This dissertation studies a firm’s decision to voluntarily disclose that it is seeking “strategic alternatives,” effectively setting out to explore the potential sale or merger of the company. Firms appear to use these voluntary disclosures to maximize shareholder value and credibly convey private information. Voluntary disclosures of strategic alternatives are associated with a three-day return of +5.8 percent on average. Compared to an entropy-balanced control group with similar characteristics in expectation, disclosing firms that are subsequently acquired experience positive abnormal takeover returns (reflecting benefits from a more favorable sale process and improved information), whereas disclosing firms that are not subsequently acquired experience negative abnormal returns (reflecting costs from more dysfunction). The existence of economically significant costs and benefits is consistent with a general voluntary disclosure framework resulting in a threshold equilibrium. The decision to seek strategic alternatives appears to be prompted by poor performance, poor information environment, and the presence of corporate governance catalysts, namely, blockholders, activists, and golden parachutes.

It is now common for firms to emphasize non-GAAP earnings metrics that exclude certain GAAP-based expenses, such as acquisition and restructuring expenses, intangible asset amortization, asset write-downs, and stock compensation expense. This study hypothesizes that managers become focused on non-GAAP earnings, causing them to underweight excluded expenses when making investment and accounting decisions. Consistent with the underweighting of acquisition-related expenses, firms with a history of reporting non-GAAP earnings over-invest relative to their peers, and engage in more acquisitions. With respect to accounting choices, excluded expenses such as write-downs and stock option expense are recorded and measured more conservatively when excluded from non-GAAP earnings. Using SFAS 141(R) and SFAS 123(R) as difference-in-differences settings, firms’ choices are found to be less sensitive to accounting standard changes when the affected expense is excluded from non-GAAP earnings. The evidence suggests that the use of non-GAAP earnings can influence real activities and accounting choices.

This paper provides a framework for assessing the accrual quality of financial institutions and applies it to commercial banks' loan portfolios. I first develop an accrual reliability categorization for financial institutions and show that existing findings for non-financial firms extend to financial firms. I next demonstrate how supplementing the information in accruals leads to significantly improved assessment of accrual quality. Focusing on commercial banks' loan portfolios, I supplement information in accruals with a measure based on footnote disclosures regarding loan portfolio concentrations and regional economic indicators. I call this measure loan portfolio quality index and show that it further isolates less reliable accruals and significantly improves the forecasting of future earnings and stock returns.

In capital markets research, market expectation of future earnings plays a vital role. However, almost all proxies inevitably measure the market expectation of future earnings with error, which results in unsatisfactory empirical outcomes in prior research (e.g., small empirical values of earnings response coefficient and poor quality estimates of expected rates of return). Using analysts' consensus forecasts, this study investigates how noisy measurement of the market expectation of future earnings affects the predictability of future earnings and stock returns. Based on the errors-in-variables approach, this study first provides a framework to capture cross-sectional variation of the measurement error in analysts' consensus forecasts. With this framework in place, this study documents that analysts' consensus forecasts with more measurement error have less ability to predict future earnings and stock returns, and that incorporating information about cross-sectional variation of the measurement error can improve the predictability of future earnings and stock returns. These findings will be useful to accounting research that relies on the market expectation of future earnings and to practitioners seeking to forecast profitability and stock returns.

Focusing on high-technology issuers, this study provides new evidence that managers strategically overinvest in research and development (R&D) projects prior to seasoned equity offerings (SEOs). It corroborates the theoretical prediction that managers with short-term valuation pressure tend to overinvest in long-term projects to elevate investors’ growth expectations (Bebchuk and Stole, 1993). I find that issuers with more intensive pre-SEO R&D expenditures exhibit lower productivity in terms of innovative output and operating performance following offerings, which is a primary manifestation of overinvestment. Such issuers also have higher price run-ups prior to offerings and lower long-term stock returns thereafter, suggesting that investors initially overestimate the future benefits of R&D expenditures but are subsequently disappointed by their low productivity. In additional analysis, I document that analysts make higher long-term growth forecasts prior to offerings for R&D intensive issuers, whereas such issuers are more likely to miss analysts’ sales forecasts subsequently relative to non-intensive issuers. This evidence suggests that analysts fare no better than investors in correctly anticipating the future benefits of pre-SEO R&D expenditures. Further analysis of managers’ disclosure of the intended use of proceeds indicates that R&D intensive issuers tend to provide more non-financial R&D information to reinforce investors’ growth expectations. Finally, I provide evidence that the documented strategic R&D investment behavior among seasoned issuers is not explained by managerial overconfidence.

In this dissertation I examine the deferred tax disclosures of a unique sample of venture capital backed firms that conducted their initial public offering (IPO) between 1996 and 2008, and generated a net operating loss (NOL) carry-forward. I find that 83% of the sample firms record an allowance fully valuing-out the carry-forward's associated deferred tax asset. This full allowance is, on average, 72% of total assets - a fact which provides strong evidence (at least in terms of this accrual) that these firms are not upwardly managing their earnings prior to IPO. I show that the size of a firm's NOL, and proxies for its expectation of future taxable income have significant predictive power for the magnitude of the valuation allowance. I also show that the allowance sends a strong negative signal about a firm's future book income. Both of these results support the contention that, though conservative, the valuation allowance does provide information about an IPO firm's economic fundamentals. Finally, I introduce a new explanation for the presence of the allowance: the ownership change limitation. This limitation can cause a firm to record an allowance independent of its expectations about future earnings. I provide evidence that firms take this limitation into account when recording the valuation allowance, and that controlling for it can enhance the allowance's signal regarding future income.

This paper provides evidence consistent with the idea that the implications of investment on future profitability differ for financially constrained and financially flexible firms. In particular, this study finds that the investment of financially constrained firms is associated with higher persistence in profitability than the investment of flexible firms. This paper also finds that this result is related to differences in future write-downs and goodwill impairments, suggesting that the difference in persistence in profitability between both groups of firms is associated with differences in investment quality. Finally, it shows that investors do not fully understand the role of financial constraints on the relation between investment and future profitability, since the investment of financially constrained firms is associated with higher one-year ahead abnormal returns than the investment of flexible firms. Moreover, for financially constrained firms, large levels of investment are not associated with negative abnormal returns, suggesting that the negative relation between corporate investment and future abnormal stock returns documented in previous research is not general to the entire cross-section of firms.