News-Induced Dynamic Networks for Market Signaling: Understanding the Impact of News on Firm Equity Value

Public news provides rich information about firm operations and market dynamics. Learning about firm interactions from news is commonly done by human investors but has not been realized by automatic methods, leading to a research opportunity in market signaling via dynamic firm relations. This study proposes a new text-mining approach to extract cobenefit/counter-benefit networks based on firms’ mutual or conflicting interests in business events. It reveals that the extracted dynamic networks provide additional value in predicting firm equity value over current adopted supply chain and coindustry networks, after controlling for market activities and other traditional indicators from news, such as volume, sentiment, and comentions. In practice, such cobenefit/counter-benefit networks provide good buy and sell signals, which enrich known indicators and support more complex trading strategies in investment and portfolio management. The analysis and visualization of the extracted cobenefit/counter-benefit networks are also useful in understanding the structure of the economy and assessing firm/industry changes in a timelier fashion.

Why do firms utilize the flexibility allowed in CEO-employee pay ratio disclosure? Evidence from Dodd-Frank Act Section 953 (b)

Section 953 (b) of the Dodd-Frank Act requires all listed firms to disclose a CEO-employee pay ratio. Firms are given the flexibility to use permitted discretions in their required pay ratio calculation and to disclose a supplementary pay ratio if necessary. We explore this unique regulatory setting and analyze the CEO-employee pay ratio data of S&P 1500 firms with fiscal year ends from December 31, 2017, through December 31, 2018. We find that both informational and opportunistic motives affect firms' supplementary pay ratio disclosure, while informational motives appear to dominate firms' use of permitted discretions. Firms consider political costs when using permitted discretions and disclosing a supplementary pay ratio. Firms with labor market signaling incentives disclose a supplementary pay ratio that is higher than the required pay ratio. The supplementary pay ratio, when issued, captures a firm's economic pay disparity better than the required pay ratio and is positively associated with subsequent firm performance.

Adverse selection and market signaling

This chapter investigates problems of adverse selection. In problems of adverse selection, one party to a transaction knows things pertaining to the transaction that are relevant to but unknown by the second party. Here a classic example is life insurance, where the insuree may know things about the state of their health that are unknown by the insurer. The “solution” to problems of adverse selection is market signaling, where the party in possession of superior information signals what they know through their actions. For example, an insurance company may offer life insurance on better terms if the insured is willing to accept very limited benefits for the first two or three years the policy is in effect, on the presumption that someone who suffers from ill health and is about to die is unwilling to accept those limited benefits.