07 Financial: Disclosure
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ItemDISAGREEMENT, SPECULATION AND MANAGEMENT FORECASTS( 2019-09-01)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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ItemCSR, Tax Avoidance, and Cost of Debt( 2019-09-01)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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ItemCEO Turnover Announcements and Information Frictions( 2019-08-31)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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ItemEffects of Transparency on Customer-Supplier Contracting( 2019-08-31)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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ItemFinancial Reporting Frequency and Managerial Learning from Stock Price( 2019-08-31)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.
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ItemDoes Portfolio Disclosure Make Money Smarter?( 2019-08-30)We document the benefits of mandatory portfolio disclosure in the hedge fund market. We study investor purchasing and selling decisions, captured by hedge fund flows. After a fund begins filing Form 13F with the Securities and Exchange Commission, we find that investor flows are better able to predict fund performance (i.e., money becomes "smarter"). In particular, the spread in performance between high- and low-flow funds is 3.7 percentage points higher for filing funds compared with non-filers. We analyze cross-sectional differences in the precision, usefulness, and access of information, and find evidence that the increase in smart money is driven by the information channel. These results help contribute to the cost-benefit analysis of mandatory disclosure.
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ItemIs Firms’ Social Media Engagement Informative about Firm Performance?( 2019-08-29)Abstract In this paper, I examine whether the volume of a firm’s tweets and its followers’ engagement is informative to capital market participants and financial intermediaries, namely investors and analysts. My data comprises of 178,236 firm-quarters (46,449 Tweet firm-quarters) and approximately 17.50 million firm-initiated tweets collected from the Primary Twitter sites of 2,229 public US firms between 2006 and 2017. I find that the volume of a firm’s tweets and the followers’ engagement during a quarter predicts the firm value during that period. The results also suggest that changes in tweet (engagement) volume are informative to investors and the information gets impounded in the stock prices concurrently. I also find evidence that followers’ engagement is more informative than the firm’s tweet volume for predicting firm-value. My findings further indicate that analysts may be using this additional information in the firm’s tweet (engagement) volume to make more accurate earnings and sales forecast, which reduces the Tweet firm’s unexpected earnings and unexpected sales growth. In additional analysis, I find that the level of tweets (engagement) helps predict a firm’s earnings and sales whereas changes in tweet (engagement) volume incrementally explain the firm’s sales growth and this may be the source of additional information to investors and analysts.
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ItemManagement Forecasts, Analyst Revisions, and Investor Reactions: The Effect of CEO Gender( 2019-08-28)In this study, we examine whether CEO gender affects the likelihood of management forecast issuance, forecast properties, and subsequent reactions from analysts and investors. We use a panel data set of CEO transitions between 2000 and 2015 to test our hypotheses. We find that while women CEOs are more likely to issue earnings forecasts after a CEO transition, the characteristics of forecasts issued by women and men CEOs do not differ. Furthermore, we find that CEO gender significantly affects analyst and investor reactions. In particular, we find that analysts and investors demonstrate a more tempered reaction to good news forecasts issued by women CEOs compared to men CEOs. Overall, our findings suggest that analysts and investors find management forecasts issued by women CEOs to be less credible than forecasts issued by men CEOs despite no apparent differences in their forecast properties.
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ItemDo Proprietary Costs Deter Insider Trading?( 2019-08-27)Insider trading conveys insiders’ private information to outsiders. A potential cost of insider trading relates to its potential benefit to rival firms, which may reduce the competitive advantage of the insiders’ firms. Following a variety of approaches to identify proprietary information risk, we find proprietary costs are negatively associated with insiders’ purchases, especially when insider trades are more likely to be informative to rivals. Consistent with proprietary information risk increasing the costs of insider purchases and, hence, the required benefits to trade, we find insiders earn significantly higher abnormal profits when proprietary costs are higher. In additional analyses, we find insiders significantly reduce their purchases prior to new product launches as well as following large reductions in import tariff rates, when stiffer competition increases proprietary costs. Finally, we find firms with higher proprietary costs are more likely to impose insider trading restrictions, and insiders’ purchase decisions are more sensitive to proprietary costs when they have higher firm ownership. Our findings indicate insiders and firms are aware of potential proprietary costs when insiders trade on private information, and insiders alter their purchase activities accordingly.
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ItemFlying under the Radar: Confidential Filings and Pre-IPO Lawsuits( 2019-08-26)Despite strong incentives to increase visibility and disclosure in advance of initial public offerings (IPOs), prior research finds many firms take advantage of the confidential filing provisions of the JOBS Act of 2012 to obscure their fundraising pursuits. We posit that one potential explanation for this puzzling phenomenon relates to reduced litigation risk, since confidential filing makes IPO activity less salient to the outsiders of the firm. Using a comprehensive sample of lawsuits against IPO firms from 2008 to 2014, we find evidence consistent with this hypothesis. Relative to a matched sample of firms that file their registration publicly, firms that file confidentially under the provisions of the JOBS Act experience 38% fewer lawsuits during the pre-IPO period. Moreover, our findings suggest that filing confidentially is particularly effective in shielding IPO firms from possibly strategic lawsuits by other businesses and from lawsuits that lack legal merit. We show that each lawsuit filed by a business against the IPO firm is associated with more than 4% increase in IPO underpricing. Our findings suggest that an unintended consequence of the confidential filing provision under the JOBS Act is to provide IPO firms a means to reduce litigation risk at the cost of increased information asymmetry.