Title: EMPIRICAL ESSAYS IN CORPORATE FINANCE
Abstract: This is Finance Project And Thesis. About this Project thesis. Over the past twenty years, write-offs have grown in popularity. With the increased usage of write-offs, it is becoming more important to understand the mechanisms behind why companies take write-offs and how write-offs affect company performance. In this paper, I examine the cross-sectional determinants of the decision to take write-offs. I use a hand-collected dataset on write-offs that is much more comprehensive than existing write-off datasets. Contrary to much hype and scandals surrounding a few write-offs, I find that quality of governance is positively related to write-off decisions in the cross-section. My results also suggest that poor governance companies wait to take write-offs until it becomes inevitable, while well-monitored companies take write-offs sooner. As a result, the charge is substantially larger than the average write-off charge. When these poor governance companies announce write-offs, the announcement generates negative abnormal returns. However, when good corporate governance companies announce write-offs, the charge is substantially smaller than the average charge. These well-monitored companies take write-offs immediately following a problem. Following the write-off announcements of these types of companies, average announcement day effects exceed a positive six percent. These results suggest that companies with quality monitoring mechanisms use write-offs in a manner that is consistent with enhancing shareholder value.
Brief Intro : In this paper, I examine why companies take write-offs and how the market reacts to write-off announcements; for this analysis, I use a carefully collected dataset of consumer manufacturing companies, focusing on asset and lay-off based write-offs. I characterize what defines good and bad write-offs, and analyze the characteristics of companies that take different types of write-offs. Finally, I examine the shareholder wealth effects of write-offs, and whether firm specific factors influence the market’s reaction to the write-off announcement. I find that the write-off decision is linked to industry shocks. Governance mechanisms also 1 affect the write-off decision. Companies with high pay-performance sensitivity, desirable board composition, strong shareholder protection measures, and CEO turnover resulting in an external replacement are all significantly correlated to a tendency to take write-offs. I find a negative relationship between governance quality and the size of write-offs, which suggests that poorly monitored companies wait to take write-offs and continue to accumulate problems. Eventually the problems become so large that a write-off is inevitable. Conversely, well-monitored companies take write-offs sooner. Since these companies act quickly, there is comparatively less that they can write-off, so the charges of well-monitored companies are less than the charges of poorly monitored companies. I also find that these well-monitored companies exhibit significant positive announce- ment effects (upwards of six percent for write-off companies with small boards, strong shareholder protection, and large percentage of outside directors. I conclude from these results that firms with effective monitoring mechanisms take value-enhancing write-offs. The paper is constructed as follows. Section II reviews the relevant literature. I describe my sample in Section III. Section IV examines the link between CEO turnover, pay-performance sensitivity, corporate governance, and the write-off decision. Section V looks at how the market reacts to write-off announcements. Section VII concludes. Appendix A discusses the tax issues related to write-offs.
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