Financial statements

This study examines whether emerging growth company (EGC) investors respond to the annual required internal control disclosures over financial reporting (ICFR). I develop three hypotheses to test across the EGC lifecycle. Specifically, I investigate whether the first year ICFR disclosure, the remediation of a previously reported material weakness ICFR disclosure and the EGC exit are associated with the firm’s cumulative abnormal return over a three-day event window. Prior literature has observed that ICFR disclosures by management and the ICFR audit opinion can be shown to be informative to investors. However, I am not aware of any study investigating whether the EGC investors respond to this type of information. I find that the reported ICFR disclosures are not associated with cumulative abnormal returns during their initial ICFR report disclosure or upon exit as informative but do respond to the reporting of material weakness remediation.

There has been a strong push for workplace diversity in the United States (U.S.) in recent years. Work teams consisting of employees with diverse backgrounds can augment firms’ competitive advantage. This view is consistent with the cognitive diversity hypothesis, which depicts multiple perspectives generated by cognitive differences among organizational members resulting in creative problem-solving. In this study, I investigate the role of cognitive diversity, measured by differences in a set of seven cultural traits between the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), in shaping firm financial reporting quality. Relying on the upper-echelon theory that executive characteristics affect firm outcomes and the cognitive diversity hypothesis that diversity reduces groupthink, sparks innovation, increases employee retention rate, and builds a positive firm culture, I expect to find a positive relationship between cognitive diversity and financial reporting quality.
In determining firm performance and outcomes, differences in executive demographic characteristics such as age, tenure, gender, and race may have an impact on how executive cognitive perceptions, values, and information sets, shape their decisions and outcomes. Therefore, I then examine the effect of executive demographic diversity on the link between executive cognitive diversity and financial reporting quality. Diversity has received a lot of attention over the last decades, but it is unclear ex ante how different types of diversity interact with each other in shaping firm outcomes. Therefore, I examine but do not hypothesize the direction of the effect of executive demographic diversity on the link between executive cognitive diversity and financial reporting quality.

In essay 1, I investigate the association of place attachment and financial reporting quality. Management characteristics affect a wide range of corporate decisions, including decisions affecting financial reporting quality; however, the influence of managerial place attachment on corporate decision-making has received relatively little attention - even though place attachment is thought to play a significant role in forming individual identity. Place attachment affects the decisions that individuals make with regards to social and environmental policies, lifestyle, and, in the corporate context, firmlevel policies. Because firms hire local CEOs and CFOs five to eight times more often than expected if geography were irrelevant to the matching process, the question of how managerial place attachment affects financial reporting outcomes is an important one. I investigate the effect of managerial place attachment on financial reporting quality in a sample of publicly traded U.S. firms. My findings indicate that firms with place attached CEOs display higher financial reporting quality, indicating a significant caretaking bond between CEO and stakeholders. CFOs, on the other hand, are marginally associated with lower financial reporting quality, indicating that they are more likely than CEOs to extract personal gain when they are local to their firm headquarters.

Government spending is essential for the US economy, and the amount of capital that flows from the government to US firms has increased substantially in recent years. Despite the economic importance of the corporate-government contracting relationship, we know little about the firm-level financial outcomes associated with government contracts. In this study, I investigate whether the corporate government contracting relationship affects firm-level financial reporting quality. Using a sample of 58,988 US publicly-traded firms from 2001 through 2017, I find that federal government contracting firms are associated with a lower level of discretionary accruals, lower probability of internal control material weaknesses, and lower probability of restatement and fraud as compared to non government contractors. However, this association is weaker when industry competition on government contracts are lower, and government switching costs in which the cost to find new suppliers are higher. Collectively, my empirical results suggest that having the government as a customer has a positive impact on the quality of financial reports.

I explore the impact financial statement transparency has on the probability of
restatement and the effect a restatement announcement has on the levels of future
financial statement transparency. Information theory suggests that a strong information
environment increases accounting quality. Using financial statement transparency as a
proxy for the information environment, I find that transparency is associated with a lower
probability of financial statement restatement. There are competing theories to predict
how restatement announcements affect future levels of transparency. Skinner’s (1953)
theory of operant conditioning, which states that behavior is modified based on positive
or negative conditioning suggests that the level of transparency increases after a
restatement announcement. However, expectancy theory suggests that firms engage in
certain behaviors in order to derive expected rewards or incentives. Motivation is
eliminated if the rewards are deemed unobtainable thereby eliminating managers’ incentive to improve their reporting strategy suggesting that the level of transparency
decreases after a restatement announcement. I find that restatement announcement has a
negative association with the transparency measure and the magnitude of this effect
decreases over time compared to non-restatement firms. These results are magnified if
the restatement is due to fraud. However, the changes are not significant. Further, the
transparency associations are mitigated if there is a change in CEO after the restatement
announcement. In addition, using a sample of firms that made a restatement
announcement matched with a sample of firms that did not make a restatement
announcement, the difference in the transparency measure before and after the
restatement announcement is statistically insignificant.

In a 2016 comment letter, the SEC summarizes the ongoing debate regarding the
usefulness of market risk disclosures and calls for additional discussion (SEC Concept
Release 2016). In response to the SEC’s call, I investigate whether investors and firms
benefit from market risk disclosures. Prior literature suggests that informative corporate
disclosure is associated with improved liquidity and investment efficiency. I find that
informative textual contents of market risk disclosures improve investors’ information
environment, and as a result, are associated with higher liquidity level, lower liquidity
uncertainty, and improved investment efficiency. My study is relevant to the ongoing
debate regarding the usefulness of market risk disclosures, calls for more detailed
regulatory guidance for market risk disclosures, and contributes to the literature on
liquidity, investment efficiency, and risk factor disclosures.

I investigate the association between rent extraction and qualitative/quantitative characteristics of 10-K filings (i.e. readability, financial statement comparability and earnings transparency), subject to existing monitoring constraints. This study focuses on one type of such rent extraction – investment inefficiency (i.e. overinvestment or underinvestment), as extant research provides evidence that it provides personal benefits to managers, often at the expense of shareholders. Managers have incentives to invest inefficiently but such behavior may be undesirable and result in negative consequences to the manager, such as turnover. Therefore, I expect that managers are likely to obfuscate information in order to make it difficult for investors to detect investment inefficiency, although monitoring over financial reporting may limit their ability to do so. I test whether monitoring over financial reporting reduces information obfuscation. Last, I study the joint effects of investment inefficiency and information obfuscation on CEO turnover and compensation.
I expect that investment inefficiency is positively associated with information obfuscation but this relation is weaker for firms with effective monitoring mechanisms over financial reporting. Further, I examine how these factors affect CEO disciplining. Managers get disciplined for inefficient investment decisions. Obfuscating information makes it difficult for investors to evaluate managers’ investment decisions. Therefore, I examine whether information obfuscation prevents managers from being disciplined as a result of inefficient investment behavior.
I find that investment inefficiency is positively associated with information obfuscation. Managers are more likely to obfuscate information for overinvestment type of inefficiency as opposed to underinvestment. Further, the results suggest that, while internal monitoring does not reduce information obfuscation, external monitoring constrains information obfuscation. I find that external monitoring (i.e. auditors) provide more stringent monitoring by reducing information obfuscation. I do not find support for my last prediction that information obfuscation prevents disciplining of CEOs.

Financial regulations require publicly traded firms to disclose firm-specific information relating to their financial performance as well as forecasts of future prospects disclosed to anyone outside the firm. Profit warnings present important market information as to the recent past firm performance as well as a glimpse into the firm's future prospects. By implementing Regulation Fair Disclosure (FD) in October 2000, the Securities and Exchange Commission (SEC) attempted to change the information environment by reducing information asymmetry between analysts and the investing public. This dissertation examines the impact of Regulation (FD) as it relates to three specific areas. Essay One examines Regulation FD's impact on market reaction to profit warnings by U.S. firms and finds significant market reaction over a two-day announcement window. The analysis in this dissertation documents statistically significant changes in the extent of the market reaction in the pre- and post-Regulation FD periods. Evidence is also presented that indicates a significant reduction in information leakage (as measured by negative cumulative abnormal returns (CARs) in stock price for firms in the two-week period immediately prior to a profit warning. Essay Two focuses on American Depositary Receipts (ADRs) and examines differences in comparative market reaction (ADRs versus U.S. stocks) in the pre and post-Regulation FD periods. Essay Three tests the market reaction to profit warnings for commercial bank stocks in the pre- and post-Regulation FD periods with particular attention focused on the contagion effect. The empirical analysis in this dissertation seeks to answer the question of whether the implementation of Regulation FD successfully achieves the SEC's goal of reducing information asymmetry between analysts and investors.

As a consequence of financial analysts' joint role as information intermediaries and firm monitors, I investigate analysts' responses to opportunistic corporate earnings management as firm mispricing increases. While firms' management have capital markets and executive equity incentives to manage earnings, financial analysts have trading volume, investment banking, and management information incentives which result in analysts' optimism bias. However, prior research also finds that analysts have reputational incentives, which motivate them to provide accurate and profitable outlooks. Using a generalized linear model (GLM), I estimate analysts' stock recommendation (price targets) responses for earnings management firms. I use the residual income model to compute fundamental value and I add proxies for earnings management to my analyst-responses models.... The main implications of my findings are that analysts use corporate earnings management and firm fundamental value in their stock recommendations (price targets) responses. In addition, my results provide evidence that, after controlling for earnings quality, analysts' stock recommendations (price targets) are consistent with strategies based on residual income models. These findings will be of interest to shareholders, regulators, and researchers as well as to finance and accounting practitioners.