SELECTED RECENT PUBLICATIONS & WORKING PAPERS
1 of 5 Florackis C., Louca, C., Michaely, R. & M. Weber (2021) Cyber Security Risk, The Review of Financial Studies, forthcoming, NBER Working Paper No. w28196.
Using textual analysis and comparing cybersecurity-risk disclosures of firms that were hacked to others that were not, we propose a novel firm-level measure of cybersecurity risk for all US-listed firms. We then examine whether cybersecurity risk is priced in the cross-section of stock returns. Portfolios of firms with high exposure to cybersecurity risk outperform other firms, on average, by up to 8.3% per year. At the same time, high-exposure firms perform poorly in periods of high cybersecurity risk. Reassuringly, the measure is higher in information-technology industries, correlates with characteristics linked to firms hit by cyberattacks, and predicts future cyberattacks.
2 of 5 Florackis C. & S. Sainani (2021) Can CFOs Resist Undue Pressure from CEOs to Manage Earnings? Journal of Corporate Finance, forthcoming.
Building upon the premise that, under certain conditions, the ability of the Chief Executive Officer (CEO) to pressure the Chief Financial Officer (CFO) is limited, we develop a measure of CFO resistance that captures the ability of the CFO to resist undue pressure from the CEO to manage earnings. In doing so, we consider various sources of power for both the CEO and CFO, and a market setting where CFO resistance is perceived to be high. We find that firms with resistant CFOs are less likely to engage in earnings management than firms with non-resistant CFOs, ceteris paribus. Additionally, while confirming prior evidence that CEOs with strong incentives are more likely to manage earnings, we show that this effect is significantly less pronounced in the presence of resistant CFOs. Overall, our findings suggest that firms can improve the quality of financial reporting by creating conditions that enable CFO resistance.
3 of 5 Florakis, C., Kanas, A., Kostakis, A., & Sainani, S. (2020). Idiosyncratic risk, risk-taking incentives and the relation between managerial ownership and firm value. European Journal of Operational Research, 283(2), 748-766.
In addition to its well-documented alignment effect, managerial ownership can also have value-destroying effects by shifting risk to managers and encouraging risk-substitution; that is, managers with relatively unhedged personal portfolios tend to pass up profitable projects with high idiosyncratic (firm-specific) risk in favor of less-profitable projects that have greater aggregate (market) risk. Using parametric and semi-parametric estimation methods, we examine how managerial ownership influences firm value in light of the trade-off between the alignment and the risk-substitution effects. We find that risk-substitution offsets the alignment effect of managerial ownership in firms that are exposed to severe risk-substitution problems, leading to a weak (or non-existent) association between managerial ownership and firm value. Our findings suggest that semi-parametric methods may prove useful for future studies aiming at capturing nonlinear features in the data.
4 of 5 Aretz, K., Florackis, C., and Kostakis, A. (2018) Do Stock Returns Really Decrease with Default Risk? New International Evidence. Management Science, 64, 3469-3970.
This study constructs a novel dataset of bankruptcy filings for a large sample of non-US firms in 14 developed markets and sheds new light on the cross-sectional relation between default risk and stock returns. Using the reduced-form approach of Campbell et al. (2008) to estimate default probabilities, we offer conclusive evidence supporting the existence of a significant positive default risk premium in international markets. This finding is robust to different portfolio weighting schemes, data filters, risk-adjusting approaches and holding period definitions. Decomposing the default risk measure into its systematic and idiosyncratic components, we find that the former drives this positive relation. We also show that the default risk premium is more pronounced in countries where creditor protection is stronger and shareholder bargaining power is lower.
5 of 5 Florackis C. and S. Sainani (2018) How do chief financial officers influence corporate cash policies? Journal of Corporate Finance, 52, 168-191.
This paper examines the extent to which Chief Financial Officers (CFOs) affect corporate cash holding policies. We construct an index (CFO index) that enables us to distinguish between “strong” and “weak” CFOs based on their ability to influence firm outcomes. We find that firms with strong CFOs hold substantially less cash than firms with weak CFOs, ceteris paribus. Importantly, the CFO effect documented in our study goes beyond the effect caused by the Chief Executive Officer (CEO) on cash holdings. Our findings provide the first direct empirical evidence that firms with strong CFOs are well positioned to hold less cash due to their relatively weak precautionary motive and superior ability to raise external financing during periods of financial stress. Consistent with an agency explanation, our results also show that strong CFOs fulfil a monitoring role in firms with higher agency costs.