09 Financial: Manager Ability / Financial Analysts / Disclosure (FAR1)

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Chair: Bok Baik
Professor, Seoul National University, South Korea


Recent Submissions

Now showing 1 - 10 of 12
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    Managerial Perceived Competition and Acquisitions
    ( 2017-09-01) Tran, Nam ; Peterson, Kyle
    We examine the relations between managerial perceived competition, firms’ tendency to engage in acquisitions, and acquisition gains. We find that firms with higher managerial perceived competition are more likely to acquire other firms. Acquirers with higher perceived competition offer higher acquisition premium to their targets. High perceived competition does not lead acquirers to engage in less profitable acquisitions. To the contrary, we find that acquirers’ perceived competition is positively associated with both total acquisitions gains and gains to acquirer shareholders as measured by abnormal stock returns around the acquisition announcement. Finally, we find no significant association between acquirers’ perceived competition and the improvement in abnormal operating performance for the merged firm after the acquisition.
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    A Theory of Classification Shifting
    ( 2017-09-01) Penno, Mark ; Stecher, Jack
    This article demonstrates that managers can influence the market by classifying some items as core earnings and others as non-core. Investors react to classifications because managers have incomplete discretion over how to classify results. Managers optimally use their discretion to pool good news with items mandatorily classified as core earnings and bad news with items mandatorily classified as non-core. Aggregation reduces this temptation to classify strategically, provided managers also have incomplete discretion over how to aggregate. That is, managers can use aggregation to separate from strategic classifiers. Our results provide empirical implications for the cross-sectional properties of financial reports.
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    Firm-Manager Matching and the Tradeoffs of CFO Accounting Expertise
    ( 2017-08-31) Bernard, Darren ; Ge, Weili ; Matsumoto, Dawn ; Toynbee, Sara
    We examine the tradeoffs of CFO accounting expertise and their role in firm-manager matching decisions. Although prior work examines the positive effects of accounting expertise on several financial reporting outcomes, there is little evidence on the tradeoffs this expertise entails, much less how firms compensate for these tradeoffs. We conjecture that acquiring accounting expertise requires costly tradeoffs in terms of acquiring other skills, including operational knowledge and strategic expertise. We find that these tradeoffs are reflected in firms’ hiring decisions ex ante and affect several ex post employment decisions. Collectively, the results suggest accounting expertise is a carefully weighed attribute of CFO hires that shapes and is shaped by the composition of the top management team.
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    Discretionary Disclosure on Twitter
    ( 2017-08-31) Crowley, Richard ; Huang, Wenli ; Lu, Hai
    Using a sample of 12.8 million tweets from S&P1500 firms with active Twitter accounts from 2012 to 2016, we show that firms selectively disclose corporate events on Twitter and choose to post financial disclosures on Twitter more frequently around earnings announcements, accounting filings, and firm-specific news events. Financial disclosures on Twitter are more likely to contain media (image or video) and links around these events. Consistent with predictions from disclosure theory, both effects are strong when the sign of the news is clearly negative or positive. The above patterns of timing and usage of media and links are robust in intraday analysis. We also find that firms with lower institutional ownership are more likely to exercise discretion. These findings suggest that firms choose events, format, and timing discretionarily when disclosing news on social media.
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    Does Risk Disclosure Signal Risk Management Outcome? An Examination of the SEC FRR No. 48 Disclosure’s Relation with Cash Flow Volatility
    ( 2017-08-31) Lobo, Gerald ; Siqueira, Wei ; Tam, Kinsun ; Zhou, Jian
    We hypothesize that the quality of market risk disclosure mandated by the U.S. Securities and Exchange Commission Financial Reporting Release No. 48 (FRR No. 48) provides useful signals for predicting risk management outcome. Measuring risk disclosure quality as the degree of modification, we find that higher-than-expected disclosure modification is associated with lower future cash flow volatility. On average, an increase in risk disclosure modification from the lowest to the highest decile is associated with a 4.4 percent decrease in cash flow volatility. We further document that this association is moderated by managers’ intention to manage risk. The market generally understands the implications of disclosure modification with respect to cash flow volatility, but its understanding has limitations. Our results should be of interest to those who seek to assess how a firm’s cash flows will fluctuate in the future.
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    The Role of Management Talent in the Production of Informative Regulatory Filings
    ( 2017-08-30) Holzman, Eric ; Miller, Brian
    This study examines the extent to which managerial talent plays a role in shaping the clarity of regulated financial disclosures. Consistent with the notion that more talented managers are likely to commit to more transparent disclosure policies, we find that more able management teams are associated with the production of more readable regulatory filings. To mitigate potential concerns that our results are driven by firm characteristics or current period performance, we show that our results are robust to the inclusion of firm fixed effects and hold across both high and low partitions of current firm performance. We also take advantage of a set of exogenous shock-based analyses (regulatory and death) that provide better identification that our results are driven by underlying differences in managerial talent. Finally, we isolate cross-sectional variation in annual report readability attributable to differences in underlying managerial talent and show that this component explains a significant amount of variation in post 10-K filing stock return volatility. In sum, our evidence suggests that managerial talent impacts a firm’s financial filing readability and has meaningful stock market implications.
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    The Disclosure of Good versus Bad News: Evidence from the Biotech Industry
    ( 2017-08-30) Enache, Luminita ; Li, Lynn ; Riedl, Edward
    This paper examines how the type of news affects firms’ voluntary disclosures. We exploit hand-collected product-level disclosures made by publicly-traded biotech firms, which provide evidence of drugs’ progression through key regulatory milestones towards marketability. Of note, the disclosures allow us to distinguish firms’ treatment of good news (i.e., when drugs progress towards marketability) versus bad news (i.e., when drugs are abandoned). We first document that firms increase disclosures following good news (e.g., consistent with incentives to maximize shareholder value), as well as following bad news (e.g., consistent with minimizing shareholder litigation costs). Critically, we then document that the increase in disclosure for good news is higher relative to that for bad news, suggesting that firms view the net benefits associated with disclosure of good news as stronger relative to those for bad news. These results are consistent across product-level regressions, firm-level specifications, and other robustness tests.
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    Does "Level Playing Field" Improve Real Efficiency? A Test Using Disclosure Regulation
    ( 2017-08-30) Jiang, Jinglin ; Nanda, Vikram
    The SEC promulgated Regulation Fair Disclosure (Reg FD) to establish a "level playing field" for investors through prohibiting the use of selective disclosure. We use Reg FD as a plausibly natural experiment to evaluate links between disclosure, private information production, and real efficiency. We find that the rule has an adverse impact on price informativeness, investment-to-price sensitivity, and firm value -- with stronger effects for firms with greater prior reliance on selective disclosure. Analyst forecast quality also appears to decline following the rule change. Interestingly, the impact of Reg FD on price informativeness and the sensitivity of investment-to-price diminishes over time, while the deterioration in analyst forecasts tends to persist. Collectively, the results highlight unintended consequences of Reg FD in inhibiting private information acquisition and, thereby, the informational feedback from stock prices to real decisions.
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    Are all outside directors created equal? Do they differ in their governance roles? Evidence from voluntary disclosures of biotechnology firms
    ( 2017-08-30) Enache, Luminita
    Empirical evidence on the association between outside directors and firms’ voluntary disclosures is mixed and controversial. We hypothesize that the outside directors do not represent a homogeneous group of people as previously considered in the literature. An outside director’s professional expertise and experience could shape her assessment of costs and benefits of disclosures as well as the investors’ demands for disclosures. Using hand-collected data from a sample of biotechnology firms, we find that the aforesaid association differs based on directors’ professional backgrounds. Thus, the outside directors must be distinguished from each other based on their professional backgrounds vis-à-vis their corporate governance roles. Our study has policy implications
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    Geographic Peer Effects in Management
    ( 2017-08-29) Matsumoto, Dawn ; Serfling, Matthew ; Shaikh, Sarah
    We find that the likelihood that a firm voluntarily provides an earnings forecast is sensitive to the extent to which other firms in the same geographic area provide earnings forecasts. We use instrumental variable techniques to alleviate the concern that these geographic peer effects are driven by omitted economic factors unique to a local area that lead firms to make similar disclosure decisions. Our findings imply that geographic peer effects in disclosure choices arise in part due to firms trying to avoid negative capital market effects induced by market pressure from local institutional investors. The evidence does not suggest that information sharing among firms plays a key role in generating these geographic peer effects.