09 Financial Accounting 2: Disclosure
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ItemThe Informativeness of Text, the Deep Learning Approach( 2020-08-16)This paper uses a deep learning natural language processing approach (Google's Bidirectional Encoder Representations from Transformers, hereafter BERT) to comprehensively summarize financial texts and examine their informativeness. First, we compare BERT's effectiveness in sentiment classification in financial texts with that of a finance specific dictionary, the naïve Bayes, and Word2Vec, a shallow machine learning approach. We find that first, BERT outperforms all other approaches, and second, pre-training BERT with financial texts further improves its performance. Using BERT, we show that conference call texts provide information to investors and that other less accurate approaches underestimate the economic significance of textual informativeness by at least 25%. Last, textual sentiments summarized by BERT can predict future earnings and capital expenditure, after controlling for financial statement based determinants commonly used in finance and accounting research.
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ItemThe Devil is in the Details: Firm-Specific or Market Information in Shareholder Activism( 2020-08-16)This study measures how shareholder activism may change market participants' processing and incorporation of different types of information. Specifically, I examine the earnings response coefficient (ERC), price delay, and probability of informed trading (PIN), which capture the usage of firm-specific public information, public market-wide information, and firm-specific private information, respectively. I find an increase in ERC, price delay, and PIN during shareholder activism. I also find an influx of attention-based trading in the 2 quarters immediately after 13D filing, which is subsequently replaced by information-based trading. The findings are consistent with a slower reflection of publicly available market-wide information and investors engaging in more firm-specific information processing. Investors appear to substitute more general information with focused information about activist targets in their trading decisions.
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ItemWhy do firms forecast earnings for multiple years simultaneously?( 2020-08-15)By issuing earnings forecasts for both current and future years simultaneously, managers provide the multi-year data required for many valuation models and help investors sort out transitory and permanent shocks. We find that firms that are overpriced and have more transitory earnings tend to issue multi-year forecasts simultaneously. Overpriced firms are more likely to issue both short- and long-term bad news than only short-term bad news forecasts. Mispricing tends to be corrected after firms' multi-year forecasts, especially when overpriced firms issue both long- and short-term bad news forecasts. We also find a more linear current period earnings—return relation when firms issue multi-year forecasts, which suggests that investors underreact less to extreme news because the future year forecasts embed earnings persistence information.
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ItemDisclosure Speed: Evidence from Nonpublic SEC Investigations( 2020-08-15)We examine cross-sectional variation in how quickly managers disclose private information. We use novel data on SEC investigations that allow us to measure a shock to managers' private information sets and the time lag until subsequent disclosures. We measure the associations between 1) the time to disclose and 2) auditor quality, shareholder monitoring, analyst coverage, corporate governance, CEO compensation incentives, and ex ante litigation costs. We document that institutional ownership, changes in auditors, CEO power, and CEO equity vega are associated with faster disclosure. We document that analyst following is associated with slower disclosure. Our findings generate insights on the relation between institutional and firm characteristics and the timely disclosure of private information.
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ItemHiding or Helping? Determinants and Consequences of the Timing of Earnings Conference Calls( 2020-08-15)Open conference calls are an important information source because of their forward-looking discussion, interactive nature, and easy accessibility. Using Bloomberg data, we investigate why firms time earnings conference calls differently and how the stock market interprets and reacts to firms' timing choices. We directly measure retrospective and prospective news that derives from earnings calls by earnings surprise and the tone of forward-looking statements. We find that firms with more extreme news (both good and bad) tend to hold calls outside trading hours, especially in the evening. To test whether the market understands the information of "timing," we conduct an event study around the date when firms schedule the calls. We find a higher trading volume when the market is notified of an upcoming switching from outside to during trading hours. Overall, our results suggest that firms strategically time conference calls and investors infer news from the timing.
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ItemCorporate Disclosure in Response to Monetary Policy Changes( 2020-08-14)This paper examines how monetary policy changes affect corporate disclosure. The increase in the federal funds rate may incentivize firms to increase disclosure so as to counteract the shock of the increased cost of capital. Alternatively, firms may decrease their disclosure in expectation of lowered external financing needs. By examining the earnings guidance of publicly listed firms from 1995 to 2009, we find that an increase in the federal funds rate induces more corporate disclosure. The cross-sectional tests show that the effect of monetary policy changes is stronger when monetary policy change is more persistent or when firms have more external financing needs or more growth opportunities. Finally, we find that firms decrease their disclosure level in response to the announcements of unconventional expansionary monetary policies introduced between 2008 and 2015. Overall, our paper provides new insight into how firms respond to macroeconomic policy changes by changing their disclosure strategy.
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ItemAccounting Reporting Complexity and Firm-Level Investment Efficiency( 2020-08-14)This paper is the first to examine the relationship between accounting reporting complexity and real economic activity. In doing so, it answers the call in Leuz and Wysocki (2016) for a better understanding of the real effects of disclosure and reporting activities. The results presented in this paper indicate that accounting reporting complexity is associated with increased firm-level investment efficiency, and that this is driven by both lower over-investment and lower under-investment. These results are robust to alternative specifications and to the effects arising from operating and linguistic complexity. The results suggest that managers facing more complex accounting reporting may be actively seeking to reduce informational frictions with the capital markets. This study is particularly relevant to standard-setters and regulators who are increasingly concerned with the potential implications of accounting reporting complexity.
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ItemExternalities of Nondisclosure: Evidence from The Spillover Effect of Redacted Proprietary Information on Corporate Investment( 2020-08-14)Firms can request to redact proprietary information from their material contracts under the Freedom of Information Act (FOIA). Such redactions reveal a manager's decision to withhold information mainly due to proprietary cost concerns. This study investigates whether firms take action when a competitor withholds proprietary information from material contracts. I hypothesize that firms gain additional knowledge about growth opportunities and perceive signals about future competitiveness from a rival's redactions. I find that firms respond with increased investments. More specifically, firms' capital investments and R&D investments increase after observing redactions from a rival's investment-related contracts and R&D/License/Collaboration agreements. The spillover effect is stronger for firms that operate in more competitive industries, when their product markets are less stable, and when a similar-sized competitor redacts proprietary information. Overall, my evidence supports that externalities exist when firms withhold information, and such externalities stem from the information conveyed by withholding behavior itself.
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ItemInvestment Opportunities, Market Feedback, and Voluntary Disclosure: Evidence from the Shale Oil Revolution( 2020-08-14)Recent theories posit that investment opportunities encourage managers to provide voluntary disclosures to elicit informational feedback from stock prices to improve investment decisions, even as doing so encourages informed trading and worsens adverse selection among investors. We test this prediction in a difference-in-differences framework using the shale oil revolution in the early 2010s as an exogenous shock to investment opportunities for oil and gas ("O&G") firms. During this period, we find that O&G firms increased capex forecasts and decreased earnings forecasts relative to non-O&G firms and that these effects are concentrated among O&G firms with more informed trading and relatively poorer managerial information. We also find that O&G firms that shifted from earnings forecasts to capex forecasts display both an increase in investment-q sensitivity and a decrease in stock liquidity during the shale oil revolution. Taken together, these results suggest that managers adjust their portfolio of voluntary disclosures to facilitate managerial learning from stock prices to exploit investment opportunities, despite worsening adverse selection costs.
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ItemUnraveling Exchange Rate Exposure( 2020-08-14)Theoretical models predict substantial firm value exposure to exchange rate movements. However, empirical papers find little to no exchange rate exposure. This paper examines whether the quality of segment reporting is a key driver of such (puzzling) low exchange rate exposure. Using the adoption of SFAS 131 as a quasi-natural experiment, I find that firms that are forced to disclose disaggregated business segment reports exhibit a significant change in their exchange rate exposure. The uncovered exposure is on average negative and economically significant. Post-SFAS 131, analysts better incorporate past currency news onto their forecasts and affected firms increase financial hedging, suggesting that disclosure has real effects.