Three essays on corporate finance

• Main Author: Qu, Chengyuan
• Other Authors: Jun-koo Kang
• Format: Thesis-Doctor of Philosophy
• Language: English
• Published: Nanyang Technological University 2022
• Subjects: Business::Finance::Corporate finance
• Online Access: https://hdl.handle.net/10356/163600
• Institution: Nanyang Technological University

This dissertation includes three essays on corporate finance. Chapter 1 discusses whether and how the voting for governance proposals is priced in the option market. By exploiting the local randomness in close-call votes, this paper finds a causal impact of passing a governance-related proposal on the cost of stock option protection against downside tail risks. In a local regression discontinuity (RD) analysis, firms that narrowly pass the majority threshold show a lower ex-ante tail risk based on implied volatility smirk and model-free implied skewness (MFIS) than those that narrowly fail. This impact is strengthened for firms with weaker corporate governance, higher information transparency, and worse operating performance. Evidence from option trading suggests that the change in ex-ante tail risk mainly comes from trading activities in put options. In additional tests, I observe that this impact mainly comes from proposals that aim to remove management entrenchment provisions, and the impact is unique in the option market and can not be explained by realized tail risk. Evidence from financial restatement as an extreme case strengthens the link between governance proposal voting and ex-ante tail risk. Overall, this paper observes how the stock option market responds to shareholder activism through shareholder proposals and sheds light on the cross-sectional determinants of option prices. Chapter 2 shows how competition threats from local laws affect corporate financial reporting in terms of earnings management. By exploiting the staggered reforms on competition laws in 58 non-US countries, we find that, conditional on product market features, firms tend to inflate their earnings when domicile countries adopt stricter competition laws, which supports the pressure effect of legal competition threats. This impact is stronger for firms facing greater external pressure, receiving less external discipline, and lacking information transparency. In cross-country analyses, the impact is mitigated in IFRS countries and countries with stronger investor protection. Firms with greater internationalization suffer less from stricter competition laws in domicile countries. Evidence from machine learning algorithms suggests the unique impact of competition laws that can not be predicted by other codependent macro-features. By showing earnings inflation under stricter competition laws, this paper suggests a material impact of antitrust laws on firms’ financial reporting practices by increasing managers’ pressure, which should not be neglected by policymakers. Chapter 3 discusses how active attention through EDGAR affects stock price crash risk, which suggests the pressure effect of modern information technologies on managers’ disclosure behaviors. This paper examines how modern information technologies affect future stock price crash risk. Using EDGAR search volume (ESV) as a direct measure, we find that firms under greater active attention through EDGAR tend to hide bad news and release it subsequently, thus increasing future stock price crash risk. EDGAR attention to non-financial information and abnormal EDGAR attention drive the results. The impact of EDGAR attention is stronger for firms with higher ex-ante cost of bad news disclosure, which indicates that modern information technologies affect managers by increasing the exposure of bad news to the public. Evidence from option prices, management guidance, and accounting practices further confirms managers’ tendency to hide bad news under greater EDGAR attention. Three plausible natural experiments based on the implementation of EDGAR, shareholder distraction from unrelated industries, and the mandatory adoption of XBRL provide a causal inference. By providing systematic evidence on the impact of active attention through EDGAR on stock price crash risk, this paper sheds light on the pressure effect of EDGAR users’ attention on managers’ strategic bad news disclosure and a side effect of modern information technologies.