Contrary to recent accounts of off‐balance‐sheet securitization by financial firms, we show that asset securitization by nonfinancial firms provides a valuable form of financing for shareholders without harming debtholders. Using data from firms’ SEC filings, we find that securitization is attractive to firms in the middle of the credit quality distribution, which are the firms with the most to gain. Upon initiation, firms experience positive abnormal stock returns and zero abnormal bond returns, and largely use the securitization proceeds to repay existing debt. Securitization minimizes financing costs by reducing expected bankruptcy costs and providing access to segmented credit markets.
We examine the economic impact of analysts' cash flow forecasts by looking at how external auditors respond to financial analysts' issuance of cash flow forecasts. Using a differences-in-differences approach, we find that financial analysts' initiation of cash flow forecasts leads to reduced auditor fees and audit report lags. Moreover, after cash flow forecast initiation, firms report fewer Section 404(b) internal control weakness disclosures. These findings suggest that cash flow forecasts constrain earnings manipulation and improve management accounting behavior, thereby reducing inherent and control risk and strengthening firms' internal control over financial reporting.1 Following McInnis and Collins (2011), we use accruals, firm accounting choice, earnings volatility, capital intensity, Altman's Z-score and the market value of equity in a prediction model for the initiation of cash flow forecasts. We then calculate a propensity score for each firm-year. We match each treatment firm in the year of cash flow forecast initiation with a control firm without replacement based on US Securities and Exchange Commission (SEC) filer status and year and a maximum propensity score distance within 3%. We also conduct robustness tests by separating firms by SEC filer status.
We test rational and behavioral explanations for price and earnings momentum applying a unified framework using return decomposition. The results demonstrate that momentum profits do not come from the expected return component. Instead, momentum profits are mainly contributed by the positive cash flow return component and partially offset by the negative discount rate return component. The cash flow return component is quite persistent before and after portfolio formation. However, the dynamics in the discount rate return component explain why the ex-ante expected return does not account for momentum returns. In comparison with price momentum, earnings momentum does not rely on past discount rate news and does not display long term reversal. Overall, our empirical evidence based on return decomposition tends to support the behavioral explanation that the market incorporates cash flow information too slowly, which drives momentum returns.JEL Classification: G11; G12; G14; M40
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