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Abstract:
This paper identifies a distinct immediate announcement period negative relation between earnings announcement surprises and aggregate market returns. Such a relation implies that market participants use earnings information in forming expectations about expected aggregate discount rates and, specifically, that good earnings news is associated with a positive shock to required returns. We also find some evidence that this negative relation persists well beyond the immediate announcement period, suggesting that market participants do not immediately fully impound these future market return implications of aggregate earnings news.

Earnings, Market Efficiency

Abstract:
A recent analysis by Kothari, Lewellen and Warner(2006) report negative relations between aggregate earnings surprise and market return in quarterly earnings disclosure and reporting periods and no evidence of a positive relation between aggregate earnings and market return in any post-disclosure quarters. In this analysis we develop approaches aimed at better isolating aggregate earning's news component and find strong evidence of a positive relation between aggregate earnings surprise and return in the quarter following the earnings disclosure quarter. This pattern is consistent with the market not fully incorporating discount rate shock and cash flow implications of aggregate earnings in the disclosure period.

Corporate Earnings, Information, Market Efficiency

Abstract:
This study examines the effect of investor sentiment on the accruals anomaly. We find that for small stocks mispricing per unit of accruals is greater in high sentiment periods as compared to low sentiment periods. This result is consistent with the notion that in high sentiment periods individual investors pay less attention towards understanding the accruals and cash flow components of earnings. This effect is observed primarily for small stocks because these stocks are more likely to be followed by individual investors, who tend to have limited attention. We also find that for small stocks reported accruals are greater during high sentiment periods as compared to low sentiment periods, suggesting that managers exploit the greater overvaluation per unit of accruals during high sentiment periods.

Accruals, Mispricing, Investor Sentiment, Accruals Management

Abstract:
When local media report news about local companies, they use fewer negative words compared to the same media reporting about non-local companies. One reason for this result is related to local media advertising expenditures — local media have a more positive slant toward companies that have more local advertising expenditures. Stock market investors do not discount this slant: abnormal positive local media slant strongly relates to firm equity values. A one standard deviation increase in local media slant is associated with a 3.59% increase in firm value on average, and the effect is stronger for small firms, firms held predominantly by individual investors, and firms with illiquid or highly volatile stock, low analyst following, or high dispersion of analyst forecasts.

Media Slant, Location, Media, Advertising, Firm Value

Abstract:
We examine whether FASB-mandated modifications of the consolidation rules (FIN 46 and FIN 46R) resulted in perceptible changes in market participants’ decisions as manifested in a variety of financial indicia. We find that financial analysts’ idiosyncratic precision of information decreased and equity market participants acted as if they perceived higher information risk, as evidenced by reduced earnings response coefficients, in anticipation of the guidance. We attribute these effects to a perceived increase in information risk and decrease in accounting information quality. We find that the actual implementation of the new rules reversed some of these effects. On the other hand, we find that information users that likely had access to information regarding the off-balance-sheet debt structures prior to 2001 did not exhibit a similar reaction to the apparent change in information risk either in anticipation or upon implementation of the new guidance. Specifically, we find that banks did not increase the loan spreads for FIN 46 firms and credit rating agencies lowered the ratings of these firms only marginally more than those of other firms. This finding is consistent with our conjecture that these entities were aware of the fundamentals of FIN 46 firms even under the prior limited disclosure regime. Overall, we conclude that the perceived information risk of firms that have previously structured a part of their operations in separate entities increased significantly with the expected promulgation of accounting guidance requiring them to bring in the previously off-balance-sheet assets, liabilities and results of operations into their financial statements. We interpret these results as evidence that these firms previously were assessed as having lower information risk relative to their peers within the equity market.

Consolidation, FIN 46, FIN 46R, SFAS 167, Variable Interest Entity, Information Risk

Abstract:
When portfolio managers trade the stocks of companies run by people with whom they have social connections, these trades earn better returns than trades in companies with whom they have no connections (Cohen et al., 2008). We look at the effects of social connections from the firm's side, examining the compensation of firm executives. Executive compensation in connected firms is substantially higher than in unconnected firms. The channel through which this result occurs appears to be share voting-connected funds are more likely to vote against shareholder-initiated proposals on executive compensation, thereby protecting their cronies from the discipline of corporate governance. The evidence is consistent with higher compensation being the quid pro quo for information flow from firm to fund.

executive compensation, social connections, share voting

Abstract:
We hypothesize that sell-side debt analysts enhance the efficiency of capital markets in two ways: they produce information and speed up the debt market’s process of incorporating publicly available information. We empirically examine whether debt and equity markets jointly react to debt research reports while controlling for alternative information sources, and whether the debt market lags the equity market less when debt research exists. The evidence supports both hypotheses. Our study adds to a wide body of research investigating the diverse institutional arrangements under which information is produced and disseminated, and its impact on capital markets equilibrium and efficiency.

Financial analysts, Information, Equity markets, Debt markets, Market Efficiency

Abstract:
This paper examines how financial networks influence asset prices and trading performance. Consistent with theoretical studies on the role of communication networks in information dissemination, we posit that financial institutions with more extensive financial networks can more efficiently acquire and process information pertaining to asset trading thus have better trading performance than financial institutions with limited financial networks. Using transaction-level Turkish government bond trading data, we find that financial institutions with global financial networks exhibit a stronger tendency to trade in the more liquid bonds and consistently trade at more favorable prices suggesting that global financial institutions have information advantages. They enjoy better trading performance than local financial institutions on informed trades. The information advantage afforded global financial institutions tends to decline over time suggesting possible learning by local financial institutions as a result of trading with global financial institutions.

Global Financial Networks, Information, Bond

Abstract:
This paper investigates the nature and behavior of the domestic (local) currency market that existed in Florence (Italy) during the late 14th and early 15th centuries (a.k.a. Early Renaissance). We find that the extant volatility and microstructure models developed for modern asset markets are able to describe the statistical volatility properties observed for the denaro-florin exchange rate. Volatility is clustered and is related to the bid-ask spread. This supports the notion that, although there are huge social, industrial and technological differences between capitalism then and now, individuals trading financial assets in an organized venue behave in a similar manner.

Volatility clustering, bid ask spread, Exchange rate, Renaissance

Abstract:
Corporate board members with mass media experience (e.g. Rupert Murdoch) influence the firm’s press coverage. Media coverage increases by more than 10% after hiring media experts. Compared with control firms, firms with a media expert on the board have their good news receive more media coverage. The effect of media experts on asymmetric coverage of performance is more pronounced outside of earnings announcement periods. This suggests that media resist attempts to change their coverage for reputational reasons and/or, in the absence of earnings news, media outlets rely on information sources that are likely to be managed by firms. I show evidence that these firms suffer from an illiquidity discount of 120 to 300 basis points per year after they hire a media expert, consistent with the argument that uncertainty about the lack/abundance of information is uninformative for valuation purposes.

Media, connections, corporate board, liquidity premium