Working Papers
Conditional Control: The Consequences of Expanding Creditors’ Rights to Initiate Bankruptcy (With: Yishay Yafeh, Asaf Hamdani, Yevgeni Mugerman, Nadav Steinberg)
This paper studies a 2013 court decision that enhanced creditor control rights in Israeli firms by allowing creditors to force distressed companies into bankruptcy. Using a Diff-in-Diff regression design, we show that the benefits of creditor control rights may be mitigated by unintended consequences in the form of increased incentives for firms to adopt aggressive accounting practices, as reflected by an increase in long-term discretionary accruals and a decrease in accounting conservatism and, as a result, a reduction in the informativeness of firms’ financial reporting.
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In the media:
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I Am The Firm: Eponymous Firms and Rosed Colored Forecasts
(With: Doron Kliger and Yevgeni Mugerman)
This paper introduces a behavioral bias that affects the quality of firms' accounting information in the form of management financial forecasts. We invoke the famous Louis XIV quote “L'État, c'est moi,” applying it to the corporate world, and introduce the novel idea that a self-serving bias, which we define as “I Am The Firm,” is infused within certain companies. We hypothesize that the owners of eponymous firms – firms that bear the names of their owners – experience enhanced self-identification with their firms, and thus tend to inject their own subjective beliefs and desires into the realistic objective prospects of the firms. Employing a unique corporate setting in Israel, we demonstrate that eponymous firms disclose unduly optimistic biased forecasts relative to their non-eponymous counterparts, which cannot be validated or justified solely by rational explanations.
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In the media:
Informativeness of Mandatory Cash Flow Forecasts to Debtholders of Financially Distressed Firms (With Benjamin Segal)
This paper studies the relevance and quality of management forecasts to creditor markets. We utilize a unique set-up that is extant in the Israeli market and pertains to a regulation that was aimed to inform and strengthen creditors by requiring a unique mandatory disclosure of cash flow forecasts from firms with bonds that face financial distress. We use a scraping tool to identify firms that disclosed the mandatory forecasts and examine the bond reaction of disclosing firms to matched non-disclosing firms (using propensity score matching). We find that bond holders of distressed firms perceive the cash flow forecasts as credible and informative. Moreover, forecasts estimated from a naïve model do not yield any bond reaction, suggesting that management forecasts convey relevant information that cannot be easily obtained from other sources. Finally, we observe real economic effect of higher recovery rates in firms that disclose the forecasts.