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ItemInnovations and Earnings Non-Synchronicity: Evidence from Industry M&A Activities( 2020-08-16)This paper investigates how earnings non-synchronicity impacts associated with firm-level research and development (R&D) investment vary as a function of industry-level merger and acquisition (M&A) intensity. Investing in R&D enables firms to differentiate and gain competitive advantages; differentiation strategies increase idiosyncratic variation in firms' earnings. We bring in an industry-level contextual variable, industry-level M&A, and show that the positive relationship between R&D investment and earnings non-synchronicity is increasing in the intensity of inside-industry but not outside-industry M&A, consistent with our conjecture that M&A within an industry facilitates an expansion of knowledge base and induces more innovative R&D through complementary effects.
ItemDigital versus Traditional Advertising and the Recognition of Brand Intangible Assets( 2020-08-15)This paper examines how different advertising media affect the occurrence and nature of brand asset recognition arising in the context of acquisitions. Prior research documents that advertising is positively associated with firm sales and brand value. However, this research focuses on aggregate advertising expenditures, which ignores major recent shifts in advertising expenditures from traditional channels (such as TV and newspaper) to digital advertising (primarily paid search and online display). Using proprietary data, I exploit this trend and decompose advertising expenditures into three core component elements—traditional, online display, and paid search—to examine how key advertising media affect subsequent brand asset recognition during mergers and acquisitions. Consistent with expectations, I find that subsequent to acquisition, target firms' traditional and online display advertising exhibit a higher likelihood of brand asset recognition, higher recognized brand asset values, and longer amortization schedules, as compared to paid search advertising. I also document higher deal premiums for targets, which spend more on traditional advertising. Affirming the acquirer's recognition of a brand asset, additional results reveal that investors react positively to the initially recognized brand amount, and that those brand intangible assets are positively associated with acquirer future revenue. Overall, these results confirm expected heterogeneous effects of different advertising channels on the recognition and characteristics of the underlying brand asset.
ItemModeling Skewness Determinants in Accounting Research( 2020-08-15)Skewness-based proxies are widely used in accounting and finance research. To study how the skewness of a dependent variable Y varies with conditioning variables X, researchers typically compute firm-specific skewness measures over a short window and regress them on X. However, we show that this standard approach can cause severe biases and produce false findings of both conditional skewness on average and systematic variation in conditional skewness. We develop alternative methods that address these biases by directly modeling the conditional skewness of Y for each observation as a function of X. Simulations confirm that our methods have good type-I errors and test power even in scenarios in which the standard method is severely biased. Our methods are transparent, robust, and can be implemented in a few lines of code. Use of our methods changes major prior findings in the literature.