Economic policy uncertainty and bank earnings opacity

Using a sample of U.S. banks and an index for economic policy uncertainty developed by Baker et al. (2016), we investigate whether economic policy uncertainty is systematically related to bank earnings opacity. When economic policy is relatively uncertain, it is easier for bank managers to distort financial information, as unpredictable economic policy changes make assessing the existence and impact of hidden “adverse news” more difficult for investors and creditors. Economic policy uncertainty also increases the fluctuation in banks’ earnings and cash flows, thus providing additional incentives and opportunities for bank managers to engage in earnings management. Our results show that uncertainty in economic policy is positively related to earnings opacity, proxied by the magnitude of discretionary loan loss provisions and the likelihood of just meeting or beating the prior year’s earnings, and negatively related to the level of accounting conservatism (i.e., the timeliness of recognition of bad news relative to good news). Collectively, our results suggest that economic policy uncertainty leads to greater earnings opacity. We also find that the impact of economic policy uncertainty on financial reporting distortion is less pronounced for stronger banks (i.e., banks with high capital ratios).     

Internal control effectiveness,textual risk disclosure,and their usefulness: U.S. evidence

This paper investigates the impact of internal control effectiveness (ICE) on the level of textual risk disclosure (TRD; including aggregate risk disclosure and its tone of good news and bad news about risk). Our findings suggest that firms with an ineffective internal control system exhibit significantly lower levels of TRD than firms with effective internal controls. Besides, we show a significant change in TRD behavior provided by managers of firms with recurrent ineffective internal controls. Pursuant to agency theory, this behavior change is prompted to reduce the expected public uncertainty and agency problems. We also investigate the usefulness of ICE reporting and TRD to the market. Results suggest that firms reporting ineffective internal controls are likely to have higher investor-perceived risk than firms reporting effective internal controls. Furthermore, TRD improves firms' market liquidity, and such improvement is principally driven by good news rather than bad news about risk. Collectively, our results fill an apparent gap in the literature on the importance of ICE, as well as the usefulness of the external auditor's attestation on a firm's internal controls and management TRD.     

媒体记者与公司管理层沟通提高了新闻报道质量吗?——基于公司调研活动的实证研究

本文以2007-2019年媒体记者参与的上市公司调研活动作为研究对象,实证检验了媒体记者与公司管理层直接沟通对媒体报道质量的影响。实证结果表明,调研媒体的报道语气整体更加乐观,集中体现在公司公布坏消息的情形之下。此外,仅当公司公布好消息时调研媒体的报道信息含量更高,而当公司公布坏消息时调研媒体的报道信息含量与非调研媒体没有显著差别。以上结果表明,媒体记者同管理层沟通后信息的阐述方式视调研所获取信息的性质而有所不同。进一步研究发现,分析师、机构投资者或者记者同行的共同参与,以及良好的公司信息环境能够帮助调研媒体改善新闻报道质量。参与公司调研是媒体维持和拓展经济业务的重要途径。在使用处理效应模型纠正变量自选择偏差及一系列其他稳健性检验之后,研究结论仍然成立。本文为媒体记者和上市公司管理层直接沟通所带来的经济后果提供了经验证据。     

Beyond Financial Reporting An Integrated Approach to Disclosure

A company's market value is a key determinant of its future success, affecting its ability to raise capital, recruit and retain key employees, and make strategic acquisitions. Confident, well‐informed investors are necessary for achieving and maintaining accurate valuation of a company's stock. But standard disclosure practice has left many companies releasing a great deal of data while conveying only limited understanding to outsiders. This article presents the outline of an integrated approach to corporate disclosure in which each of the three major elements–required financial reports, supplemental disclosure, and interactions with investors and intermediaries–are consistent and mutually reinforcing. Such an approach begins with required reports that refiect as closely as possible the economic reality of a company's business. But if GAAP income statements and balance sheets are often useful for communicating current and past performance, they are not designed to convey management's strategic vision and the company's prospects for creating value. To achieve and maintain accurate valuation, management must supplement mandated financial reporting with voluntary communication that highlights value drivers and helps investors understand both the company's strategic goals and management's progress in meeting those goals. Finally, management must interact with investors and capital market intermediaries in ways that provide them with a clear and compelling picture of the company's prospects, which should help both analysts and institutional investors become more effective monitors of the firm's performance. Through consistent communication that goes well beyond the sell side's focus on quarterly earnings per share, management will discover that it has the power to set the agenda for how the company's performance is evaluated by the market. In the process, companies are also likely to find that their investors (and analysts) are more patient than they thought, while their operating managers feel less pressure to take shortsighted steps to boost EPS. Both of these expected benefits of an integrated disclosure policy should end up increasing a company's value.     

Audit opinion improvement and the timing of disclosure

Companies have been found to report positive information more quickly than they report negative information (i.e., good news early, bad news late). This paper investigates the potential impact of audit opinion change on the timeliness of financial disclosures, with improvements in audit opinion considered to be “good news.” We take both the direction and the magnitude of audit opinion change into consideration, with magnitude measuring how far the opinion is from an unqualified opinion (i.e., an unqualified opinion with explanatory paragraph is closer to an unqualified opinion than a qualified opinion is). We find that firms experiencing an improvement in their audit opinions disclose their financial results earlier, while those with audit opinion deteriorations report their financial results later, and that these effects were related to the magnitude of the opinion change. What's more, there is an asymmetric response to good audit opinion news vs. bad audit opinion news, with bad audit opinion news having a larger effect on earnings timeliness than the effect on earnings timeliness of good audit opinion news. Overall, our results support the “good news early, bad news late” notion. Finally, we also find that overall earnings timeliness has improved in China since the enactment of new reporting regulations in 2006.     

中国上市公司年度报告披露及时性实证研究

年度报告作为投资者决策的重要信息源之一,其及时性受到了监管部门和市场研究者的关注。本文通过对中国上市公司1993～2003年间公布的8294份年度报告披露时间进行多元回归分析,发现除盈利公司比亏损公司更及时地公布其年度报告外,标准无保留审计意见公司也较非标准无保留意见的公司更及时地披露其年度报告,证实了中国股票市场存在“好消息早,坏消息晚”披露的基本规律。而且,随着时间推移,我国上市公司年报披露的及时性在逐步提高。     

中央银行透明化政策与宏观经济稳定

在通胀预期管理背景下,构建中国2001~2013年中央银行信息交流指数,考量中央银行透明化政策影响宏观经济稳定机制。结果表明,央行增加信息交流有利于宏观经济稳定,某些情况下甚至超过实际干预的效果。因此,我国央行应进一步提高货币政策透明度并培育规范的中央银行信息交流机制。     

Distress Risk,Growth and Earnings Quality

We extend and complement prior work by investigating the earnings quality of firms with different financial health characteristics and growth prospects. By using three alternative measures of default likelihood and two alternative measures of growth options, without being limited to a specific event, we provide a more comprehensive setup for analysing the earnings characteristics of the universe of firms than examining distressed firms with persistent losses, dividend reductions or bankruptcy‐filings. Our dataset consists of 15,049 healthy U.S. firms over the period 1990–2004. Results show that the relation between earnings quality and financial health is not monotonic. Distressed firms have a low level of earnings timeliness for bad news and a high level for good news, and manage earnings toward a positive target more frequently than healthy firms. On the other hand, healthy firms have a high level of earnings timeliness for bad news. Growth aspects play an important role in a firm's ability to manage earnings. In contrast to the findings of prior studies, growth firms have greater earnings timeliness for bad news, whereas value firms manage earnings toward a positive target more frequently than growth firms.     

Central bank communication and exchange rate volatility: a GARCH analysis

We examine the effects of the Czech National Bank communication, macroeconomic news and interest rate differential on exchange rate volatility using generalized autoregressive conditional heteroscedasticity model. Our results suggest that central bank communication has a calming effect on exchange rate volatility. The timing of central bank communication seems to matter, too, as financial markets respond more to the communication before the policy meetings than after them. Next, macroeconomic news releases are found to reduce exchange rate volatility, while interest rate differential seems to increase it.     

To Be or Not Be …'Too Late': The Case of the Belgian Semi-annual Earnings Announcements

In this study, we demonstrate that the average reporting lag of Belgian interim reports is large but has decreased slightly over the years 1991–1998. Contrary to US findings, we show that the disclosure of interim reports containing bad (good) news is not systematically delayed (speeded up). Interim reports are value relevant since good (bad) news, according to a naïve earnings expectations model, induces positive (negative) abnormal returns. The 'short term' timeliness of the information disclosure, however, seems not to matter at all.     

央行货币政策报告文本信息、宏观经济与股票市场

本文利用金融情感词典和文本分析技术,分析中国人民银行货币政策执行报告的文本情绪、文本相似度和文本可读性等多维文本信息,刻画央行货币政策执行报告的文本特征,探究货币政策报告的文本信息与宏观经济和股票市场的关系。实证研究发现,货币政策报告的文本情绪的改善会引起显著为正的股票市场价格反应,报告文本相似度的增加会引起股票市场波动性的显著降低,报告可读性对公布后股票市场的波动性影响不显著。货币政策报告文本情绪还与诸多宏观经济指标显著相关。进一步研究发现,引起股票市场显著反应的是报告文本情绪中反映货币政策指引的部分,而反映宏观经济历史状态的部分对股票市场的影响不显著。本文从文本大数据分析角度证明了我国央行沟通的有效性,对国内央行沟通相关研究形成了有益补充。     

Financial reporting and corporate political connections: An analytical model of interactions

We analyze the interactions between accounting institutions and corporate political connections (CPCs). We present a model where a costly policy depends on the perceived economic condition of a firm. This policy and the valuation of the firm by capital market participants create incentives for the firm to manipulate its financial reports. A politician has some discretion over the policy and can use it to favor a connected firm. Our analysis reveals that the firm’s financial reporting is determined by the interplay of an accounting standard, enforcement strictness, and the salience of the policy for the firm. The possibility to manipulate the financial reports imposes an upper boundary on the value of political connectedness which does not exist if only truthful reporting is possible. The reason is that a low credibility of reported figures leads only to a weak revision of the policy. In general, the value of CPCs is highest when the financial reporting regime evenly splits between firms in good and bad economic condition. Our analysis further suggests that while connected firms generally report being in good condition more often than non-connected firms do, the effect of CPCs on absolute reporting manipulation depends on policy salience. If policy salience is low, connected firms exhibit a higher absolute degree of manipulation than non-connected firms do; the opposite holds if policy salience is high.     

On the Value Relevance of Asymmetric Financial Reporting Policies

This paper considers an overlapping generations model where investors trade in a firm's stock. Investment risk is partly determined by the volatility of the stock price at which current investors can sell their shares to the next generation of investors. It is shown that asymmetric reporting of good and bad news is value relevant as it affects the allocation of risk among future generations of shareholders.     

Do analysts affect bad news timeliness?

I investigate the effect of analysts on the speed with which bad news is reflected in earnings. Intuitively, the more analysts that cover a firm, the more costly it will be for the firm to keep bad news suppressed. Thus, analyst coverage should positively affect bad news timeliness (BNT) (but not necessarily the differential timeliness of bad news over good news, or conditional conservatism). Using brokerage house mergers as a natural experiment with a difference-in-differences design, I find that an exogenous decrease in analyst coverage decreases BNT; that is, analysts positively affect BNT. The decrease in BNT is robust to controlling for unobserved firm heterogeneity, using a propensity score matched sample, persists for up to three years after the brokerage house merger, and is stronger for firms with relatively low analyst coverage before the merger. The result improves our understanding of how analysts affect a firm's information environment.     

To believe or not to believe

This paper explains how the actions of skeptical traders can make manipulable earnings reports informative. Our model consists of a price-maximizing manager who chooses a cheap talk report, a profit-maximizing trader who may then seek costly information, and competitive market makers. Since the manager can influence the trader's information acquisition decision, the manager may choose to reveal even bad news to decrease the impact of order flows on prices. The paper provides foundations for treating positive and negative earnings surprises as good news and bad news respectively, even when external auditing cannot constrain opportunistic managers. Testable implications are derived.     

Waiting and following: Within-industry herding behavior in annual report disclosure

Using the unique scheduled disclosure system for annual reports in China’s stock market, we examine within-industry herding behavior in annual report timing. The results reveal the waiting and following behavior strategies used in the annual reporting process within industry. Firms that originally schedule an early (late) disclosure date within their industry are more likely to reschedule to a later (earlier) date. Informational pressure is the dominant mechanism underlying herding in annual reporting, and capital market reputation incentives mainly induce the herding of bad news. Further analysis shows that delaying disclosure via the waiting strategy reduces the future occurrence of restatements, whereas bringing forward disclosure does not change the propensity of future restatements. Overall, we enrich the limited empirical studies on sequential mandatory disclosure decisions within industry.     

Does the stock market reward innovation? European stock index reaction to negative news during the global financial crisis

This study uses data on 27 European stock indices over the period from January 2007 to December 2012 to investigate the relationship between innovations and the market reaction to negative news during the financial crisis. We use the bivariate BEKK-GARCH approach to estimate time-varying betas and abnormal returns. We show that index prices of countries in the high (low) innovation groups experience significantly positive (negative) abnormal returns on and following the negative news announcement dates. We also find that index beta changes following the arrival of bad news is negatively associated with a country's innovativeness. This finding suggests that innovations promote economic stability and enhance investors' confidence in a country's ability to cope during difficult times. Thus, policy makers who are concerned with sustainable growth should encourage R&D investments by adopting effective policies and avoid unnecessary cuts in R&D expenditures even during times of crisis. A study of the pre-crisis period from January 2001 to December 2006, using the same methods, indicates that investors value innovation more during difficult times.     

RBA monetary policy communication: The response of Australian interest rate futures to changes in RBA monetary policy

This paper examines the Australian interest rate futures market reaction to changes in Reserve Bank of Australia (RBA) monetary policy. Having determined market expectations from 30-day Interbank futures, the study finds evidence that interest rate futures react strongly to target rate announcements across the maturity spectrum, with a stronger reaction evident in short maturity futures. Further, there is evidence of an asymmetric news effect whereby volatility reacts more strongly to bad news. Disaggregation of the market reaction into target- and path-surprise factors demonstrates that the change in market expectations of future target rates plays a significant role in explaining changes in yield, particularly for bond futures. There is strong evidence that monetary policy statements drive the path-factor, while the December 2007 modification in policy communication has improved the ability of the RBA to influence market expectations.     

Stock price crash risk and internal control weakness: presence vs. disclosure effect

This study examines the stock price crash risk for a sample of firms that disclosed internal control weaknesses (ICW) under Section 404 of the Sarbanes‐Oxley Act (SOX). We find that in the year prior to the initial disclosures, ICW firms are more crash‐prone than firms with effective internal controls. This positive relation is more pronounced when weakness problems are associated with a firm's financial reporting process. More importantly, we find that stock price crash risk reduces significantly after the disclosures of ICWs, despite the disclosure itself signalling bad news. The above results hold after controlling for various firm‐specific determinants of crash risk and ICWs. Using an ICW disclosure as a natural experiment, our study attempts to isolate the presence effect of undisclosed ICWs from the initial disclosure effect of internal control weakness on stock price crash risk. In so doing, we provide more direct evidence on the causal relation between the quality of financial reporting and stock price crash risk.     

Financial Reporting and Supplemental Voluntary Disclosures

A standard result in the voluntary disclosure literature is that when the manager's private information is a signal correlated with the firm's liquidation value, mandatory disclosures substitute for voluntary disclosures. In this paper, we assume that the manager's private information complements the mandatory disclosure and show that the content and likelihood of a voluntary disclosure depend on whether the mandatory reports contain good or bad news. This different information asymmetry produces new, testable implications regarding the probability of and market reaction to voluntary disclosures. We also show that changes in mandatory disclosure regulations can have unintended consequences due to their effects on the manager's willingness to voluntarily provide supplemental disclosures.