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- Creators: Haydn, Joseph, 1732-1809
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
Responding to the allegedly biased research reports issued by large investment banks, the Global Research Analyst Settlement and related regulations went to great lengths to weaken the conflicts of interest faced by investment bank analysts. In this paper, I investigate the effects of these changes on small and large investor confidence and on trading profitability. Specifically, I examine abnormal trading volumes generated by small and large investors in response to security analyst recommendations and the resulting abnormal market returns generated. I find an overall increase in investor confidence in the post-regulation period relative to the pre-regulation period consistent with a reduction in existing conflicts of interest. The change in confidence observed is particularly striking for small traders. I also find that small trader profitability has increased in the post-regulation period relative to the pre-regulation period whereas that for large traders has decreased. These results are consistent with the Securities and Exchange Commission's primary mission to protect small investors and maintain the integrity of the securities markets.
ContributorsDong, Xiaobo (Author) / Mikhail, Michael (Thesis advisor) / Hwang, Yuhchang (Committee member) / Hugon, Artur J (Committee member) / Arizona State University (Publisher)
Created2011
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
Description
Existing literature consistently documents a relationship between book-tax differences and future financial performance. Specifically, large book-tax differences are associated with lower earnings persistence. I contend that one reason the tax information contained in financial statements is informative about future earnings is that the relationship between book income and taxable income captures information about a firm's life cycle stage. Using a life cycle measure from the literature, I use fundamental analysis to group firm-year observations into life cycle stages and document a link between book-tax differences and firm life cycle. I build on prior studies that find a relation between earnings persistence and book-tax differences, and earnings persistence and firm life cycle. I find that after controlling for firm life cycle stage, the association between large positive book-tax differences and lower earnings persistence does not hold. My results offer an economic theory based explanation for the relation between book-tax differences and earnings persistence as an alternative explanation to findings in prior research.
ContributorsDrake, Katharine D (Author) / Mikhail, Michael (Thesis advisor) / Brown, Jennifer (Committee member) / Martin, Melissa (Committee member) / Arizona State University (Publisher)
Created2012
ContributorsHaydn, Joseph, 1732-1809 (Composer)
ContributorsHaydn, Joseph, 1732-1809 (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
Description
Insider trading potentially reveals proprietary information, allowing rivals to compete more effectively against the insiders' firm. This paper examines whether proprietary costs are associated with insiders' trading decisions and the profitability of their trades. Using a variety of approaches to identify proprietary information risk, I find proprietary costs significantly deter insiders' trading activities. The deterrence effect is more pronounced when insider trading is likely to be more informative to rivals. Specifically, trades by top executives, non-routine trades, and trades at low complexity firms are curbed to a greater extent by proprietary costs. Examining the mechanisms of this deterrence effect, I find firms with higher proprietary costs are more likely to impose insider trading restrictions, and insiders' trading decisions are more sensitive to proprietary costs when they have higher share ownership of the company. These results suggest insiders reduce trading activities not only due to firm policies, but also due to incentive alignment. Finally, when insiders trade despite higher proprietary costs, they earn significantly higher abnormal profits from their purchase transactions. Overall, this study suggests product market considerations are an important factor associated with insiders' trading decisions and profitability of their trades. These findings are likely to be of interest to regulators and corporate boards in setting insider trading policies, and help investors make investment decisions using insider trading signals.
ContributorsChoi, Lyungmae (Author) / Hillegeist, Stephen (Thesis advisor) / Faurel, Lucile (Thesis advisor) / Hugon, Jean (Committee member) / Huang, Xiaochuan (Committee member) / Arizona State University (Publisher)
Created2017