Accounting Publications

The Effect of Algorithmic Trading on Management Guidance

Erik William Jeffries — Sun, 10 Nov 2024 20:36:29 +0000

The Effect of Algorithmic Trading on Management Guidance Erik William J… Sun, 11/10/2024 - 13:36

I investigate whether algorithmic trading (AT) affects the provision of management guidance. Existing research finds that AT decreases fundamental information acquisition before earnings announcements and consequently reduces the informativeness of prices. To compensate for reduced information acquisition, I predict and find that managers at firms with more AT activity increase the quantity and quality of guidance issued at earnings announcements. Evidence is consistent with managers responding to reduced information acquisition, as opposed to changes in liquidity, and results suggest guidance in response to AT is effective at reducing information asymmetry. These findings identify a new channel through which AT affects stock price informativeness by documenting a link to managers' disclosure decisions.

Stephan, Andrew. The Effect of Algorithmic Trading on Management Guidance. Accounting Review. Nov2024, Vol. 99 Issue 6, p421-449.

Read the Full Article Here.

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Creating visibility: voluntary disclosure by private firms pursuing an initial public offering

Erik William Jeffries — Tue, 10 Sep 2024 21:49:10 +0000

Creating visibility: voluntary disclosure by private firms pursuing an initial public offering Erik William J… Tue, 09/10/2024 - 15:49

We draw on (Merton, The Journal of Finance 42:483-510, 1987) to develop predictions for the benefits of voluntary disclosures by firms pursuing an initial public offering (IPO) prior to when they begin providing regulated financial information via their IPO prospectus. We find that voluntarily issuing press releases and attending investor and industry conferences are common disclosure activities prior to filing the IPO prospectus. Consistent with these disclosures enhancing investor awareness, we find positive associations with subsequent information acquisition by prospective investors and the financial press during the IPO filing period. These relations remain significant in tests exploiting the passage of the 2005 Securities Offering Reform as a source of variation in issuers' ability to provide disclosures designed to attract attention from prospective investors. Consistent with pre-prospectus disclosures enhancing the visibility of the firm, we find that, while direct associations between pre-prospectus voluntary disclosures and IPO pricing are limited, there are significant indirect effects operating through filing-period information acquisition by prospective investors and media coverage. We find no evidence that issuers' disclosure activities serve as hype, as the IPO price impact does not reverse post-offering. Overall our evidence is consistent with pre-prospectus voluntary disclosures benefiting issuers by enhancing awareness, which leads to improvements in firm valuations.

Dambra, Michael; Schonberger, Bryce; Wasley, Charles. Creating visibility: voluntary disclosure by private firms pursuing an initial public offering. Review of Accounting Studies. Sep2024, Vol. 29 Issue 3, p2468-2517.

https://link.springer.com/article/10.1007/s11142-023-09763-y

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Forecasting Market Volatility: The Role of Earnings Announcements.

Erik William Jeffries — Wed, 10 Jul 2024 19:44:39 +0000

Forecasting Market Volatility: The Role of Earnings Announcements. Erik William J… Wed, 07/10/2024 - 13:44

This study examines whether information revealed by firms' earnings announcements (EAs) forecasts short-run market-wide volatility in equity index prices. Using an exponential generalized autoregressive conditional heteroskedasticity model that includes controls for the information in an array of macroeconomic announcements, we find that EA information aggregated across firms forecasts market volatility at daily and weekly intervals. EA information's forecasting power is greatest when more firms announce earnings on a given day, when EAs convey negative news, and for EA information about core earnings. Out-of-sample tests confirm that forecasts incorporating EA information better predict short-run market volatility than forecasts omitting EA information. We conclude that firm-level EAs are a significant source of systematic, market-wide information relevant for predicting near-term market volatility.

Kim, Jaewoo; Schonberger, Bryce; Wasley, Charles; Yang, Yucheng. Forecasting Market Volatility: The Role of Earnings Announcements. Accounting Review. Jul2024, Vol. 99 Issue 4, p251-279.

https://publications.aaahq.org/accounting-review/article/99/4/251/12075/Forecasting-Market-Volatility-The-Role-of-Earnings

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When are concurrent quarterly reports useful for investors? Evidence from ASC 606

Erik William Jeffries — Mon, 10 Jun 2024 22:03:04 +0000

When are concurrent quarterly reports useful for investors? Evidence from ASC 606 Erik William J… Mon, 06/10/2024 - 16:03

Prior research suggests that quarterly reports released concurrently with earnings depress trading due to information overload. In this study, we predict that concurrent reports help investors trade when they face uncertainty about how to interpret earnings news. We rely on the implementation of ASC 606 as a quasi-exogenous increase in uncertainty about how to trade in response to earnings news. Specifically, we find that when uncertainty is high in the first quarter of ASC 606 implementation, 10-Qs released concurrently with earnings are associated with increased trading around the earnings announcement. We find the relation is more pronounced when investors face greater uncertainty about earnings and when firms increase disclosure in their revenue recognition footnote. We also find some evidence that our results hold in a broader sample of accounting standard changes and generalize to other proxies for investor uncertainty. Our results suggest that concurrent quarterly reports are informative to investors when uncertainty about earnings is especially high.

Glaze, Jesse L.; Skinner, A. Nicole; Stephan, Andrew. When are concurrent quarterly reports useful for investors? Evidence from ASC 606. Review of Accounting Studies. Jun2024, Vol. 29 Issue 2, p1360-1406.

https://link.springer.com/article/10.1007/s11142-022-09744-7#:~:text=We%20find%20evidence%20that%20concurrent,to%20anticipate%20ASC%20606%20effects).

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The Irrelevance of Environmental, Social, and Governance Disclosure to Retail Investors

Erik William Jeffries — Thu, 11 Apr 2024 01:29:53 +0000

The Irrelevance of Environmental, Social, and Governance Disclosure to Retail Investors Erik William J… Wed, 04/10/2024 - 19:29

Using an hourly data set on retail investor individual security positions from Robinhood Markets, we find no evidence that environmental, social, and governance (ESG) disclosures inform retail investors' buy and sell decisions. The response on ESG press release days by retail investors is indistinguishable from nonevent days. In contrast, these same investors make economically meaningful changes to their portfolios in response to non-ESG press releases, especially those that pertain to earnings announcements. We use stock return tests to show that there is economic content in ESG press releases, and we conduct subsample analyses showing that retail investors do not respond to the most salient and economically transparent ESG disclosures. Collectively, these tests suggest that a lack of economic content, a lack of visibility, and difficulty with investment integration are unlikely to explain our findings.

Moss, Austin; Naughton, James P.; Wang, Clare. The Irrelevance of Environmental, Social, and Governance Disclosure to Retail Investors. Management Science. Apr2024, Vol. 70 Issue 4, p2626-2644.

https://pubsonline.informs.org/doi/10.1287/mnsc.2023.4822

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Signing Blank Checks: The Roles of Disclosure and Reputation in the Face of Limited Information.

Erik William Jeffries — Sun, 10 Mar 2024 20:20:50 +0000

Signing Blank Checks: The Roles of Disclosure and Reputation in the Face of Limited Information. Erik William J… Sun, 03/10/2024 - 14:20

We examine how disclosure and manager reputation influence capital raised when there is no commercial substance underlying the investment. Special Purpose Acquisition Companies (SPACs or "blank check" companies) do not have operations or substantive assets at the IPO but promise to use the funds raised to acquire a private firm, generally within two years. Given the lack of commercial substance and historically poor ex post performance, it is unclear what SPACs disclose at the IPO and why investors invest. Although disclosure is important in traditional IPOs, the underlying information available differs for SPACs. Nonetheless, our evidence suggests disclosures are useful to SPAC investors, although differently than for traditional IPO investors. We also examine manager reputation and find prior SPAC or CEO experience and celebrity status are associated with funds raised. Even when an investment lacks commercial substance, disclosure and reputation are important for investing decisions.

Pawliczek, Andrea; Skinner, A. Nicole; Zechman, Sarah L. C. Signing Blank Checks: The Roles of Disclosure and Reputation in the Face of Limited Information. Accounting Review. Mar2024, Vol. 99 Issue 2, p395-419.

https://publications.aaahq.org/accounting-review/article/99/2/395/11676/Signing-Blank-Checks-The-Roles-of-Disclosure-and

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Subject Matter Complexity and Disclosure Channel Richness.

Erik William Jeffries — Wed, 10 Jan 2024 21:23:14 +0000

Subject Matter Complexity and Disclosure Channel Richness. Erik William J… Wed, 01/10/2024 - 14:23

Despite the increase in and diversity of disclosure channels available, our understanding of how managers incorporate channel features into their disclosure decisions remains incomplete. I provide evidence that managers choose relatively rich channels that offer multiple cues, opportunities for interaction, and linguistic diversity (i.e., the earnings call, as compared to the press release) to communicate complex information. The positive relation between disclosure channel richness and subject matter complexity persists in both a document-level analysis and a small sample test examining disclosure channel choice from all possible disclosure channels. I provide some evidence that deviating from the complexity/richness matching strategy is associated with a muted market response to firms' quarterly disclosures. The results are consistent with managers choosing disclosure channels to reduce investors' information processing costs.

Skinner, A. Nicole. Subject Matter Complexity and Disclosure Channel Richness. Accounting Review. Jan2024, Vol. 99 Issue 1, p393-425.

https://publications.aaahq.org/accounting-review/article/99/1/393/11439/Subject-Matter-Complexity-and-Disclosure-Channel

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News at the Bell and a Level Playing Field

Justin Michael Forbis — Thu, 10 Nov 2022 21:41:25 +0000

News at the Bell and a Level Playing Field Justin Michael… Thu, 11/10/2022 - 14:41

We provide initial evidence that stock exchange procedures around closing auctions advantage speed traders at the expense of auction participants. We show that, on Nasdaq and NYSE Arca, 4:00 pm earnings releases result in informed trading in the continuous regular-hour session in the short window between 4:00 pm and the closing auction; this trading subsequently moves closing prices in the direction of the earnings news. The ability of speed traders to submit 4:00-pm-news orders to the auction through the continuous session earns them up to 1.5 percent profit and creates an unlevel playing field because most auction participants are not allowed to cancel their orders. When stock exchanges recommended that firms delay disclosures until after the market closes, those with higher institutional ownership were more likely to voluntarily do so. Our study has implications regarding the timing of information releases and the design of the closing process.

Hu, Danqi; Stephan, Andrew. News at the Bell and a Level Playing Field. Accounting Review. Nov2022, Vol. 97 Issue 6, p357-384.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3523964

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Forecast Withdrawals and Reporting Reputation

Justin Michael Forbis — Sun, 06 Nov 2022 21:37:02 +0000

Forecast Withdrawals and Reporting Reputation Justin Michael… Sun, 11/06/2022 - 14:37

While accounting research has extensively examined initial guidance disclosures, the disclosures that managers make when initial forecasts become materially inaccurate have received much less attention. These updates are unique because managers are communicating that their initial forecasts are no longer correct. In this context, we examine how earnings forecast withdrawals affect managers' reporting reputation, relative to earnings revisions and nondisclosure. While managers face immediate negative market consequences after withdrawals, they enjoy reputational benefits (in the form of improved credibility) in the long run when guidance updates resume. In contrast, reporting reputation does not improve for managers who revise forecasts or for those who choose not to update at all. Difference-in-differences analyses confirm this incremental boost to credibility that is associated with withdrawals. This evidence suggests disclosing what managers do not know may be as important as disclosing what they do know when building a reporting reputation.

Marshall, Nathan T.; Skinner, A. Nicole. Forecast Withdrawals and Reporting Reputation. Accounting Review. Nov2022, Vol. 97 Issue 7, p347-377.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3237089

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The Regulatory Role of Credit Ratings and Voluntary Disclosure

Justin Michael Forbis — Fri, 11 Mar 2022 00:15:27 +0000

The Regulatory Role of Credit Ratings and Voluntary Disclosure Justin Michael… Thu, 03/10/2022 - 17:15

We find that corporate credit rating changes have an effect on firms' voluntary disclosure behavior that is independent of the information they convey about firm fundamentals. Our analyses exploit two separate quasi-experimental settings that generate either exogenous credit rating downgrades or credit rating upgrades (i.e., credit rating label changes). We find evidence of a negative relation between the direction of the credit rating label change and the provision of voluntary disclosure in both settings—firms respond to exogenous downgrades by increasing voluntary disclosure and to exogenous upgrades by decreasing voluntary disclosure. The effects we document are attributable to the regulatory role rather than the information role of credit ratings. Overall, our analyses indicate that credit rating agencies as gatekeepers influence firms' provision of voluntary disclosure.

Basu, Riddha; Naughton, James P.; Wang, Clare. The Regulatory Role of Credit Ratings and Voluntary Disclosure. Accounting Review. Mar2022, Vol. 97 Issue 2, p25-50.

https://publications.aaahq.org/accounting-review/article-abstract/97/2/25/4360/The-Regulatory-Role-of-Credit-Ratings-and?redirectedFrom=fulltext

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Accounting Publications

The Effect of Algorithmic Trading on Management Guidance

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Creating visibility: voluntary disclosure by private firms pursuing an initial public offering

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