07 Financial Accounting 2: Disclosure (FAR2)

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    Do Managers Strategically Time Investor Mood? Evidence of Releasing Bad News on Sunny Days
    ( 2022) Chen, Chen ; Dong, Yashu ; Lai, Shufang
    This paper explores whether managers strategically time the dissemination of bad news on sunny days to leverage positive investor mood. Our empirical evidence suggests that managers are more likely to announce bad news on sunny days and tend to reschedule bad news earnings announcements from cloudy days to sunny days when accurate weather forecasts are available. Further analysis shows a weaker short-term market reaction and a stronger post-earnings announcement drift for firms announcing bad news on sunny days rather than non-sunny days. In addition, we find that this strategic disclosure of bad news is not motivated by insider selling, but is more likely to be driven by firms’ fear of high litigation risks. Considering the benefit and cost of applying the mood-timing strategy, our cross-sectional tests show that managers are more likely to announce bad news on sunny days when the market sentiment is low, when the firm does not follow a routine pattern to release its earnings announcement, and when there are fewer sunny days around the EAD. In summary, our findings suggest that managers consider investor mood in their information dissemination strategies and that litigation concerns are the main driver behind the strategic release of bad news on sunny days.
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    Where Do My Tax Dollars Go? Tax Morale Effects of Perceived Government Spending
    ( 2022) Giaccobasso, Matias ; Nathan, Brad ; Perez-Truglia, Ricardo ; Zentner, Alejandro
    Do perceptions about how the government spends tax dollars affect the willingness to pay taxes? We designed a field experiment to test this hypothesis in a natural, high-stakes context and via revealed preferences. We measure perceptions about the share of property tax revenues that fund public schools and the share of property taxes that are redistributed to disadvantaged districts. We find that even though information on where tax dollars go is publicly available and easily accessible, taxpayers still have significant misperceptions. We use an information-provision experiment to induce exogenous shocks to these perceptions. Using administrative data on tax appeals, we measure the causal effect of perceived government spending on the willingness to pay taxes. We find that some perceptions about government spending have a significant effect on the probability of filing a tax appeal and in a manner that is consistent with the classical theory of benefit-based taxation. We discuss implications for researchers and policy makers.
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    The Information Content of Municipal Financial Statements: Large-sample Evidence
    ( 2022) Nakhmurina, Anya ; Cuny, Christine ; Li, Ken ; Watts, Edward
    The usefulness of financial disclosures is a source of considerable debate in the municipal setting, given their lack of timeliness. This paper empirically examines the extent to which municipal financial disclosures have information content. Using the entire universe of annual financial disclosures from 2009 to 2020, we show that trading activity in the secondary market for municipal bonds increases after the disclosures are filed. Both institutional and retail trades increase around disclosure filings, but the effect is pronounced for retail traders, for whom the reports are more likely to provide new information. Moreover, the heightened trading is pronounced for timelier disclosures, consistent with regulators' views that untimely disclosures are less likely to provide new information. We also find a pronounced response when investors' risk is high and when the disclosures contain risk-related discussions. Our results contrast with earlier research and provide the first large-scale evidence that participants in the U.S. market for municipal bonds perceive financial disclosures to have informational value.
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    Division Managers’ Private Information and Capital Investment: Exploiting External Social Connections as an Information Source
    ( 2022) Luo, Shuqing ; Wang, Xin ; Wu, Qiong ; Zhang, Guochang
    We examine the relationship between division-level information and capital investment in conglomerates, exploiting the external social connections of division managers (DMs) as an information source. We find that DMs who are socially connected with the CEOs of industry peers undertake more investment than those without such connections. The documented effect is stronger when (i) the DM’s information source is more useful, proxied by connected external firms having superior performance, high growth, large market shares, or experienced CEOs; (ii) the industry environment is more uncertain and less transparent; and (iii) the DM is more influential within the conglomerate. Along with increased investment, connected divisions display greater responsiveness to investment opportunities and subsequently realize higher profitability. Overall, division-level information helps improve capital investment decisions despite exacerbated information asymmetries.
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    Strategic Scientific Disclosure – Evidence from the Leahy-Smith America Invents Act
    ( 2022) Valentine, Kristen ; Zhang, Jenny Li ; Zheng, Yuxiang
    We examine the impact of technological competition on voluntary innovation disclosure using changes scientific publications around the enactment of Leahy-Smith America Invents Act of 2011 (AIA). The AIA changes the patent system from first-to-invent to first-inventor-to-file system and induces a patent “race” that increases technological competition. Firms with resource constraints tend to be slow in filing a patent and are disadvantaged in this race. Using a difference-in-differences design, we show that financially constrained firms strategically increase scientific publications in an attempt to block competitors from obtaining a patent and extend the patent race after the enactment of AIA. This effect is more pronounced among firms (1) that are less capital intensive, and whose competitors have a lower cost of entry; (2) that face more patent competition; and (3) whose patents have longer lifecycles. The findings suggest that technological competition is a key determinant of firms’ scientific publications. The positive effect of the AIA on corporate scientific publications is consistent with the policy makers’ goal to promote knowledge spillover in society.
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    Incomplete Investor Search: Low-expense Index Funds and Fund Flows in a Management Company
    ( 2022) Du, Mengqiao
    This paper shows that a low price of index funds draws investor attention to a management company, and investors' subsequent incomplete search within funds in the management company raises the flows of actively managed funds in the same management company by 10%. These spillover effects are more salient among retail investors and among share classes with direct distribution channels. At the management company level, offering low-expense index funds positively influences aggregated flows. Management companies strategically increase the expense ratios of actively managed funds after introducing low-expense index funds.
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    The Future Performance Implications of Non-GAAP-Motivated Investment
    ( 2022) Lewis-Western, Melissa ; Christensen, Ted ; Ahn, Minkwan ; Johnson, Ryan
    We investigate whether having a policy of consistently reporting non-GAAP performance metrics is associated with investment efficiency. Prior research finds that managers who disclose non-GAAP performance measures increase investment levels, consistent with overinvestment. However, we find that increased investment associated with non-GAAP reporting is not necessarily indicative of overinvestment. Specifically, we explore the relation between investment and future cash flows as a proxy for the realization of investments in positive net present value projects. We find that the investments of firms that consistently report non-GAAP metrics are associated with higher future operating cash flows and abnormal returns, both of which are inconsistent with overinvestment. A path analysis reveals that the benefit of non-GAAP reporting stems from both a higher level of investment and a greater return per dollar of investment. Additional analyses suggest that reduced GAAP earnings pressure on investment decisions is a likely mechanism associated with changes in investment. Our evidence is consistent with non-GAAP reporting reducing a market friction and improving investment efficiency.
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    Do note disclosures influence value relevance more after financial statement placement becomes more uniformly prominent? Evidence from ASU 2011-05
    ( 2022) Cedergren, Matthew ; Chen, Changling ; Chen, Kai ; Wang, Victor
    We examine whether financial statement note disclosures play an enhanced role in value relevance when the placement of line items among financial statements becomes more uniformly prominent. We consider ASU 2011-05, which prohibited reporting other comprehensive income (OCI) in the statement of changes in stockholders’ equity, and report two main findings. First, using a larger sample and longer time period than early studies examining ASU 2011-05, we document that, relative to firms unaffected by this prohibition, firms required to change OCI placement exhibited positive changes in OCI value relevance after ASU 2011-05 became effective, in line with the FASB’s stated goal of raising OCI prominence. This finding resolves the seemingly puzzling findings of early studies, which documented an unexpected incremental decrease in OCI value relevance for these firms. Second, we find that this effect is enhanced when OCI-related note disclosures are more specific and numeric, and are more readable, more stable, or shorter in length. Collectively, our findings suggest that financial statement placement and note disclosure characteristics interact in a manner such that when financial statement line items influence valuation to a greater extent via prominent placement, qualitative characteristics of accompanying note disclosures assume this role more prominently as well.
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    Mandatory Disclosure and Peer Firm Managers’ Learning from Stock Prices
    ( 2022) Kim, Jaewoo ; Pearson, Hunter ; Twedt, Brady
    Research suggests that mandatory disclosure hinders managers’ ability to learn from their own stock prices in making investment decisions. We build on this research by examining how mandatory disclosure impacts the learning of managers of peer firms. Using the introduction of mandatory segment disclosure under SFAS 131, we document a significant decrease in investment-q sensitivity for peer firms, suggesting decreased investment efficiency. We also find that the decrease in sensitivity is concentrated among peers with lower financial constraints and higher informed trading, as well as those with greater economic links to disclosing firms. Collectively, our findings suggest that mandatory disclosure interferes with peer firm managers’ learning from their own stock prices. We provide novel evidence that mandatory disclosure has negative externalities to peer firms’ investment.
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    Contextualized News in Corporate Disclosures: A Neural Language Approach
    ( 2022) Siano, Federico
    I quantify and explain value-relevant news in textual disclosures using word context. I improve upon current methods by applying a new textual analysis approach—a BERT-based neural language model—to characterize disclosures as sequentially connected and interacting elements (rather than stand-alone words). I denote this enhanced measurement as contextualized, and I apply it to predicting the magnitude and direction of disclosure news. The contextualized text in earnings announcements (1) explains three times more variation in short-window stock returns than text measured using traditional narrative attributes or recent machine learning techniques, and (2) offers large incremental explanatory power relative to reported earnings modeled using traditional or machine learning methods. Contextualized disclosures also strongly predict future earnings, with most news arising from (a) word order (i.e., context), (b) text describing numbers, and (c) text at the beginning of disclosures. This study highlights the importance of contextualized disclosures for researchers, regulators, and practitioners.