Dr. Benjamin Segal



Dr. Benjamin Segal
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American Society for Quality
Buisness, Organizations
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Last update: 17-Mar-2015
Full Time Faculty, Buisiness Administration, Senior Lecturer

About Me

Following is a summary discussion of my research activities and interests. Research papers are numbered in
parentheses consistent with the C.V.
Efficient resources allocation is a fundamental tenet of economics. Markets and competition play a
major role in determining what goods or services are produced, how efficiently, and the resources or capital
their producers will employ. The understanding that better resource allocation is beneficial on an economywide
level may explain a lot of the government intervention we observe. Specifically, in order to increase
participation and create strong and efficient capital markets (deemed necessary to facilitate this goal),
information has become highly regulated. Accounting regulation facilitates more informed investing and
lending decisions by trying to make the information firms provide to current or potential investors and
lenders 1) comparable: across firms and periods similar economic activities will be presented similarly; 2)
timely: firms must quickly disclose new pertinent (positive and negative) information and events; and 3)
reliable: intentional and negligent misrepresentations are penalized (criminal action, administrative orders,
fines etc.) and may give cause of action for investor civil lawsuits. Impacted by the regulation governing
aggregation, presentation, and dissemination of information, these investment and lending decisions give rise
to the observed valuations, cost of capital, and resource allocation among firms.
Broadly stated, my research interests focus on 1) the valuation effect of such financial information
and 2) its interaction with accounting regulation. These areas of research have implications for academic
research on value relevance, market efficiency and how (or how well) publicly available information—both
numeric and textual—is incorporated into security prices. They are also relevant to policy-makers when
considering the consequences and efficacy of their regulation. Finally, there are some implications for
practitioners regarding retrieval and analysis of financial information, improved portfolio performance and
devising trading strategies.
The valuation effects, information content, and use of financial information
Publications (1) and (7) identify and examine a previously undocumented phenomena of preliminary
earnings revisions: cases in which firms announce to the public one set of numbers (preliminary earnings,
typically announced in a press release), but soon after “quietly” file with the Securities and Exchange
Commission (SEC) a different set of numbers just a few weeks later. We identify the characteristics of these
“revising” firms as generally being more complex, leveraged, and volatile or having losses. When analyzing
the market's reaction to this unusual phenomenon we are able to provide definitive evidence regarding the
attention investors give to financial filings and show that investors interpret revisions as a weakness and
assign lower weight and credibility to these revised numbers.

Early on in my research I became interested in the textual component of financial filings. While the
obvious characteristics of numeric results make them attractive to all users (easy to collect, monitor, compare
and analyze), textual content does not naturally lend itself to such use. Publication (6) addresses the
challenges of putting textual information to use in a financial filing context. The paper copes with known
problems and limitations to text mining and content classification. Specifically, we retrieved and analyzed
NT (non-timely) forms—filings in which companies announce the reasons for which they would not be able
to meet their regulatory filing deadline. Our results indicate that the SEC filings may be quite ambiguous.
However, allowing classifications into more than one category using document level information yields
accuracy of about 90%. A more practitioner-oriented paper, publication (5), analyzes Form 8-K filings and
examines market reaction to companies' own announcement (filings) stating their previously released
financial statements should no longer be relied upon—for example, due to recently discovered errors or
misapplication of rules. By analyzing and classifying these textual filings, we identify a range of reasons for
these “non-reliance” filings and document a differential (and seemingly inefficient) way in which markets
react to these announcements. Publication (4) investigates whether the tone of a textual disclosure is value
relevant. Extracting, analyzing, and classifying the text of Management Discussion and Analysis disclosures
(MD&A) into negative and positive tones, and incorporating them into market reaction tests, showed they
contain incremental information beyond commonly used numerical financial measures. Stated differently, we
find that management optimism or pessimism, as embedded in the text of the disclosure, contains value
relevant information that is beyond what the accounting numbers convey. Working paper (5) expands the
scope of financial information beyond regulated filings to sell-side analyst reports. We investigate how the
stock market responds to the tone in analyst reports. Using a large sample of analyst reports (~215,000), we
examine whether two textual attributes, tone and uncertainty, provide incremental information to investors
beyond quantitative summary measures. We find that tone (uncertainty) is positively (negatively) associated
with short-term abnormal returns around the report's release date conditional on forecast and
recommendation revisions. These results are consistent with our hypothesis that analysts provide additional
information in the text of their reports that is not captured in the summary quantitative measures.
In working paper (1) I continue to explore sell-side analysts by examining their reaction to different
types of information in financial filings. We analyze corporate form 8-K filings (material current events and
information) and find that while approximately 70% of analysts revise their earnings forecast following
earnings 8-K releases, only 14% of analysts revise their forecasts after non-earnings 8-K releases. Comparing
forecasts that are revised and forecasts that remain unchanged following non-earnings 8-K releases, we find
that revised forecasts are associated with lower forecast errors. We also find that analysts who revise their
forecasts after non-earnings 8-K releases have more accurate and timelier forecasts in subsequent periods.


Overall, our findings indicate that non-earnings 8-K releases are informative about future earnings, and that
analysts who revise their forecast after these releases have greater skill.
Under review (2) and working paper (4) explicitly set out to explore strategic disclosure behavior on
the part of firms, and its market implications. Under review (2) examines whether firms opportunistically
report material events and to what extent investors see through it. We find strong evidence of opportunistic
reporting of negative news, especially among public firms. Public firms are more likely to delay disclosure of
negative news, report negative news after trading hours, and report on the last day of the week. We also find
evidence of opportunistic bundling of news. Our findings support the notion that managers engage in
strategic disclosure by delaying or obfuscating negative news in order to mitigate the potential market
reaction. Working paper (4) explores related questions with respect to the likely truthfulness and reliability
of disclosed reasons for director resignations. The paper examines the informativeness and credibility of
reasons cited by outside directors for their resignation. Given that directors are privy to private information
about the firm, they may resign in anticipation of future underperformance in order to limit potential damage
to their reputation. We posit that these directors have an economic incentive not to disclose the true reason
for their resignation in order to protect their existing equity ownership, business relationships, and future
directorship opportunities. We find that resignations explained by ambiguous or unverifiable reasons, as well
as those with no reason at all, are associated with poor recent as well as poor future financial and operating
performance. Furthermore, results indicate that investors and analysts at least partially understand and
respond to these potential misrepresentations
While the above two papers, under review (2) and working paper(4), explicitly hypothesize
deliberate manipulation of timing or content of corporate disclosures on the part of executives and directors,
under review (3) sets out to explore executive behavior that is expressly deemed not intentional, namely,
behavioral biases. Human inference and estimation is subject to systematic biases. In particular, there is a
long literature showing that overconfidence due to cognitive biases can lead to sub-optimal decisions. We
depart from this research by showing empirically that a) over-optimism is a related but different bias; b) it
can emerge dynamically in a rational framework rather than because of cognitive biases; and importantly, c)
it can improve firm's welfare—more specifically, firms' profitability and market value. Our results show that
managers who experienced more frequent successes in the past four quarters subsequently issue more
optimistic forecasts. Similarly, textual analysis indicates that earnings press releases display an increasingly
optimistic tone as managers experience more short-term successes. Importantly, we show that the overoptimism
we document can increase firm performance and that managers appear to exert greater effort to
meet their own over-optimistic forecasts.


Effects of regulation
Defined broadly, accounting regulation may include mandated filings and disclosures, stock exchange
restrictions (e.g. on corporate governance), “non-accounting” securities law, taxation, and other sources and
types of regulatory requirements. While their goals may vary, these rules often provide opportunities for
interesting research on valuation implications and the effects and efficacy of regulatory intervention.
Publication (3) looks at changes in the accounting for goodwill and its impairment (SFAS No. 142). The
paper is a combination of my Ph.D. dissertation on the topic and a competing working paper. It examines the
dramatic change in accounting for goodwill—an artifact of acquisitions of other firms and a major intangible
asset on balance sheets. We present evidence relating to the market reaction to goodwill impairments (writedowns
or write-offs) before, during, and after the implementation of a new fair value based methodology
mandated by the new rule. We examine whether the new rule altered the information content of goodwill
write-offs. We find that the negative news conveyed by the unexpected portion of these write-offs is
attenuated for firms with low information asymmetry (proxied by high analyst following) and for firms who
find it relatively costly to implement impairment tests (proxied by small firm size). However, the negative
reaction for the high information asymmetry firms does not persist following the adoption of SFAS 142,
which may be consistent with critics' prediction of reduced information content of accounting reports
implementing SFAS 142 fair value impairment methods. Working paper (2) uses the exogenous reforms to
board of directors' audit committees mandated by the Sarbanes-Oxley Act of 2002 to investigate the
triangular relationship between audit committee characteristics, audit inputs (efforts or quality), and financial
reporting quality. We address issues of endogeneity by using a difference-in-difference approach and
examine the impact of changes in audit committee attributes (financial expertise, size, and independence) on
firms' audit inputs and financial reporting quality. Results suggest that larger, more independent, and more
competent audit committees are better able to detect misstatements or deter opportunistic reporting by
management, independent of the level of audit input quality. The paper disentangles audit efforts and
governance, highlighting the importance of governance and board committee composition on the quality of
financial reports, providing justification for the audit committee reforms. Working paper (3) similarly uses
the exogenous reforms to board of directors' composition to investigate the relationship between governance
and risk management, and ask whether firms hedge financial risk optimally. Using new textual analysis
based proxies for the extent of financial risk management in non-financial firms, we find that treated firms
reduce their financial hedging in a difference-in-difference framework. The reduction is concentrated in
firms with higher conflicts of interests, such as a high CEO equity ownership level, which exposes them to
more idiosyncratic risk and a higher occurrence of option backdating. We conclude that some firms hedge
too much, reducing shareholder value, potentially to the benefit of under-diversified CEOs. We also show

that board independence serves to reinforce monitoring which allows boards to cut back on excessive
financial hedging.
An even more interesting aspect of some accounting regulation is the fact that it often has only
presentation or “cosmetic” effects. Accounting, as its name indicates, takes account of economic activities
that occurred in the past and represents them based on a set of rules. Changing those rules obviously does not
change the past economic activity they are depicting. Therefore, if markets seem to react to such changes and
if managers respond and change their behavior following such “cosmetic” changes, an explanation and
investigation are very much in order. Several aspects of this question are explored in under-review paper
(1), where we find that the accounting presentation of a security seems to be a deciding factor in how firms
determine their actual capital structure. We test the influence of securities' classification into liabilities and
equity on firms' financing choices, utilizing the setting of a change in reporting classification requirement of
hybrid securities (SFAS No. 150). Results suggest that the requirement to classify the securities as a liability
sever the reporting incentive from the decision to issue debt-like hybrids.
Another fundamental aspect of regulation is that it may be “all bark, no bite” without its
counterpart—enforcement. I explore aspects of this issue in publication (2) relating to Regulation Fair
Disclosure (Reg FD), a rule designed to curb rampant selective disclosure practices where managers used to
regularly share material information with select analysts and institutional investors. Although the rule was
designed to “level the playing field” for the common investor, it is stripped of most of the deterring
components securities regulation generally contains. In our view, investors suffer not only as a result of the
SEC penalties but also because the FD allegations increase investor uncertainty about the adequacy of
company disclosure controls.
Research agenda and other projects
I continue to be interested in the valuation effect of publicly available financial information. The
multiple sources of the information (e.g. mandated or voluntary disclosure, security analysts, or the media),
its nature (e.g. earnings vs. non-earnings related), characteristics (e.g. numeric, textual), mode, and timing of
delivery and the way that information is incorporated into security prices are far from being fully understood.
My near term projects will likely focus on and make us of the significant database of material events reports
(Form 8-K) that I have constructed (close to one million reports). I will also likely continue to make use of
textual analysis expertise that I have honed over the last several years. Finally, I'm very interested in
corporate governance and board of directors' composition. Thus, for example, together with co-authors, I am
currently in the process of obtaining data to explore several aspects of the way in which important
constituents in capital markets utilize and respond to specific types of information. Another recent project I
have started together with a colleague seeks to expand our understanding of the role and functions of
members of the board of directors.