Essays on the Role of Accounting Information and Governance in Emerging Institutions

Abstract

In these essays, I explore the role of accounting information and governance in emerging institutions. In the first essay, “Credibility of Disclosures in Weak Enforcement Institutions: Evidence from Shanghai-Hong Kong Connect,” I study whether voluntary disclosure can be credible when the enforcement institutions to deter managers from engaging in cheap-talk are weak. Using the case of China, I examine the effect of a market liberalization pilot program’s announcement, which increased foreign investors’ future ability to invest in select Shanghai stocks, on affected firms’ disclosure policies. I find that affected firms did not change public disclosure (press releases and management forecasts), but significantly increased private disclosure (corporate access and private dial-ins) in anticipation of the program’s implementation. Private disclosure increases were concentrated among firms in need of capital and these firms experienced an increase in foreign institutional holdings after the implementation. Further, their stock prices suffered less during a subsequent market crash and they retained more foreign institutional investors. Overall, the results suggest that voluntary disclosure supports investor confidence even in weak environments, albeit through private (instead of public) channels. In the second essay, “Corporate Sustainability: First Evidence on Materiality,” co-authored with Mozaffar Khan and George Serafeim, we develop a novel dataset by hand-mapping sustainability investments classified as material for each industry into firm-specific sustainability ratings using newly available materiality classifications of sustainability topics. This allows us to present new evidence on the value implications of sustainability investments. Using both calendar-time portfolio stock return regressions and firm-level panel regressions, we find that firms with good ratings on material sustainability issues significantly outperform firms with poor ratings on these issues. In contrast, firms with good ratings on immaterial sustainability issues do not significantly outperform firms with poor ratings on the same issues. These results are confirmed when we analyze future changes in accounting performance. The results have implications for asset managers who have committed to the integration of sustainability factors in their capital allocation decisions. In the third essay, “Shareholder Activism on Sustainability Issues,” co-authored with Jody Grewal and George Serafeim, we examine shareholder activism on sustainability issues which has become increasingly prevalent over the years, with the number of proposals filed doubling from 1999 to 2013. We use recent innovations in accounting standard setting to classify 2,665 shareholder proposals that address environmental and social issues as financially material or immaterial, and we analyze how proposals on material versus immaterial issues are related to firms’ subsequent environmental or social performance and market valuation. We find that 42 percent of the shareholder proposals in our sample are filed on financially material issues. We document that filing shareholder proposals are related to subsequent improvements in the performance of the company on the focal environmental or social issue, even though such proposals nearly never received majority support. Improvements occur across both material and immaterial issues. Proposals on immaterial issues are associated with subsequent declines in firm valuation while proposals on material issues are associated with subsequent increases in firm value. We show that managers increase performance on immaterial issues in companies with agency problems, low awareness of the materiality of sustainability issues, or poor performance on material issues.