UCLA

The first essay investigates whether managers learn about their own default risk through feedback from credit default swap (CDS) spreads and, if so, whether this learning influences their risk management. I find that managers who learn more from CDS market feedback lower the leverage ratio and are more likely to record contingent liabilities in the following year than those who do not. Also, I find that overconfident managers, who are likely to rely less on outsiders’ judgment about their own firms, are less likely to record impairments or writedowns, compared to those who learn from CDS spreads. Finally, I find that the CDS learning channel is more effective with higher analyst following and disagreement. Overall, the feedback from CDS spreads appears to be more relevant when learning about downside risk, compared to the feedback from stock prices that resolve upside uncertainties such as potential investment opportunities.The second essay is on investor disagreement and learning from stock prices. The divergence of opinions among investors brings two conflicting effects on the managers’ ability to glean information from stock prices. On the one hand, investors’ divergent opinions could supply more information and signals to the price, improving the chance of learning new information from stock prices. On the other hand, they could inhibit managers’ ability to learn from stock prices since signals with different directions can confuse managers. Generally, my findings align more with the latter: higher investor disagreement appears to inhibit managerial learning from stock prices, leading to reduced investment-q sensitivity. However, these results become more nuanced when price movements are likely influenced by informed traders.