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- Creators: Debussy, Claude, 1862-1918
Description
In this study, I test whether firms reduce the information asymmetry stemming from the political process by investing in political connections. I expect that connected firms enjoy differential access to relevant political information, and use this information to mitigate the negative consequences of political uncertainty. I investigate this construct in the context of firm-specific investment, where prior literature has documented a negative relation between investment and uncertainty. Specifically, I regress firm investment levels on the interaction of time-varying political uncertainty and the degree of a firm's political connectedness, controlling for determinants of investment, political participation, general macroeconomic conditions, and firm and time-period fixed effects. Consistent with prior work, I first document that firm-specific investment levels are significantly lower during periods of increased uncertainty, defined as the year leading up to a national election. I then assess the extent that political connections offset the negative effect of political uncertainty. Consistent with my hypothesis, I document the mitigating effect of political connections on the negative relation between investment levels and political uncertainty. These findings are robust to controls for alternative explanations related to the pre-electoral manipulation hypothesis and industry-level political participation. These findings are also robust to alternative specifications designed to address the possibility that time-invariant firm characteristics are driving the observed results. I also examine whether investors consider time-varying political uncertainty and the mitigating effect of political connections when capitalizing current earnings news. I find support that the earnings-response coefficient is lower during periods of increased uncertainty. However, I do not find evidence that investors incorporate the value relevant information in political connections as a mitigating factor.
ContributorsWellman, Laura (Author) / Dhaliwal, Dan (Thesis advisor) / Hillegeist, Stephen (Thesis advisor) / Walther, Beverly (Committee member) / Mikhail, Mike (Committee member) / Hillman, Amy (Committee member) / Brown, Jenny (Committee member) / Arizona State University (Publisher)
Created2014
Description
While credit rating agencies use both forward-looking and historical information in evaluating a firm's credit risk, the role of forward-looking information in their rating decisions is not well understood. In this study, I examine the association between management earnings guidance news and future credit rating changes. While upward earnings guidance is not informative for credit rating changes, downward earnings guidance is significantly and positively associated with both the likelihood and speed of rating downgrades. In cross-sectional analyses, I find that downward guidance is especially informative in two important circumstances: (i) when a firm's current credit rating is overly optimistic compared to a model predicted rating, and (ii) when the relevance or reliability of alternative information sources is lower. In addition, I find that downward guidance is associated with lower future cash flows, as well as a higher volatility of future cash flows. Overall, the results are consistent with credit rating agencies incorporating voluntary bad news disclosures into their decisions about whether and when to downgrade a firm.
ContributorsLin, An-Ping (Author) / Hillegeist, Stephen (Thesis advisor) / Hugon, Jean (Thesis advisor) / Call, Andrew (Committee member) / Dhaliwal, Dan (Committee member) / Arizona State University (Publisher)
Created2015
Description
I examine the degree to which stockholders' aggregate gain/loss frame of reference in the equity of a given firm affects their response to the firm's quarterly earnings announcements. Contrary to predictions from rational expectations models of trade (Shackelford and Verrecchia 2002), I find that abnormal trading volume around earnings announcements is larger (smaller) when stockholders are in an aggregate unrealized capital gain (loss) position. This relation is stronger among seller-initiated trades and weaker in December, consistent with the cognitive bias referred to as the disposition effect (Shefrin and Statman 1985). Sensitivity analysis reveals that the relation is stronger among less sophisticated investors and for firms with weaker information environments, consistent with the behavioral explanation. I also present evidence on the consequences of this disposition effect. First, stockholders' aggregate unrealized capital gain position moderates the degree to which information-related determinants of trade (e.g. unexpected earnings, firm size, and forecast dispersion) affect abnormal announcement-window trading volume. Second, stockholders' aggregate unrealized capital gains position is associated with announcement-window abnormal returns, consistent with the disposition effect reducing the market's ability to efficiently incorporate earnings news into price.
ContributorsWeisbrod, Eric (Author) / Hillegeist, Stephen (Thesis advisor) / Kaplan, Steven (Committee member) / Mikhail, Michael (Committee member) / Arizona State University (Publisher)
Created2012
Description
When managers provide earnings guidance, analysts normally respond within a short time frame with their own earnings forecasts. Within this setting, I investigate whether financial analysts use publicly available information to adjust for predictable error in management guidance and, if so, the explanation for such inefficiency. I provide evidence that analysts do not fully adjust for predictable guidance error when revising forecasts. The analyst inefficiency is attributed to analysts' attempts to advance relationship with the managers, analysts' compensation not tie to forecast accuracy, and their forecasting ability. Finally, the stock market acts as if it does not fully realize that analysts respond inefficiently to the guidance, introducing mispricing. This mispricing is not fully corrected upon earnings announcement.
ContributorsLin, Kuan-Chen (Author) / Mikhail, Michael (Thesis advisor) / Hillegeist, Stephen (Committee member) / Hugon, Jean (Committee member) / Arizona State University (Publisher)
Created2012
ContributorsDebussy, Claude, 1862-1918 (Composer)
ContributorsDebussy, Claude, 1862-1918 (Composer)
ContributorsDebussy, Claude, 1862-1918 (Composer)
ContributorsDebussy, Claude, 1862-1918 (Composer)
ContributorsDebussy, Claude, 1862-1918 (Composer)
Description
The International Accounting Standards Board (IASB) is interested in a cost versus benefit analysis of the direct method of cash flow statements. IASB proposed, in the most recent Staff Draft of an Exposure Draft on Financial Statement Presentation in July of 2010, requiring the direct method to be presented, opposed to the current standard which lets companies choose between the direct or indirect method. There is constant controversy between these two presentation styles. Those who report with the indirect method claim the direct method is too costly and has no great benefit. In the United States only approximately two percent of companies report using the direct method, whereas the other ninety-eight percent use the indirect method. However, many preparers, researchers, and other financial statement users see great benefit in the direct method. Multiple research studies have been conducted in this field, and conclude the direct method has substantial and material benefits. There is strong support for the direct method in Australia, where the companies voluntarily report using the direct method. Because firms in Australia voluntarily use the direct method, I conducted a survey for Australian analysts in order to find the benefits (if any) they perceive. I have found that all of the analysts that participated in our survey state the direct method has benefits, is the more beneficial cash flow method to use for their forecasts, and should be required. With this new knowledge of the opinions and experiences of those actually using the direct method reports every day, a more accurate conclusion can be draw about the many benefits the direct method can bestow. These findings ultimately lead to the conclusion that there are added benefits in reporting the direct method, which likely outweigh the costs if Australian companies are continuing to voluntarily present the direct method each year. My major recommendations for the IASB are to require the direct method to be presented, and to require an indirect reconciliation in the notes along with the direct method. The indirect method can be useful when used with the direct method, but the direct method offers greater benefits to those who use them, and therefore should be the required cash flow statement to present. Key Words: Direct method, Cash flow statements
ContributorsArmstrong, Kate Denise (Author) / Orpurt, Steven (Thesis director) / Hillegeist, Stephen (Committee member) / Barrett, The Honors College (Contributor) / Department of Supply Chain Management (Contributor) / School of Accountancy (Contributor)
Created2013-12