How Does Information Quality Affect Stock Returns?

Using a simple dynamic asset pricing model, this paper investigates the relationship between the precision of public information about economic growth and stock market returns. After fully characterizing expected returns and conditional volatility, I show that (i) higher precision of signals tends to increase the risk premium, (ii) when signals are imprecise the equity premium is bounded above independently of investors' risk aversion, (iii) return volatility is U-shaped with respect to investors' risk aversion, and (iv) the relationship between conditional expected returns and conditional variance is ambiguous.     

Does Noninformative Text Affect Investor Behavior?

This article demonstrates that easily processed texts affect investor trading behavior even in the absence of any informational content. We examine the trading symbols of US firms and find that stocks with clever tickers (those that are actual words in the English language) are more liquid, as measured by higher turnover and trading volume, as well as lower spreads. Furthermore, clever ticker stocks are traded more by uninformed investors and have larger market reactions on earnings announcement days. These results suggest that ticker fluency facilitates trading by improving the firm's visibility among retail investors through attention grabbing and memorization.     

How Does Uncertainty Resolution Affect VC Syndication?

We use the external certification due to the FDA 510(k) clearance process in the medical device industry as a natural experiment and analyze the dynamics of the syndicate formation of venture capital (VC) firms under various levels of uncertainty. We test several nonmutually exclusive hypotheses on project selection, second opinion, collusion, and diversification. Our results suggest that FDA 510(k) clearance serves as an outside certification and reduces uncertainty leading to greater amounts of capital flowing into the company from a larger group of investors. Our results also suggest that experienced VC firms are able to identify promising projects early on without the need for external 510(k) certification or second opinion.     

How Does Unobserved Heterogeneity Affect Value Relevance?

Most value relevance (VR) studies consider an accounting item value relevant if the regression coefficient (RC) of that item is statistically significant. Unobservable heterogeneity leads to biased RCs, interpretation of which generates incorrect inferences. To obtain unbiased RCs, the effect of unobservable heterogeneity on RCs should be mitigated. As two dimensions of unobservable heterogeneity are at the firm level and time level, outcomes with the following unobservable heterogeneity concerns are discussed: i) no fixed‐effects (FE); ii) firm FE; iii) time FE; and iv) two‐way (firm and time) FE. By employing a sample of Turkish firms from 2005–2014, we report several findings. First, we find that regressions with firm (time) FE yield large (low) RCs vis‐à‐vis regressions with no FE, and regressions with two‐way FE generate balanced RCs compared to the others. Second, we compare RCs with i and iv, and conclude that the book value of equity becomes more value relevant while net income does not after controlling for unobservable heterogeneity. Last, we arbitrarily divide the entire period into two to reveal how unobserved endogeneity affects the comparison of RCs belonging to different periods. Our outcomes robustly reveal that unobserved endogeneity leads to erroneous RC comparisons.     

How Does Sustainability Disclosure Drive Behavior Change?

In 2011, as part of the Carbon Disclosure Project (CDP), over 3,700 companies disclosed information about their energy use, emissions, risks, opportunities, and strategy to their institutional investors and customers. In this article, the Chief Innovation Officer of CDP discusses five ways that such disclosure is expected to lead to changes in corporate behavior. The first two are “internal” mechanisms that tend to encourage constructive change more or less directly as a result of going through the process of disclosure. One is known as “WGMGM,” which is shorthand for the often‐cited principle that “what gets measured gets managed.” The second is the tendency of disclosure to bring about valuable changes in strategic thinking. The next two are mechanisms that work to effect change through “external” channels. One relies on the use of data to enable investors, regulators, and other corporate stakeholders to draw comparisons among companies and industries in assessing the value implications of climate change disclosure. The second involves competitor benchmarking and the growing use of data in investment research. Fifth and last, recent evidence suggests that a growing number of investors are willing to raise the bar in terms of the expectations they place on companies to act responsibly now in the face of current and expected future changes. Each of these five change processes are discussed while citing evidence drawn from CDP's long experience of managing the disclosure process and working with both investors and companies to convert data into action.     

When Does Information Asymmetry Affect the Cost of Capital?

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.     

How Does Local Economy Affect Commercial Property Performance?

The real estate literature recognizes the real option to invest in capital expenditures (CAPEX) or sell a property but treats these options as independent. We show that these real options are interconnected. We provide empirical evidence that, consistent with the real option framework, CAPEX increases in income growth expectations but declines in their volatility; that CAPEX are partially capitalized into property market values; and that CAPEX significantly reduce the subsequent likelihood of sale. We also present evidence that, controlling for market timing, past property performance influences CAPEX but not disposition choices, consistent with a value-add investment strategy.

     

How Does Information Disclosure Affect Bank Systemic Risk in the Presence of a Deposit Insurance System?

ABSTRACT

This article establishes a dynamic game with incomplete information to theoretically analyze the influence mechanism of information disclosure on systemic risk in the presence of a deposit insurance system. To verify the mechanism, we use panel data on 247 global banks in 41 countries during the period 2006 to 2015 in an empirical analysis. Our article finds that a high degree of information disclosure can reduce deposit insurance premiums and weaken the negative incentive from a bailout by regulatory authorities. Moreover, the effect of deposit insurance on financial stability is not apparent, but the synergistic effect of deposit insurance and information disclosure reduces bank systemic risk. Furthermore, different deposit insurance designs affect bank behavior, so it is crucial for bank supervisors to create proper deposit insurance systems, which are helpful in strengthening market discipline and preventing moral hazard thus contributing to a stable financial environment. Therefore, under the deposit insurance system, regulatory authorities should strive to improve the standard of information disclosure to ensure systemic stability.     

Does IFRS Mandatory Adoption Affect Information Asymmetry in the Stock Market?

The purpose of International Financial Reporting Standards (IFRS), adopted mandatorily by European listed firms in 2005, is to increase the transparency and the comparability of accounting information, which should have led to improvements in these firms’ information environments. This study uses market microstructure proxies for information asymmetry to examine the effects of IFRS adoption on the level of information asymmetry in the Spanish stock market. Therefore, we consider a setting with substantial differences between local standards – Spanish Accounting Standards (SAS) ? and IFRS and where the level of enforcement is low. By controlling for conventional determinants of information asymmetry and firms’ characteristics that influence their information environments, we find a reduction of information asymmetry after IFRS adoption. Our findings suggest that the mandatory switch from local accounting standards to IFRS conveys benefits to the market, even when the enforcement level is not strong.     

How Does Being Public Affect Firm Investment? Further Evidence from China

What role does the stock market play in the allocation of capital? Few studies have examined how being public affects firm investment in emerging markets. This study fills this gap by comparing investment behavior in public and private Chinese firms over the period 2004–2010. We find an overall improved capital allocation of public firms relative to private firms in China. By disentangling the financial constraints effect from the agency effect, we show that public firms are less likely to underinvest when there is cash flow insufficiency and more likely to overinvest when there is free cash flow. We conclude that both effects coexist and that whether or not being public improves investment behavior depends on the net effect of loosening financial constraints and worsening agency conflicts. Further examination shows that financial information plays a limited role in these effects, implying that the association between being public and firm investment may not be attributed to information asymmetry but, rather, institutional arrangement in China.     

How Does Cross‐Border Activity Affect EU Banking Markets?

Cross‐border activity in the EU is widely viewed as a necessary condition for the implementation of a single banking market and therefore as a positive factor for the enhancement of competition and cost performance in the region. In this paper, we analyse the relevance of this view by investigating whether cross‐border activity really promotes competition and cost efficiency in EU banking markets. We also consider the potential role of a bank's mode of entry by comparing existing domestic banks that foreign banks take over (mergers and acquisitions) with new branches created by foreign banks, often through subsidiaries (greenfield operations). We consider the impact of cross‐border banks on cost efficiency (measured by the stochastic frontier approach), profitability (assessed through return on assets) and competition (measured by the Lerner index). We find that greenfield banks enhance cost efficiency and competition, while mergers and acquisitions hamper competition and cost efficiency. Therefore, our results suggest that EU authorities should promote only greenfield banks rather than all cross‐border entries.     

Does Going Public Affect Innovation?

This paper investigates the effects of going public on innovation by comparing the innovation activity of firms that go public with firms that withdraw their initial public offering (IPO) filing and remain private. NASDAQ fluctuations during the book‐building phase are used as an instrument for IPO completion. Using patent‐based metrics, I find that the quality of internal innovation declines following the IPO, and firms experience both an exodus of skilled inventors and a decline in the productivity of the remaining inventors. However, public firms attract new human capital and acquire external innovation. The analysis reveals that going public changes firms' strategies in pursuing innovation.     

Does Competition Affect Bank Risk?

Although policymakers often discuss trade-offs between bank competition and stability, past research provides differing theoretical perspectives and empirical results on the impact of competition on risk. We employ a new approach for identifying exogenous changes in the competitive pressures facing individual banks and discover that an intensification of competition materially boosts bank risk. With respect to the mechanisms, we find that competition reduces banks’ profits, pricing power, and charter values and increases banks’ provision of nontraditional, riskier banking services and lending to riskier firms.     

How Does Investor Sentiment Affect Stock Market Crises? Evidence from Panel Data

We test the impact of investor sentiment on a panel of international stock markets. Specifically, we examine the influence of investor sentiment on the probability of stock market crises. We find that investor sentiment increases the probability of occurrence of stock market crises within a one‐year horizon. The impact of investor sentiment on stock markets is more pronounced in countries that are culturally more prone to herd‐like behavior, overreaction and low institutional involvement.     

How Does the Change in Investor Sentiment over Time Affect Stock Returns?

We examine how the change in investor sentiment (IS) over time (the IS trend) affects stock returns. The turnover rates of trading shares, trading value, and transactions, three market measures of trading activity, have been demonstrated to meet the psychometric criteria for measuring the IS trend. The ratio of market price to book value and the short-selling turnover ratio are inappropriate proxies. The empirical results indicate that the influence of the IS trend on returns depends on the direction of the trend (optimistic or pessimistic) and stock characteristics of individual holdings and on arbitrage constraint. The effectiveness of arbitrage, sentiment-driven mispricing, and market intervention are discussed.     

Does Investor Sentiment Affect Earnings Management?

I hypothesize and find that earnings management via accruals is driven partially by the prevailing market‐wide investor sentiment. Managers inflate earnings in periods of higher sentiment, but report more conservatively during periods of low sentiment. Moreover, the likelihood of income‐increasing earnings management to avoid negative earnings surprises is also positively associated with investor sentiment. These results are robust to: (i) controls for time‐varying firm characteristics such as growth, investment opportunity sets, future profitability, leverage and size; (ii) macroeconomic variables such as future inflation, GDP growth, and growth in industrial production; (iii) multiple proxies for investor sentiment; and (iv) discretionary revenues as alternative measure of earnings management. Cross‐sectional analyses reveal that firms whose stock returns co‐move more with investor sentiment are more (less) likely to manage earnings upward via abnormal accruals in quarters of higher (lower) sentiment. The findings of managers’ strategic use of abnormal accruals show the need for increased attention from boards of directors, auditors and regulators to heightened managerial incentives to overstate earnings and to report optimistic earnings numbers during periods of high investor sentiment.     

How Does Financial‐Reporting Regulation Affect Industry‐Wide Resource Allocation?

This paper examines the impact of mandatory reporting and auditing of firms’ financial statements on industry‐wide resource allocation. Using threshold‐induced variation in the share of mandated firms in a given industry, I document that reporting mandates facilitate ownership dispersion in capital markets and spur competition in product markets. I, however, do not find that reporting mandates unambiguously improve the efficiency of industry‐wide resource allocation. With respect to auditing mandates, I find only that they impose a fixed cost on firms, deterring smaller entrants.     

Where,When, and by How Much Does Abnormal Weather Affect Housing Construction?

This article investigates whether departures from normal in precipitation or temperature have a significant contemporaneous effect on housing starts in each month of the year, for the nation as a whole and in each of the four Census regions. It also evaluates the extent to which these immediate effects are reversed in later months. The results indicate that atypical weather has statistically significant effects on the change in housing starts that are concentrated in the months of the first quarter and that the magnitude of these effects is quite substantial. However, such effects also are found in some other months as well. Significant lagged effects are found that tend to offset the contemporaneous effects of weather deviations.