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Essays on the Outcomes, Incentives, and Regulations of Disclosure
Date of Award
Olin Business School
Doctor of Philosophy (PhD)
My dissertation examines the outcomes, incentives, and regulations surrounding the voluntary and mandatory disclosure of information by public firms. It contains three chapters.
Using earnings conference calls as a prevalent setting to examine voluntary disclosure incentives and outcomes, Chapter 1 examines the market response to firms' scripting answers to questions they expect to receive during the question and answer (Q&A) session of the conference call. I hypothesize that firms script their Q&A responses when future performance is poor to avoid disclosing information that can be used in litigation against the firm or as a means of withholding bad news from investors. I develop a measure of Q&A scripting and find evidence that investors react negatively to scripted Q&A. I also find negative returns in the quarter following scripted Q&A suggesting that investors do not fully incorporate the negative signal into the stock price at the time of the conference call. Lastly, I provide evidence of a negative association between Q&A scripting and unexpected earnings for the two quarters following the conference call, suggesting that the negative reaction to scripted calls is warranted given the realization of negative future outcomes.
Chapter 2 then focuses on the incentives for firms to provide disclosures prior to raising capital in seasoned equity offerings. Seasoned equity offerings involve significant information asymmetry between the firm and potential investors. Firms can reduce information asymmetry and the cost of obtaining financing by disclosing detailed plans for how the offering proceeds will be used to generate a return for investors. However, disclosure of forward-looking strategic information is costly. A policy of full disclosure can allow competitors to obtain and use proprietary information to the detriment of the firm or can preclude investors from investing in the offering if they disagree with the chosen strategy of the manager. I argue that managers are likely to disclose only if the expected benefits of disclosure outweigh the expected costs. I expect the benefits of disclosure are the lowest for high-ability managers. High-ability managers can credibly convey firm value at the offering date and enjoy lower levels of information asymmetry. Low-ability managers, on the other hand, cannot credibly convey the value of the offering resulting in high levels of information asymmetry at the time of the offering. I provide evidence that low-ability managers are more likely to disclose plans for the offering proceeds than high-ability managers to reduce information asymmetry and the cost of obtaining funds.
Finally, Chapter 3 examines the effect of regulation on the disclosure and reporting decisions of banking institutions. All public firms, including banks, must register their securities with the Securities and Exchange Commission (SEC) if they meet certain thresholds. Registered firms must disclose financial information and adhere to strict reporting requirements. These firms are also subject to regulations such as the Sarbanes Oxley Act, which requires costly attestation of the adequacy of the firm's internal controls. In 2012, the Jumpstart Our Business Startups (JOBS) Act loosened the requirements for banks to register with the SEC. The JOBS Act raised the previous registration threshold of 300 shareholders of record to 1,200 shareholders of record, allowing banks with between 300 and 1,200 shareholders of record the opportunity to deregister their securities without incurring the costs of reducing their shareholders of record to be below the prior threshold. Within the first six months following the JOBS Act, 89 banks deregistered from the SEC, which is large given that only 142 banks deregistered over the ten years prior to the Act. We hypothesize that banks deregister to take advantage of private benefits of control. We find that banks deregistering after the Act have significantly lower institutional ownership, more insider trading and insider loans, and do not display significantly lower asset growth. In contrast to positive returns during pre-JOBS Act deregistration announcements, announcement returns for post-JOBS Act deregistrations are insignificant. By reducing the costs of deregistration, the Act likely allowed banks to capture private benefits while increasing the attractiveness of deregistration for higher growth banks.
Chair and Committee
Jared Jennings, Xiumin Martin, John Nachbar, Anjan Thakor
Lee, Joshua Alan, "Essays on the Outcomes, Incentives, and Regulations of Disclosure" (2014). Arts & Sciences Electronic Theses and Dissertations. 256.