Prior research suggests that the use of accounting information differs substantially by investor class. My analysis extends this line of research to the area of SEC Form 8-K filings. Prior research also provides mixed evidence on the informativeness of these filings. I hypothesize that the method of the disclosure is an important factor in evaluating 8-K usefulness to varying types of investors. Specifically, the timing, venue, and packaging of these accounting disclosures affect their use by investors. Regulation Fair Disclosure (2000) considers both press releases and 8-K filings as broad-based disclosures that do not favor any investor class. I, however, identify five unique informational settings in which 8-K filings occur. The five settings are: a concurrent 8-K event and filing (with or without a press release), a filing which precedes the press release, a press release that precedes the filing, an 8-K event that precedes a filing and/or press release, and the 8-K event alone. I examine the similarities and differences in trading by small and large investors across these settings. The identification of these empirical regularities with respect to disclosure form should be particularly useful to policy makers seeking to implement level playing field objectives with respect to public disclosures. My findings show that the relative trading activity to 8-K filings is different by the type of disclosure. Differential trading activity was found to be more pronounced in disclosure settings that contained a public announcement. In addition, the type of Form 8-K disclosure also had an effect on the differential trading activity. Form 8-K filings of acquisition or disposition of assets were associated with the most pronounced responses. My findings show the differential trading activity to these filings differs from other accounting events such as earnings announcements and annual report filings.

This thesis first examines the determinants of earnings management in an international setting using the Limited Investor Attention Model of Hirshleifer and Teoh (2003). The model predicts that investor attention reduces earnings management. I have four key findings. First, I document that financial analysts curb adjusted absolute abnormal accruals and absolute performance-matched abnormal accruals in global firms. Second, I document that institutional block-holdings curb adjusted absolute abnormal accruals across the world. Third, I document that analyst following is related to more reduction in earnings management in common law countries than in code-law countries. Fourth, I find that institutional block-holders are more effective monitors in common law countries than in code law countries. This thesis also examines the relation between investor attention and stock mispricing of abnormal accruals in an international setting using the Limited Investor Attention Model of Hirshleifer and Teoh (2003). Consistent with the model’s hypothesis that investor attention reduces stock mispricing, I document three key findings. First, I find a significant and negative correlation between stock mispricing and analyst following in global firms. Second, stock mispricing is negatively correlated with institutional ownership in U.S. firms. Stock mispricing is not significantly correlated with institutional block-holdings in global firms. Third, stock mispricing per dollar of abnormal accrual is decreasing in analyst following for sufficiently large abnormal accruals in U.S. and global firms.

This dissertation contains two essays in empirical finance. The first essay studies the mutual fund industry, and the second essay looks into the stock market. Both studies provide insights in the underlying mechanism of some asset return patterns identified from the data currently available. The first essay investigates the sources of a recently identified performance pattern in mutual funds. Specifically, actively managed mutual funds, in general, underperform a passive benchmark; however, some recent studies find they, in fact, outperform the benchmark in bad economic states. I examine whether a state dependent risk shifting behavior of mutual fund managers contributes to this performance difference across states, and find supportive evidence. As shown in prior studies, the risk shifting behavior is motivated by a non-linear flow-performance relationship. Using a piece-wise linear regression, I demonstrate that the non-linearity exists mainly in good states; whereas in bad states, the flow-performance relationship is close to linear. Thus, non-zero risk shifting incentives are only expected in good states. I empirically measure these incentives in good states, and show that managers do react to the ``gambling'' (i.e., positive) incentives. In addition, higher ``gambling'' incentives are found to be associated with lower fund performance. The second essay, based on joint work with Hai Lu and Kevin Wang, examines how stock price shocks in the absence of public announcement of firm specific news affect future stock returns. We find that both large short term price drops and hikes are followed by negative abnormal returns over the subsequent twelve months. The pattern of asymmetric drifts, the return continuation for negative shocks versus the return reversal for positive shocks, is puzzling. We explore whether investor disagreement can explain the puzzle and find that the evidence is consistent with predictions of disagreement theory. Moreover, price shocks with public news disclosures are followed by weaker drifts, suggesting that reduction of information asymmetry from public disclosures mitigates disagreement-induced overpricing.

This thesis first examines the determinants of earnings management in an international setting using the Limited Investor Attention Model of Hirshleifer and Teoh (2003). The model predicts that investor attention reduces earnings management. I have four key findings. First, I document that financial analysts curb adjusted absolute abnormal accruals and absolute performance-matched abnormal accruals in global firms. Second, I document that institutional block-holdings curb adjusted absolute abnormal accruals across the world. Third, I document that analyst following is related to more reduction in earnings management in common law countries than in code-law countries. Fourth, I find that institutional block-holders are more effective monitors in common law countries than in code law countries. This thesis also examines the relation between investor attention and stock mispricing of abnormal accruals in an international setting using the Limited Investor Attention Model of Hirshleifer and Teoh (2003). Consistent with the model’s hypothesis that investor attention reduces stock mispricing, I document three key findings. First, I find a significant and negative correlation between stock mispricing and analyst following in global firms. Second, stock mispricing is negatively correlated with institutional ownership in U.S. firms. Stock mispricing is not significantly correlated with institutional block-holdings in global firms. Third, stock mispricing per dollar of abnormal accrual is decreasing in analyst following for sufficiently large abnormal accruals in U.S. and global firms.

This dissertation contains two essays in empirical finance. The first essay studies the mutual fund industry, and the second essay looks into the stock market. Both studies provide insights in the underlying mechanism of some asset return patterns identified from the data currently available. The first essay investigates the sources of a recently identified performance pattern in mutual funds. Specifically, actively managed mutual funds, in general, underperform a passive benchmark; however, some recent studies find they, in fact, outperform the benchmark in bad economic states. I examine whether a state dependent risk shifting behavior of mutual fund managers contributes to this performance difference across states, and find supportive evidence. As shown in prior studies, the risk shifting behavior is motivated by a non-linear flow-performance relationship. Using a piece-wise linear regression, I demonstrate that the non-linearity exists mainly in good states; whereas in bad states, the flow-performance relationship is close to linear. Thus, non-zero risk shifting incentives are only expected in good states. I empirically measure these incentives in good states, and show that managers do react to the ``gambling'' (i.e., positive) incentives. In addition, higher ``gambling'' incentives are found to be associated with lower fund performance. The second essay, based on joint work with Hai Lu and Kevin Wang, examines how stock price shocks in the absence of public announcement of firm specific news affect future stock returns. We find that both large short term price drops and hikes are followed by negative abnormal returns over the subsequent twelve months. The pattern of asymmetric drifts, the return continuation for negative shocks versus the return reversal for positive shocks, is puzzling. We explore whether investor disagreement can explain the puzzle and find that the evidence is consistent with predictions of disagreement theory. Moreover, price shocks with public news disclosures are followed by weaker drifts, suggesting that reduction of information asymmetry from public disclosures mitigates disagreement-induced overpricing.

More and more events and anomalies that have happened in recent years cannot be explained by traditional models, which leads to a pervasive doubt of the effectiveness of the efficient market hypothesis. In particular, over ninety percent of Taiwan¡¦s stock market investors are individuals, and the noise trading phenomenon is very common and has a great effect upon the return of stock. Hence, the measure of investor sentiment formed by noise traders becomes a task for the researcher studying the factors which effect the stock return in Taiwan. The objective of this paper is to find the investor sentiment proxy variables which can be a significant factor in explaining stock return. This analysis adopts the arbitrage pricing model of the macroeconomic factors. The sample contains data for most listed stocks on the Taiwan Stock Exchange from 1984 to 2002. By combining the stock or company characteristic related to the noise traders¡¦ perception, including market value, stock and etc., and phenomenons effect by investor sentiment, including closed-end fund discount, initial returns on IPOs, and number of IPOs to the arbitrage pricing model , we found that closed-end fund discount and initial returns on IPOs are significant and appropriate to investor sentiment proxy variables. However, the number of IPOs is not significant enough

We analyze institutional allocation in initial public offerings (IPOs) using a new data set of R.O.C. offerings between 2005 and 2006. We document a positive relationship between institutional allocation and day one IPOs returns. This is partly explained by the practice of giving institutions more shares in IPOs with strong premarket demand, consistent with Book Building theories. However, institutional allocation also contains private information about first-day IPOs returns not reflected in premarket demand and other public information. Our evidence supports Book Building theories of IPO underpricing, but suggests that institutional allocation in Underpriced issue is in excess of that explained by Book Building alone.

Prior research suggests that the use of accounting information differs substantially by investor class. My analysis extends this line of research to the area of SEC Form 8-K filings. Prior research also provides mixed evidence on the informativeness of these filings. I hypothesize that the method of the disclosure is an important factor in evaluating 8-K usefulness to varying types of investors. Specifically, the timing, venue, and packaging of these accounting disclosures affect their use by investors. Regulation Fair Disclosure (2000) considers both press releases and 8-K filings as broad-based disclosures that do not favor any investor class. I, however, identify five unique informational settings in which 8-K filings occur. The five settings are: a concurrent 8-K event and filing (with or without a press release), a filing which precedes the press release, a press release that precedes the filing, an 8-K event that precedes a filing and/or press release, and the 8-K event alone. I examine the similarities and differences in trading by small and large investors across these settings. The identification of these empirical regularities with respect to disclosure form should be particularly useful to policy makers seeking to implement level playing field objectives with respect to public disclosures. My findings show that the relative trading activity to 8-K filings is different by the type of disclosure. Differential trading activity was found to be more pronounced in disclosure settings that contained a public announcement. In addition, the type of Form 8-K disclosure also had an effect on the differential trading activity. Form 8-K filings of acquisition or disposition of assets were associated with the most pronounced responses. My findings show the differential trading activity to these filings differs from other accounting events such as earnings announcements and annual report filings.

No description available.

Hohenheim, Univ., Diss., 2007