Essays on managerial response to information shocks

Abstract

In this dissertation, I examine managers’ real decisions in response to exogenous information shocks and resulting changes in external monitoring. In the first chapter I study the impact dissertation I study how incentives provided by rating agencies affect portfolio management decisions of mutual fund managers. I provide causal evidence supporting the incentive effects of Morningstar ratings. I analyze managerial response to impending ratings in the year before a fund gets rated for the first time and find that managers just below the exogenous ratings cutoffs try to improve risk-adjusted returns by decreasing risk relative to managers just above the ratings cutoffs. The reduction in risk is through decreased fund exposure to unsystematic risk. Other ways in which managers alter their funds include an increased fund exposure to growth stocks. The effects are driven by both investor flows and manager career concerns. Managers just below the three and the four-star rating cutoff and those just below the two and the three-star rating cutoff are more likely to reduce risk in the rating year. The effects are also driven by risk-averse managers. My findings suggest that Morningstar ratings can align investor and manager incentives by encouraging managers to focus on risk-adjusted returns. In Chapter 2, co-written with Jody Grewal and Gerardo-Perez Cavazos, I exploit the 2017 introduction of Payment Practices Disclosure Regulation in the United Kingdom to examine the effects of mandating disclosure on customer-supplier payment practices. We find that non-disclosing small and medium-sized enterprises (SMEs) reduce their accounts receivable by 7.0%. Cross-sectional tests indicate that higher expected reputational costs drive large firms to accelerate the payment of their accounts payable. Further, SMEs with stronger competitive positions and lower financial constraints are better able to capture the benefits. We also find evidence suggesting improved financial and competitive positions for small firms: SMEs reduce short-term debt by approximately 1.9% and are awarded an additional 4.5% in government contracts. Lastly, newly disclosed information shows that large firms accelerate payments and increase the fraction of invoices paid within agreed upon terms. In Chapter 3, co-written with Wilbur Chen, we examine the effects of local newspaper closures on information asymmetry between local and nonlocal banks. We find limited evidence of local newspaper closures increasing information asymmetry between local and non-local banks and reducing competition from non-local banks. Cross-sectional tests indicate that adoption of data driven lending technologies by non-local banks reduces local banks’ gains from newspaper closures. Local banks benefit more from local newspaper closures in markets where non-local banks are less likely to adopt data driven lending technologies, in markets where alternative data is less available and in rural markets. In these markets local banks also increase net interest margins, total loans made and share of loans made following a newspaper closure. We also find that the effect of newspaper closures has changed over time. Before the wide-spread usage of data driven lending technologies a local newspaper closure resulted in local banks increasing net interest margins by 3.3% and share of loans made by 2.7%. After widespread adoption of these technologies, local banks benefit less from newspaper closures and we find no increase in net interest margins or share of loans made by these banks.