ABSTRACT
We study how short-term changes in institutional owner attention affect managers' disclosure choices. Holding institutional ownership constant and controlling for industry-quarter effects, ...we find that managers respond to attention by increasing the number of forecasts and 8-K filings. Rather than alter the decision of whether to forecast or to provide more informative disclosures, attention causes minor disclosure adjustments. This variation in disclosure is primarily driven by passive investors. Although attention explains significant variation in the quantity of disclosure, we find little change in abnormal volume and volatility, the bid-ask spread, or depth. Overall, our evidence suggests that management responds to temporary institutional investor attention by making disclosures that have little effect on information quality or liquidity.
JEL Classifications: G23; G32; G34; G12; G14.
Although recent research documents a positive relation between corporate transparency and the proportion of independent directors, the direction of causality is unclear. We examine a regulatory shock ...that substantially increased board independence for some firms, and find that information asymmetry, and to some extent management disclosure and financial intermediation, changed at firms affected by this shock. We also examine whether these effects vary as a function of management entrenchment, information processing costs, and required changes to audit committee independence. Our results suggest that firms can alter their corporate transparency to suit the informational demands of a particular board structure.
This paper examines when information asymmetry among investors affects the cost of capital in excess of standard risk factors. When equity markets are perfectly competitive, information asymmetry has ...no separate effect on the cost of capital. When markets are imperfect, information asymmetry can have a separate effect on firms' cost of capital. Consistent with our prediction, we find that information asymmetry has a positive relation with firms' cost of capital in excess of standard risk factors when markets are imperfect and no relation when markets approximate perfect competition. Overall, our results show that the degree of market competition is an important conditioning variable to consider when examining the relation between information asymmetry and cost of capital.
We investigate Gompers, Ishii, and Metrick's (2003) finding that firms with weak shareholder rights exhibit significant stock market underperformance. If the relation between poor governance and poor ...returns is causal, we expect that the market is negatively surprised by the poor operating performance of weak governance firms. We find that firms with weak shareholder rights exhibit significant operating underperformance. However, analysts' forecast errors and earnings announcement returns show no evidence that this underperformance surprises the market. Our results are robust to controls for takeover activity. Overall, our results do not support the hypothesis that weak governance causes poor stock returns.
This paper discusses two real effects of financial reporting on pay and incentives: (1) Better earnings leads to better incentives, and (2) If pay is mismeasured, pay can be misused. The first real ...effect follows from the fact that incentives are often based on earnings, and the effectiveness of earnings-based incentives is positively related to the quality of earnings. Greater use of earnings in incentives provides better incentives at a lower cost. The second real effect has to do with how well the accounting system measures the expense of various pay components. Complex calculations are required to value complex pay components such as options, post-employment benefits, and performance-vested equity, and these calculations have historically not been done correctly. The incorrect accounting leads to these pay components being misused. I conclude by discussing how accounting and disclosure of pay and incentives can be improved.
This paper investigates whether the business press serves as an information intermediary. The press potentially shapes firms' information environments by packaging and disseminating information, as ...well as by creating new information through journalism activities. We find that greater press coverage reduces information asymmetry (i. e., lower spreads and greater depth) around earnings announcements, with broad dissemination of information having a bigger impact than the quantity or quality of press-generated information. These results are robust to controlling for firm-initiated disclosures, market reactions to the announcement, and other information intermediaries. Our findings suggest that the press helps reduce information problems around earnings announcements.
We use changes in the value of a firm's real estate assets as an exogenous change in a firm's financing capacity to examine (1) the relation between reporting quality and financing and investment ...conditional on this change, and (2) firms' reporting quality responses to the change in financing capacity. We find that financing and investment by firms with higher reporting quality is less affected by changes in real estate values than are financing and investment by firms with lower reporting quality. Further, firms increase reporting quality in response to decreases in financing capacity. Our findings contribute to the literature on reporting quality and investment, and on the determinants of reporting quality choices.
We examine the press’ role in monitoring and influencing executive compensation practice using more than 11,000 press articles about CEO compensation from 1994 to 2002. Negative press coverage is ...more strongly related to excess annual pay than to raw annual pay, suggesting a sophisticated approach by the media in selecting CEOs to cover. However, negative coverage is also greater for CEOs with more option exercises, suggesting the press engages in some degree of “sensationalism.” We find little evidence that firms respond to negative press coverage by decreasing excess CEO compensation or increasing CEO turnover.
We re-examine the claim that many corporations are underleveraged in that they fail to take full advantage of debt tax shields. We show prior results suggesting underleverage stems from biased ...estimates of tax benefits from interest deductions. We develop improved estimates of marginal tax rates using a non-parametric procedure that produces more accurate estimates of the distribution of future taxable income. We show that additional debt would provide firms with much smaller tax benefits than previously thought, and when expected distress costs and difficult-to-measure non-debt tax shields are also considered, it appears plausible that most firms have tax-efficient capital structures.
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