07 Financial: Disclosure

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    DISAGREEMENT, SPECULATION AND MANAGEMENT FORECASTS
    ( 2019-09-01) Dimitrov, Valentin ; Palia, Darius ; Xu, Zhiwei
    Prior theoretical and empirical research has shown that disagreement can cause speculative trading which leads to a speculative premium in stock prices. We examine whether managers take actions to reduce or prolong the disagreement among investors. We establish causality using the exogenous variation in speculative trading after the yearly reconstitution of the Russell 1000/2000 indices. We find that speculative trading reduces the frequency, likelihood, and precision of management forecasts. This relationship is significantly stronger when short-sale constraints are more binding. Consistent with theory, the effect is more pronounced when managers have stronger equity-based incentives. We also find that managers sell equity to benefit from the speculative premium. In summary, our results suggest that managers issue forecasts opportunistically in response to speculative trading – they keep silent whenever possible, and issue fewer and less precise forecasts to prolong disagreement and overpricing.
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    CSR, Tax Avoidance, and Cost of Debt
    ( 2019-09-01) Amirkhani, Kourosh
    Theories in management strategy argue that CSR generates economic value either through enhancing corporate performance or through preserving corporate performance. The insurance-like argument of CSR focuses on generating economic values through mitigating the adverse effects of negative events. This paper examines the insurance property of CSR in the context of cost of debt financing and tax avoidance. Specifically, I examine whether tax-avoiding firms with superior CSR performance enjoy a lower cost of debt financing. Using three measures of tax avoidance, two measures of cost of debt, and a measure of CSR based on KLD indicators, I find that firms with higher levels of tax avoidance and a better CSR performance have lower bond spread and superior credit rankings. Additional analysis indicates that tax-avoiding firms reduce their cost of debt mainly through enhancing positive CSR performance than reducing poor CSR activities. Further analysis reveals that firms with higher levels of tax avoidance (i.e. top quartile of tax avoidance) receive greater benefits from participation in CSR activities .These findings provide support for the hypothesis that firms utilize CSR activities to temper adverse effects of risky behaviors such as tax avoidance.
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    CEO Turnover Announcements and Information Frictions
    ( 2019-08-31) John, Kose ; Tian, Xu ; Liu, Christine ; Zhang, Haofei
    This paper analyzes the market reaction to CEO turnover announcements in the presence of information frictions. We find that the market reaction to forced CEO turnover announcements is negatively related to the level of asymmetric information between a firm and its investors. No such relation exists for voluntary turnovers. We also find that in cases where information frictions are high, companies attempt to present forced turnover as voluntary and this behavior leads to a less negative market response. Overall, our results suggest that firms act strategically when disclosing information about CEO turnover to avoid a negative market reaction.
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    Effects of Transparency on Customer-Supplier Contracting
    ( 2019-08-31) Grewal, Jody ; Perez-Cavazos, Gerardo ; Mohan, Aditya
    This paper examines the effects of disclosure on customer-supplier payment practices. Exploiting the introduction of the Payment Practices Disclosure Regulation (PPDR) in the United Kingdom, we find that large firms that are required to disclose their payment practices reduce accounts payable as a fraction of assets by 2.1% and that small, non-disclosing firms experience a reduction of 11.3% in accounts receivable scaled by revenue. Cross-sectional tests suggest that the threat of consumer pressure and barriers to entry are important drivers of the change in payment terms, with effects concentrated among firms that sell to final consumers and those with high barriers to entry. We also show that the effects occur over time, with large firms reducing the fraction of invoices not paid within the agreed terms by 1.5% every six months. Our findings indicate that disclosure regulation is an effective tool for changing payment practices.
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    Financial Reporting Frequency and Managerial Learning from Stock Price
    ( 2019-08-31) Hillegeist, Stephen ; Kausar, Asad ; Kraft, Arthur ; Park, Youil Chris
    Using hand-collected data on changes in public firms’ financial reporting frequency over the peirod 1951-1974, we provide evidence that increased reporting frequency enhances the extent to which stock price guides managers’ investment decisions. Using a generalized differencein-differences research design, we find the sensitivity of investment to stock price (measured by Tobin’s Q) increased for treatment firms following an increase in reporting frequency, relative to control firms. The results are more pronounced among firms traded by more informed investors, measured by price nonsynchronicity and stock illiquidity. Consistent with managers making better investment decisions when stock prices provide more investment-relevant information, we find future operating performance of the treatment firms improves following the increase in reporting frequency. Our findings are consistent with the “crowding-in effect” theorized in Goldstein and Yang (2019). Our results are relevant to the ongoing regulatory debates in the United States and European Union regarding how frequently firms should be required to report their financial results.