Approach each new problem not with a view of finding
what you hope will be there, but to get the truth, the realities
that must be grappled with. You may not like what you find.
In that case you are entitled to try to change it. But do not
deceive yourself as to what you do find to be the facts of the situation.

-- Bernard M. Baruch

Reading, after a certain age, diverts the mind too much
from its creative pursuits. Any man who reads too much and
uses his own brain too little falls into lazy habits of thinking.

-- Albert Einstein

Web http://web.ics.purdue.edu/~yli/

Research Interest

Financial reporting and voluntary disclosure; shareholder litigation; corporate governance.

Publications

C.S. Agnes Cheng, Henry He Huang, Yinghua Li, and Gerald J. Lobo, 2009. Institutional Monitoring through Shareholder Litigation. Forthcoming in Journal of Financial Economics (PDF) .

Abstract

This paper investigates the effectiveness of using securities class action lawsuits in monitoring defendant firms by institutional lead plaintiffs from two aspects: (1) immediate litigation outcomes, including the probability of surviving the motion to dismiss and the settlement amount, and (2) subsequent governance improvement such as changes in board independence. Using a large sample of securities lawsuits from 1996 to 2005, we show that institutional investors are more likely to serve as the lead plaintiff for lawsuits with certain characteristics. After controlling for these determinants of having an institutional lead plaintiff, we document that securities class actions with institutional owners as lead plaintiffs are less likely to be dismissed and have larger monetary settlements than securities class actions with individual lead plaintiffs. This effect exists for various types of institutions including public pension funds. We also find that after the lawsuit filings, defendant firms with institutional lead plaintiffs experience greater improvement in their board independence than defendant firms with individual lead plaintiffs. Our study suggests that securities litigation is an effective disciplining tool for institutional owners.

Yinghua Li, 2009. Shareholder Litigation, Management Forecasts and Productive Decisions during the Initial Public Offerings. Journal of Accounting and Public Policy 28: 1-15.

Abstract

This paper develops a model to analyze the impact of shareholder litigation on managers' voluntary disclosure strategies in equity offerings. The major findings are as follows. First, under different economic parameters, the entrepreneur has two possible equilibrium disclosure strategies: full and partial disclosure. Of particular interest is the latter equilibrium, in which shareholder litigation can give the entrepreneur incentives to partially disclose her private information. Second, production decisions might be distorted by the entrepreneur's disclosure incentives. The full disclosure equilibrium is associated with underinvestment, while overinvestment exists in the partial disclosure equilibrium.

The model is then used to examine the effect of regulatory polices on firms' disclosure incentives. It shows that relaxing the legal liability can result in more information flow to the public. However, it also leads to a higher rate of lawsuits and an increase in deadweight litigation costs.

Joy Begley, Sandra Chamberlain, and Yinghua Li, 2006. Modeling Goodwill for Banks: A Residual Income Approach with Empirical tests. Contemporary Accounting Research 23: 31-68.

Abstract

This paper uses the residual income valuation technique outlined in Feltham and Ohlson 1996 to examine the relation between stock valuations and accounting numbers for a prototypical banking firm. Prior work of this nature typically assumes a manufacturing setting. This paper contributes to the prior research by clarifying how the approach can be extended to settings where value is created from financial assets and liabilities. Key elements of our model include allowing banks to generate positive net present value from either lending or borrowing activities, and allowing for accounting policy to affect valuation through the loan loss allowance.

We validate our model using archival data analysis, and interpret coefficients in light of our modeling assumptions. These results suggest that banks create value more from deposit-taking activities than from lending activities. Vuong tests confirm that our model outperforms adaptations of the unbiased accounting model of Ohlson 1995 and adaptations of the base model proposed by Beaver, Eger, Ryan, and Wolfson 1989. However, our model is outperformed by the popular net income–book value model used in many empirical studies, and we can formally reject one of our key modeling assumptions. These tests of our model suggest future avenues for improving upon the theoretical analysis.

Working Papers

All-star Coverage and Corporate Transparency (with Raghavendra Rau and Jin Xu), 2009 (PDF).

Abstract

We examine how Institutional Investor all-star analyst coverage is related to corporate transparency. Our results are consistent with a dynamic evolution of analysts' coverage decisions and firm transparency. Before they become all-stars, analysts tend to cover firms with better transparency - better voluntary disclosure quality and less earnings management. This coverage behavior improves their chances of becoming all-stars, potentially through their positive impacts on forecast accuracy and recommendation performance. Once they become all-stars, however, analysts tend to cover firms with more earnings management and the potential for value enhancement. Subsequently, the covered firms reduce their earnings management.

History Matters: Individual Analysts' Responses to Quarterly Management Guidance (with Mark Bagnoli and Susan G. Watts), 2009 (PDF).

Abstract

We ask whether the history of interactions between a firm and its analysts affects management’s current quarterly earnings forecast decision and subsequent earnings estimate revisions by its analysts. We show that the history of their interactions not only reflects their individual incentives but is also used to form expectations about current decisions. Specifically, guidance is more likely to be pessimistically biased if management has a history of offering pessimistic forecasts and if analysts have tended to respond passively (i.e., by mimicking guidance or revising in the direction indicated by management). Individual analysts are more likely to respond passively to management’s current forecast if they have historically responded in such a manner or if management has tended to offer unbiased or accurate guidance. Analysts with superior earnings forecasting track records are less likely to respond passively to guidance that is pessimistically biased. Collectively, our results indicate that downward bias in quarterly guidance and information production by analysts depend on what management and analysts have learned about each other over time as reflected in their forecasting histories.

Disclosure Regimes and Corporate Decisions around Initial Public Offerings, 2007.

Abstract

This paper analyzes the impact of different disclosure regimes on corporate decision- making during initial public offering. Specifically, it examines how disclosure rules affect firms' incentives to acquire forward-looking information, their disclosure practices and investment strategies. It shows that a Non-Disclosure Regime can result in misevaluations and induce overinvestment. Both overinvestment and underinvestment can occur under the Voluntary Disclosure Regime. In addition, firms tend to excessively acquire information. The Mandatory Disclosure Regime has the highest price efficiency, but it also imposes burden on firms to produce information to meet the disclosure requirement. Each regime can be socially optimal under certain conditions.