Essays in Corporate Finance
This dissertation addresses several questions in corporate finance. A common thread is the study of stock market investors' processing of disclosure by public firms.
The first chapter studies the effect of public scrutiny on financial misreporting. I exploit the staggered implementation of the EDGAR system, which provides all investors with free and instant access to financial reports. Firms phased into EDGAR received higher public scrutiny and stronger stock market reaction to earnings announcements. A plausibly exogenous increase in public scrutiny incentivizes firms to substitute between different methods of earnings management. Moreover, the increase in public scrutiny impacts firms differently depending on the ex-ante level of scrutiny that firms already have, consistent with theoretical predictions.
The second chapter models investors' allocation of attention to financial disclosures and its impact on firms' voluntary disclosure. We jointly solve investors' optimal allocation of limited attention and managers' choice to disclose their privately observed signals (e.g., forecasts of future earnings). We predict an inverse-U-shaped relation between firms' likelihood of disclosure and investor attention, supported by our empirical tests. The third chapter also studies investors' reactions to financial reports. In particular, we examine whether earnings management by manipulating firms distorts investors' response to financial reports by (similar) non-manipulating firms. We exploit a unique setting in China's stock market that de-lists firms if they report consecutive negative annual earnings. We find that non-manipulating firms suffer from significant adverse capital market effects, resulting from investors' distrust.