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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.
PhD.
We investigate whether investor attention is associated with the pricing (and mispricing) of earnings news where investor attention is measured using social media activity. We find that high levels of investor attention are associated with greater sensitivity of earnings announcement returns to earnings surprises, with the effect being strongest for firms that beat analysts' forecasts. This appears to be appropriate pricing, on average, as only firms with low levels of attention are associated with significant post-earnings-announcement drift. Our results are distinct from other information sources including traditional media outlets, financial blogs, and internet search engine activity. Our results are consistent with investor attention observed in social media activity having distinct effects on the pricing and mispricing of earnings news.
Bachelor Thesis from the year 2017 in the subject Business economics - Banking, Stock Exchanges, Insurance, Accounting, grade: 1.3, University of Münster, language: English, abstract: The existing research focuses on two channels how stock (mis-)pricing influences firm investment. On the one hand, the informational role of prices is examined. The general conclusion shared by many papers is as follows: managers learn from high prices that the aggregated opinion of investors sees promising investment opportunities. Hence, decision makers invest because they either learn from actual new information or they want to cater the investors and keep the stock prices high because of personal incentives. On the other hand, the financing role of equity is investigated. Many papers come to the same conclusion. Mispriced stocks are equal to misvalued eq-uity. Consequently, if stocks are overpriced the cost of financing through issuance of new shares declines. If the cost of financing declines, more in-vestment opportunities seem to be promising. Therefore, the firm's investment activity increases. Additionally, third parties and potential debt lenders like banks evaluate the firm based on the stock performance amongst other aspects. If the stock price is high banks are more likely to issue credit and reduce their demands concerning the terms of debt (e.g. decrease inter-est rate). This is particularly important for financially constrained firms which are only able to invest in new projects if they are able to raise capital on their own. By following the approach of Polk and Sapienza (2009, pp. 191-194), my thesis examines if the relation of firm investment to stock mispricing is influenced by market concentration. At first, I regress firm investment on mispricing, investment opportunities and cash flow proxies on my whole sample. Afterwards I build sub samples based on market concentration and conduct the same regression on those sub samples again. Thereby, my re-search adds t
We provide a model in which a single psychological constraint, limited investor attention, explains both under- and over-reaction to different earnings components. Investor neglect of information in current-period earnings about future earnings induces post-earnings announcement drift and the pro fit anomaly. Neglect of earnings components causes accruals and cash flows to predict abnormal returns. We derive new untested empirical implications relating the strength of the drift, accruals, cash flows, and pro fit anomalies to the forecasting power of current earnings-related information for future earnings, the degree of investor attention to different types of information, and the volatilities of and correlation between accruals and cash flows. We also show that owing to costs of attention, in equilibrium some investors may decide not to attend to the implications of earnings or its components.
I analyze whether or not market-wide investor sentiment induces stock mispricing, by affecting the boldness of predictions of firms' long-term earnings growth. I predict that bullish market-wide sentiment induces investors to aggressively separate firms with high growth futures from others, and that this excessive boldness results in a high level of mispricing. Consistent with my prediction, I observe an excessively large dispersion in consensus growth forecasts when proxies for investor sentiment are high at the beginning of the period. Furthermore, stocks with higher-predicted growth experience more negative forecast revisions and lower subsequent stock returns, especially following periods of high investor sentiment.
Prior research documents a large downward drift in stock prices following issuances of debt and equity by U.S. firms. We conduct tests based on both stock price and trading volume to provide evidence on the reasons for this apparent market anomaly. We document evidence of earnings management through accruals prior to external financing and lower operating performance afterward that is associated with the amount of capital raised. The earnings management that precedes external financing and the amount of capital raised are associated with both the post-financing decline in stock price and trading volume around earnings announcements that follow for a period of three years. This evidence is consistent with the proposition that firms raise external capital prior to predictable declines in their operating performance and they release upward biased earnings before these events to manage investor expectations. The failure of many investors to incorporate this information into their trading decisions in a timely manner consistent with limited attention and over-confidence appears to drive stock mispricing. Our evidence does not support the conjecture that the financing anomaly is primarily a statistical artifact or that it is a manifestation of the accrual anomaly.