Essays on the Role of Accounting Information in Governance and Valuation
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AbstractMy dissertation is focused on understanding how firm-level accounting information affects resource allocation in capital markets, by : (1) interacting with mechanisms through which investors govern managers and (2) facilitating investment decisions. To this end, I use both analytical, and empirical methods, using both international and US data.
In the first essay I study shareholder activism, which is arguably the most salient corporate governance mechanism, currently. In particular, I examine the interaction of managerial incentives and reported performance, in the context of this phenomenon. I document that reporting better accounting performance at the onset of an activism campaign is associated with a lower likelihood of proxy fights and board turnover for target firms. Consequently managers, facing a threat to their control and careers, take actions to boost short-term earnings. Proxies of earnings management are significantly higher for target firms in the quarter following the launch of activism. Cross-sectional and time-series evidence suggests that this is driven by managers responding to the pressure of an activism campaign. Furthermore, target firms, which manage earnings, underperform over the next year, suggesting that the evidence is more consistent with costly short-term earnings management than improvement in operational efficiency due to activism.
In the second essay, co-authored with Matthew Lyle and Charles Wang, we attempt to make progress in establishing a standard for estimating firm-level expected returns. Consistent with existing work, we show that under fairly general and economically motivated assumptions, expected stock returns can be expressed as a linear combination of two firm-level characteristics --- book-to-market (value) and profitability. More interestingly, we show that empirical estimates based on this relation predict the cross-section of out-of-sample returns in 26 of 29 international equity markets. In sharp contrast, we find that firm-level estimates based on standard factor-models fail to exhibit any systematic predictive power internationally. We also show, both analytically and empirically that the importance of profitability in forecasting returns depends on the quality of information disclosed to investors.
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