Graduation Semester and Year
Summer 2024
Language
English
Document Type
Dissertation
Degree Name
Doctor of Philosophy in Business Administration
Department
Finance
First Advisor
Grace Qing Hao
Abstract
This dissertation aims to study the impact of different sources of financial information and corporate policies on outcomes that are relevant to researchers, regulators, finance professionals, financial institutions, and investors.
In the first essay, I show that credit rating change announcements disclose a new form of value-relevant information to the market. Issuer credit rating downgrades (upgrades) inform the market about equity underpricing (overpricing). This is reflected by a significant association between a firm’s downgrade (upgrade) and increase (decrease) in the anomalous stock underpricing (overpricing). Furthermore, I show how this mispricing gets corrected over time by analyzing the returns after the rating announcements. The returns are also significantly associated with the downgrade and upgrade events, implying predictable mispricing correction. Further analysis reveals that credit rating downgrades result in greater mispricing correction (higher stock returns) for firms with higher disaggregation quality of financial statements. Overall, the results suggest that credit rating changes are important in correcting mispricing. Higher-quality disclosures are vital for rational investors when they reassess the latest information and correct mispricing after downgrades. These results have important implications for firms' disclosure policies. Firms anticipating downgrades should enhance the quality of their financial statements to improve their post-downgrade stock returns.
The literature suggests that disaggregated data is more useful for valuation. In the second essay I study if disaggregated accounting data from the annual statements, proxied by Disaggregation Quality (DQ), is useful for valuation. I find that DQ corrects mispricing of the most overpriced and underpriced stocks. Using a portfolio-based approach I show that the alphas are significantly positive for stocks with the highest DQ, and this effect is not subsumed by the firm’s size. Furthermore, the factor alphas are significantly positive for the highest DQ portfolios during the next fiscal year, irrespective of the amount of mispricing. Finally, through Fama-Macbeth regressions, I show that, in the cross-section, DQ is associated positively with the returns of the first month post SEC publication date for those deciles of stocks that are not extremely mispriced. Overall, my findings suggest that higher disaggregation quality corrects extreme mispricing, has value-relevance, and generates significantly positive alpha (except for most mispriced stocks) immediately after annual financial statements are accepted/published on the SEC’s website. This paper suggests that extremely mispriced firms can reduce their mispricing by releasing more disaggregated financial statements. Further, firms that are not extremely mispriced can improve their stock performance by improving their disclosures through higher disaggregation.
In the third essay I study the association between the relative emphasis placed by S&P 500 firms on ethical categories in their corporate code of ethics and outcomes that are important for investors, firms and regulators. First, I study forced leadership exits and find that firms emphasizing more on trust and moral behavior in their code of ethics, have significantly higher incidents of forced exits of directors and senior officers including the CEOs. Second, I study readability of 10-K filings using Gunning Fog index and Smog index. Firms that have a stronger emphasis on trust and moral behavior have significantly easier to read 10-K disclosures. A stronger emphasis on preventing inappropriate behavior and corruption is associated with less readable 10-K disclosures. Sentiment analysis of code of ethics reveals a positive association between readability and uncertain words and negative association with weak modals. Third, I study the relationship between shareholder rights based on four corporate governance provisions and the linguistic attributes of the codes. Litigious and uncertain language in code of ethics is associated negatively while the usage of strong modals is associated positively with shareholder rights. Code of ethics determine how businesses conduct themselves at both individual and organizational level and studying these documents reveal how they might be relevant for outcomes important for shareholders, firms, and regulators, such as forced leadership exits, readability of 10-K filings, and shareholder rights.
Keywords
Credit ratings, Disclosure quality, Mispricing, Code of ethics, Disaggregation quality
Disciplines
Finance and Financial Management
License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Recommended Citation
Kapur, Ankit, "Three Essays on Financial Information, Disclosures, and Ethics" (2024). Finance and Real Estate Dissertations. 42.
https://mavmatrix.uta.edu/financerealestate_dissertations/42