How Does Soft Information Affect External Firm Financing? Evidence from Online Employee Ratings
72 Pages Posted: 12 Jan 2020
Date Written: December 16, 2019
We analyze the effects of equity market investors having access to soft information, such as online employee ratings of firms, on their external financing and investment policies. We develop testable hypotheses using a theoretical framework in which the insiders of a firm have private information about its intrinsic value, but where outsiders have access to soft information signals imperfectly correlated with this intrinsic firm value. We test these hypotheses using a large sample of around 1.1 million employee ratings from the Glassdoor website covering a sample of 2842 public firms during 2008 to 2017. We find that firms with higher average online employee rating realizations are associated with algebraically greater abnormal stock returns upon an equity issue announcement; a greater propensity to have positive abnormal stock returns upon such an announcement; a greater propensity to issue equity rather than debt to raise external financing; higher annual investment expenditures; greater participation by institutional investors in their seasoned equity offerings (SEOs); and better long-run post-SEO operating performance. Our identification strategy makes use of a difference-in-differences (DID) methodology relying on the staggered implementation of laws protecting the First Amendment Rights of citizens (anti-SLAPP laws) across US states.
Keywords: Seasoned Equity Offerings (SEOs); Soft Information; Online Employee Ratings; Information Environment; Big Data
JEL Classification: G32; G23; G24
Suggested Citation: Suggested Citation