Russell Lundholm

This thesis is a collection of two studies on the capital market consequences of financial reporting weaknesses. Chapter 2 examines the change in voluntary disclosure of internal control deficiencies (ICD) by IPO firms after the JOBS Act. The JOBS Act postponed the compliance deadline of internal control audits after IPO and increased the number of small IPO firms with potential ICD. I find that IPO firms are more likely to disclose ICD after the JOBS Act. Further, post-JOBS IPO firms who are willing to disclose ICD experience lower underpricing. These results are consistent with a dynamic view that as investors rationally update the belief of increasing “lemons” in the IPO population after the JOBS Act, IPO firms become more forthcoming with ICD disclosure. Chapter 3, co-authored with Professors Weili Ge, Dawn Matsumoto, and Jenny Li Zhang, examines the stock market consequences of disclosing accounting irregularities for U.S. listed foreign firms. We find that foreign firms experience significantly more negative two-day stock market reactions following restatement announcements than U.S. firms. Moreover, for a sample of foreign firms that are listed on both a U.S. and home country stock exchange, we find that restating firms’ U.S. investors react more negatively to the same restatement than their home-country investors. This differential market reaction appears related to firm-specific information frictions that are greater for foreign firms than U.S. firms. We also find a geographic contagion effect as non-restating firms from the same country experience significant stock price declines following restatements. Within a country-year, this contagion effect is concentrated among firms with lower accrual quality, suggesting that foreign firms’ restatements cause investors to alter their assessment of the earnings quality of non-restating firms from the same country. Collectively, our results suggest that accounting irregularities cause U.S. investors to reassess the information risk associated with foreign firms.

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This thesis is a collection of three essays on capital markets. The first essay examines how signals of reputation with non-equity stakeholders affect the market reaction to accounting restatements. Using Corporate Social Responsibility (CSR) rating as a proxy for reputation with non-equity stakeholders, I find significantly less negative market reaction to restatements for firms with better reputation. I also find that high-CSR firms experience smaller earnings-decreases and need to engage in fewer reputation restoration activities. The results suggest that a significant portion of the market value loss triggered by restatements reflects an expectation that the restating firms will face a ‘worsening of terms’ in their future transactions with the non-equity stakeholders, and CSR reputation can dampen this effect. The second essay examines the impact of accounting restatements on the information content of analyst forecast revisions (FRIC). I find that following material restatements that are perceived to be intentional, FRIC increases significantly compared to the pre-restatement period level. The results suggest that investors increase their reliance on analysts when there is uncertainty about the firm and the credibility of management disclosure is compromised. Additional tests reveal that the effect is greater for analysts who are less likely to have close ties with the management. The third essay studies how misaligned language between the investor and the firm contributes to the foreign investor bias. In particular, we document a significant US institutional investor bias against firms located in Quebec relative to firms located in the Rest of Canada (ROC). The differential bias is surprising given that Quebec and the ROC share the same country, federal law, stock exchange, accounting standards, and regulatory filings are prepared in both English and French; and given that US institutional investors are sophisticated investors at close geographic proximity to both Quebec and the ROC. We also contrast the bias against Quebec firms with different levels of French versus English online presence, and we contrast the bias of institutional investors located in the UK versus France, to bolster our conclusion that incongruent languages are a major source of bias.

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This thesis examines the capital market consequences of two new forms of disclosure: foreign cash holdings in 10-K filings, a semi-voluntary disclosure, and firms’ presentations at conferences hosted by a variety of third-party organizations, a voluntary disclosure. The first essay exploits the recent trend of disclosing foreign cash holdings by US multinational firms in 10-K filings and investigates the valuation of foreign cash holdings, both relative to domestic cash holdings and cross-sectionally. Firms whose filings in prior years receive a comment on foreign cash from the SEC are much more likely to disclose foreign cash, but internal and external governance structures also affect the likelihood of disclosure. I find that the valuation of foreign cash is similar to the valuation of domestic cash for the same firm. Cross-sectionally, I find that firms who need to pay higher repatriation tax to access foreign cash do not have less valuable foreign cash. Firms whose foreign operations have more severe agency problems have less valuable foreign cash, but firms with higher foreign growth opportunities have more valuable foreign cash.The second essay studies how managers’ presentations at different types of conferences affect firms’ information environments, including analyst forecast properties, stock price informativeness and liquidity. Despite their popularity, little is known about conference presentations’ impact on capital market efficiency, other than some studies implying that these disclosures might give conference participants an informational edge. I classify conferences based on sponsors into three categories: conferences hosted by brokerage houses (broker-hosted conferences), trade organizations (trade shows), and other parties (investor relation, or IR conferences), and calculate the frequency of attending these conferences for each firm. I find that information quality and uncertainty of the presentations differ across conferences. Broker-hosted conferences have a positive effect on all the information environment measures, IR conferences have a milder or no effect, whereas trade shows actually have a negative effect across the board. Among all the conferences, only presentations at trade shows are followed by stock price reversals, indicating an initial overreaction to such presentations, possibly due to managers’ incentive to oversell new products.

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