Analyst forecast characteristics and the cost of debt

We examine the relation between analyst forecast characteristics and the cost of debt financing. Consistent with the view that the information contained in analysts’ forecasts is economically significant across asset classes, we find that analyst activity reduces bond yield spreads. We also find that the economic impact of analysts is most pronounced when uncertainty about firm value is highest (that is, when firms have high idiosyncratic risk). Our findings are robust to controls for private information in equity prices and level of corporate disclosures. Overall, the results indicate that the information contained in analyst forecasts is valued outside the equity market and provide an additional channel in which better information is associated with a lower cost of capital.     

Corporate governance and the information environment: Evidence from Chinese stock markets

This article explores the relationship between corporate governance and the information environment in Chinese stock markets. We construct a parsimonious governance measure for public firms using a 2003 through 2011 sample period. We use four indicators to proxy for the information environment: analyst following, analyst forecast accuracy, analyst forecast dispersion, and price timeliness. We find that better governed firms tend to be associated with larger analyst followings and more informative forecasts. We also find that better governed firms tend to improve on the timeliness of bad news relative to good news.     

The Effect of the Private Securities Litigation Reform Act on Analyst Forecast Properties: The Impact of Firm Size and Growth Opportunities

Abstract:  We provide evidence that the effect of the Private Securities Litigation Reform Act (the Act) of 1995 on analyst forecast properties is conditional on firm size and growth opportunities. We show that analyst coverage, frequency of forecast revisions, forecast errors and dispersion after the Act decreased for large firms and for firms with low growth opportunities but increased for small firms and for firms with high growth opportunities. These results are consistent with the hypothesis that the Act results in additional high quality disclosures in large firms, which face higher litigation risk and tighter scrutiny from investors but not in smaller firms. Our findings of increases in analyst coverage and revision but deterioration in accuracy and precision of analyst forecasts for firms with high growth opportunities after the Act suggest that in spite of increased corporate disclosures, the information environment for analysts deteriorated in those firms.     

Corporate Governance,Companies’ Disclosure Practices and Market Transparency: A Cross Country Study

We examine the link between corporate governance, companies’ disclosure practices and their equity market transparency in a study of more than 5,000 listed companies in 23 countries covering the period 1 January 2003 to 31 December 2008. Our results confirm the belief that better‐governed firms make more frequent disclosures to the market. We also find greater disclosure in common law relative to code law countries. However firms with better governance in both code and common law countries make more frequent disclosures. We measure market transparency by the timeliness of prices. In contrast to single country studies, results show, for the 23 countries collectively, better corporate governance is associated with less timely share prices. This would suggest that a firm substitutes better corporate governance for transparency. We are thus led to the conclusion that even if information is disclosed more frequently by better‐governed firms, it does not necessarily follow that information is reflected in share prices on a timelier basis.     

The association between corporate governance and earnings quality: Further evidence using the GOV-Score

This paper reexamines the relation between corporate governance and quality of earnings using a summary governance measure. Prior research has used many surrogates for corporate governance including size and composition of board of directors, existence and composition of audit committee, and extent of institutional ownership. However, the criticism of the extant research has been that corporate governance comprises many facets and is not uni-dimensional. In this study we fill this void by using the Gov-Score developed by Brown and Caylor [Brown, D., and Caylor, M.L., (2006). Corporate governance and firm valuation. Journal of Accounting and Public Policy 25, 409-434.] to measure corporate governance. In the post-Sarbanes-Oxley period, we find evidence of a significant inverse relationship, namely higher levels of corporate governance are associated with lower absolute discretionary accruals and higher quality of earnings. Furthermore, our results suggest that only firms in the highest category of corporate governance experience significantly improved quality of earnings. Finally, as a test of robustness, we document that corporate governance is negatively associated with small earnings surprises. This implies that firms with weak corporate governance are more likely to manage earnings in order to meet or beat analyst forecasts.     

The association between employee stock option disclosures and corporate governance: Evidence from an enhanced disclosure regime

This study examines the role of corporate governance in employee stock option (ESO) disclosures following the revision of AASB 1028 Employee Benefits in 2001. We find that, while firms do not fully comply with AASB 1028 ESO disclosures, they voluntarily provide other ESO disclosures. In relation to corporate governance measures that have a role in the financial reporting process, we find two corporate governance measures dominate our results—the quality of auditor and duality of the role of CEO and Chair of the Board of Directors. We show that, in general, external auditor quality has positive incremental association with both mandatory and voluntary ESO disclosures while the dual role of CEO and chairperson of the board is associated with lower levels of mandatory disclosure.     

Disclosure of internal control material weaknesses and optimism in analyst earnings forecasts

This paper investigates how analyst forecast optimism is associated with disclosures of internal control material weaknesses (ICMWs) and their remediation under Section 404 of the Sarbanes–Oxley Act (SOX). Drawing on agency theory, I hypothesize that analysts are likely to issue earnings forecasts that are more optimistic for firms with ICMW disclosures than for those without ICMW disclosures. Using a sample of 20,875 firm-year observations with 10-K (10-Q) reports from 2004 to 2018, I find a positive association between ICMW disclosures and analyst forecast optimism. This positive association is partially driven by investors’ inability to unravel analyst forecast bias and analysts’ intentions to curry favor with management for private information. In addition, analysts are found to issue less optimistic forecasts for firms with ICMW remediation disclosures compared with those without ICMW remediation disclosures. A series of propensity score matching and regression analyses are conducted to test the robustness of my inferences. Overall, the paper suggests that analysts have incentives to take the opportunity of firms disclosing ICMWs to bias their forecasts upward for self-interest. The findings have the potential to assist regulators in guiding analyst behavior and educating investors to unravel positive bias in analyst forecasts.     

Does corporate governance transparency affect the accuracy of analyst forecasts?

Using country‐level proxies for corporate governance transparency, this paper investigates how differences in transparency across 21 countries affect the average forecast accuracy of analysts for the country's firms. The association between financial transparency and analyst forecast accuracy has been well documented in previous published literature; however, the association between governance transparency and analyst forecast accuracy remains unexplored. Using the two distinct country‐level factors isolated by Bushman et al. (2004 ), governance transparency and financial transparency, we investigate whether corporate governance information impacts on the accuracy of earnings forecasts over and above financial information. We document that governance transparency is positively associated with analyst forecast accuracy after controlling for financial transparency and other variables. Furthermore, our results suggest that governance‐related disclosure plays a bigger role in improving the information environment when financial disclosures are less transparent. Our empirical evidence also suggests that the significance of governance transparency on analyst forecast accuracy is higher when legal enforcement is weak.     

Management Going‐concern Disclosures: Impact of Corporate Governance and Auditor Reputation

The UK regulatory requirements relating to going‐concern disclosures require directors to report on the going‐concern status of their firms. Such directors have incentives not to report fairly in the case of financially‐distressed firms. We expect effective corporate governance mechanisms will encourage directors to report more truthfully in such situations. This paper tests this proposition explicitly using a large sample of going‐concern cases over the period 1994–2000. We find that whereas auditors' going‐concern opinions predict the subsequent resolution of going‐concern uncertainties directors' going‐concern statements convey arbitrary and unhelpful messages to users. However, robust corporate governance structures and high auditor reputation constrain directors to be more truthful in their going‐concern disclosures, bringing these more into line with the more credible auditor opinions.     

Voluntary disclosure of corporate political spending

In this paper, we study voluntary political spending disclosure, a widespread yet relatively unexplored corporate voluntary disclosure practice. Using an index created by the CPA-Zicklin Center that measures the level of voluntary political spending disclosure for S&P 500 firms, we examine firm-level characteristics associated with such disclosures, and their importance. We find that firms with greater political expenditures, direct political connections, higher investor activism, better corporate social responsibility performance and governance, and more industry competition tend to have a higher level of political spending disclosure. We also find that a higher level of political spending disclosure is positively associated with both the number of institutional investors and the proportion of shares owned by institutional investors, particularly socially responsible institutional investors, after controlling for the quality of other disclosures. The level of political spending disclosure is also associated with a higher analyst following, lower forecast error, and smaller forecast dispersion. Finally, we find that political spending disclosure enhances the positive relationship between annual corporate political spending and firm financial performance. Together, these results are consistent with the view that voluntary political spending disclosure helps align managers’ interests with those of shareholders.     

Corporate governance and capital allocations of diversified firms

We examine how various aspects of corporate governance structures affect the capital allocation inefficiency that drives the value discounts of diversified firms. Diversified firms with more effective internal or external governance mechanisms experience more efficient investment allocations at both the firm and segment levels and show less of a diversification discount. The efficiency of the investment allocation process is better for diversified firms with high board independence, low board busyness, high institutional ownership, high outside director ownership, high CEO equity-based pay, high audit quality, and strong shareholder rights. The results hold after controlling for other potential influences. Our evidence suggests that corporate governance considerations are important in assessing the relation between investment efficiency and firm value for diversified firms.     

Continuous disclosure compliance: does corporate governance matter?

Our study investigates the quality of firms’ continuous disclosure compliance during mandatory continuous disclosure reform, and whether the compliance quality is impacted by corporate governance, using the New Zealand market as the setting. We use a novel coding of different categories of disclosures (non‐routine, non‐procedural and internal), which represents the extent of proprietary insider information inherent in disclosures, to evaluate firms’ compliance quality. Our findings provide evidence that firms’ compliance quality improved after the reform, and this improvement is inconsistently impacted by corporate governance. Our findings provide important implications for regulators in their quest for a superior disclosure regime.     

Do Better‐Governed Australian Firms Make More Informative Disclosures?

Abstract:   We investigate whether and if so, how, corporate governance 'quality' ¹ is related to the information flows from a company and how the share market and its agents respond. Specifically, we study links between the 'quality' of a firm's corporate governance (CGQ) and the informativeness of its disclosures. We employ six indicators of informativeness. They include document counts, properties of analysts' forecasts and a 'timeliness' metric, in the spirit of Ball and Brown (1968) , that reflects the average speed of price discovery throughout the year. Our results suggest the answer to our question is 'Yes': better‐governed firms do make more informative disclosures.     

Management earnings forecasts and other forward-looking statements

We identify forward-looking statements (FLS) in firms’ disclosures to distinguish between “forecast-like” (quantitative statements about earnings) and “other”, or non-forecast-like, FLS.  We show that, like earnings forecasts, other FLS generate significant investor and analyst responses. Unlike earnings forecasts, other FLS are issued more frequently when uncertainty is higher. We then show that earnings-related FLS are more sensitive to uncertainty than quantitative statements, suggesting that managers are more likely to alter the content than the form of FLS when uncertainty is higher.  Our study indicates that incorporating other FLS into empirical measures provides a more comprehensive proxy for firms’ voluntary disclosures.     

Corporate governance and impression management in annual results press releases

We study the association between corporate governance and impression management in annual results press releases (ARPRs). Press releases constitute a timely vehicle to communicate firm performance to third parties but they can be manipulated to distort readers’ perceptions of corporate achievements. We predict that governance mechanisms actively monitor managerial disclosures, improving firm transparency and thus reducing impression management in ARPRs. The results confirm that strong governance limits impression management, consistent with governance monitoring effectively reducing self-serving disclosures by management. Our evidence suggests that management disclosure practices respond, at least partly, to informative motivations. We also show that strong governance firms are more likely to release an ARPR.     

Credit ratings and disclosure channels

We study the relation between analysts’ ratings of firms’ credit worthiness and ratings of the quality of firms’ (1) annual report disclosures, (2) quarterly and other disclosures, and (3) manager-analyst communications. We find that credit ratings are better for firms with higher rated annual report disclosures. We also find that marked increases in analyst ratings of annual report quality are accompanied by improvements in credit ratings. We find no relation between credit ratings and analysts’ ratings of either quarterly report disclosures or management-analyst communications. Overall, the results suggest that a commitment to better annual report disclosure is related to a lower cost of credit capital.     

Readability of narrative disclosures,and corporate liquidity and payout policies

In this paper, we examine the relation between the readability of narrative disclosures in 10-K reports, and corporate liquidity and payout policies. We find that firms with less readable disclosures hold significantly more cash. We also find that this relationship is stronger for firms with weak corporate governance, and with higher financing constraints and refinancing risks. Further analysis also shows that firms with less readable disclosures pay fewer cash dividends and repurchase less stock. Our findings are robust to different estimation methods, and to alternative specifications of key variables. The findings from this study contribute to the emerging research that stresses the importance of 10-K report readability in protecting shareholder wealth.     

Corporate Governance: Factors Influencing Voluntary Disclosure by Publicly Traded Canadian Firms*

We report on the comprehensiveness of voluntary corporate governance disclosures in the annual reports and management information circulars of Toronto Stock Exchange (TSE) firms. We focus on disclosure of the corporate governance practices implemented by our sample of TSE 300 firms vis‐à‐vis the 14 guidelines set out in the TSE's report on corporate governance Where Were the Directors? Our analysis indicates that only a very few firms disclose that they have fully implemented the TSE guidelines, and that the extent of disclosure of corporate governance practices implemented varies widely among the firms. We then test factors associated with the comprehensiveness of such disclosures and the choice of disclosure medium using simultaneous equations multivariate analysis. We also assess the influence of publicized corporate governance failures on disclosure. Overall, our results suggest that the choices of disclosure medium and the extent of disclosure are made concurrently, and are influenced by the strategic considerations of management.     

Form versus substance: The effect of ownership structure and corporate governance on firm value in Thailand

We examine the relation between the quality of corporate governance practices and firm value for Thai firms, which often have complex ownership structures. We develop a comprehensive measure of corporate governance and show that, in contrast to conventional measures of corporate governance, our measurement, on average, is positively associated with Tobin’s q. Furthermore, we find that q values are lower for firms that exhibit deviations between cash flow rights and voting rights. We also find that the value benefits of complying with “good” corporate governance practices are nullified in the presence of pyramidal ownership structures, raising doubts on the effectiveness of governance measures when ownership structures are not transparent. We conclude that family control of firms through pyramidal ownership structures can allow firms to seemingly comply with preferred governance practices but also use the control to their advantage.     

Social disclosure, financial disclosure and the cost of equity capital

We test the relation between financial and social disclosure and the cost of equity capital for a sample of Canadian firms with year-ends in 1990, 1991 and 1992. We find that, consistent with prior research, the quantity and quality of financial disclosure is negatively related to the cost of equity capital for firms with low analyst following. Contrary to expectations, there is a significant positive relation between social disclosures and the cost of equity capital. This positive relationship is mitigated among firms with better financial performance. We consider some biases in social disclosures that may explain this result. We also note that social disclosures may benefit the firm through its effect on organizational stakeholders other than equity investors.