary policy under heterogeneous loan interest rate contracts in both discretionay and commitment monetary policies, (2) however, the optimal r...

The paper analyzes the manner in which sentiment affects the pricing kernel. Sentiment is another term for traders' errors. There are two main questions addressed in the paper. The central question is: How can the concept of sentiment be formally defined so as to identify the manner in which traders' errors are manifest in the pricing kernel? The s...

Researchers are increasingly using data from the Nasdaq market to examine pricing behavior, market design, and other microstructure phenomena. The validity of any study that classifies trades as buys or sells depends on the accuracy of the classification method. Using a Nasdaq proprietary data set that identifies trade direction, we examine the val...

This paper examines aftermarket trading of underwriters and unaffiliated market makers in the three-month period after an IPO. We find that the lead underwriter is always the dominant market maker; he takes substantial inventory positions in the aftermarket trading, and co-managers play a negligible role in aftermarket trading. The lead underwriter...

This study re-examines the impact of the differential taxation of dividends and capital gains on assets’ prices. Our analysis shows that the time horizon used to define and measure the dividend period is a key issue when interpreting the empirical results. Our results indicate that most of the return variation previously attributed to dividends is...

We investigate the effect of asymmetric information on prices and liquidity by analyzing trades, quotes, spreads, and depths. Information content should increase with trade size and the information asymmetry of the trading period. Results show that price and liquidity effects are significantly associated with information content as measured by both...

We propose and test the possibility that dividends are increased as firms become mature (the maturity hypothesis). As firms become mature, they become less risky, have fewer growth opportunities available--resulting in declining growth and profitability. The empirical results show that firms that increase dividends experience a subsequent decline i...

Brokerage analysts frequently comment on and sometimes recommend companies that their firms have recently taken public. We show that stocks that underwriter analysts recommend perform more poorly than 'buy' recommendations by unaffiliated brokers prior to, at the time of, and subsequent to the recommendation date. We conclude that the recommendatio...

This paper issues a warning that compounding daily returns of the Center for Research in Security Prices (CRSP) equal-weighted index can lead to surprisingly large biases. The differences between the monthly returns compounded from the daily tapes and the monthly CRSP equal-weighted indices is almost 0.43 percent per month, or 6 percent per year. T...

Citizens Utilities Company (CU), Stamford, CT, has two classes of common stock, one paying cash dividends and one paying stock dividends. Unless CU shareholders ignore dividend taxation, the price of the cash dividend shares should increase relative to the stock dividend shares after the 1986 tax change. Contrary to this hypothesis, we find that th...

Many dividend theories imply that changes in dividends have information content about the future earnings of the firm. The authors investigate this implication and find only limited support for it. Firms that increase dividends in year 0 have experienced significant earnings increases in years -1 and 0, but show no subsequent unexpected earnings gr...

We examine how banks' capital requirements affect the way bank mergers are financed, as well as the stock-market reaction to the merger announcement. We find that the capital position of the acquirer is one of the two factors most strongly influencing the choice of financing method; the other is the relative size of the merging banks. The smaller t...

We test a theory of the interaction between investors’ heterogeneity, risk, transaction costs, and trading volume. We take advantage of the specific nature of trading motives around the distribution of cash dividends, namely the costly trading of tax shields. Consistent with the theory, we show that when trades occur because of differential valuati...

We develop a model of trading volume when agents have different valuation and face transaction costs. In particular, the differential valuation is induced by differential tax status which generates trading around the distribution of cash dividends. Our model predicts that trading volume is negatively affected by idiosyncratic risk of dividend-payin...

This paper analyzes the relationship between tax heterogeneity and the behavior of stock prices and trading volume around the ex-dividend day within an equilibrium framework. We conclude that, even in a world without transaction costs, the price drop on the ex-day need not be equal to the dividend amount. Our model accounts for the higher market tr...

This article investigates market reactions to initiations and omissions of cash dividend payments. Consistent with prior literature, the authors find that the magnitude of short-run price reactions to omissions are greater than for initiations. In the year following the announcements, prices continue to drift in the same direction, though the drift...

To investigate the effect of reputation on auditor business decisions, we look at the relationship between auditor reputation and the characteristics of the IPOs that auditors take to the market. Consistent with our hypotheses, we find that: 1) More prestigious auditors are associated with IPOs that seem a priori less risky; 2) the market perceives...

This study analyzes how firms choose between a spin-off and an equity carve-out as a way to divest assets. Using a sample of 91 master limited partnerships that were issued to the public, we find that riskier, more leveraged, less profitable firms choose to divest through a spin-off. The spin-off firms are smaller and less profitable then the carve...

To investigate the effect of taxation on stock price and trading volume around the ex-dividend day, we use the Italian stock market, where dividends on two classes of stock are taxed differently. We find that the weighted average of investors’ tax rates is reflected in the ex-day prices and the variance of the relative tax rate across investors is...

Initiations and omissions of dividend payments are important changes in corporate financial policy. This paper investigates the market reaction to such changes in terms of prices, volume, and changes in clientele. Consistent with the prior literature we find that short run price reactions to omissions are greater than for initiations (-7.0% vs. +3....

We test the empirical implications of several models of IPO underpricing. Consistent with the winner’s-curse hypothesis, we show that in markets where investors know a priori that they do not have to compete with informed investors, IPOs are not underpriced. We also show that IPOs underwritten by reputable investment banks experience significantly...

This paper contains a survey of the literature on dividend policy. We start with a description of the Miller-Modigliani dividend irrelevance proposition and then consider the effect of relaxing the assumptions it is based on. In particular, we consider the role of taxes, asymmetric information, incomplete contracting possibilities and transaction c...

"November 1993." "First version."

This paper analyzes the behavior of stock prices around ex-dividend days after the implementation of the 1986 Tax Reform Act that dramatically reduced the difference between the tax treatment of realized long-term capital gains and dividend income in 1987 and completely eliminated the differential in 1988. The author shows that this tax change had...

Empirical studies of the modern theories of bond pricing typically choose proxies for the state variables in a rather arbitrary fashion. This paper empirically analyzes the question of the optimal spot rates to use as state variables. The authors' findings indicate that the four-year spot rate serves as the best proxy in the one-state-variable mode...

The purpose of this paper is to analyze the optimal individual behavior in acquiring information and to determine the amount of information incorporated in a stock at equilibrium, in the presence of a cost schedule in acquiring information. Our paper shows that at equilibrium the cost to acquire information that is not already incorporated in the p...