1360 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
Abstract: I measure how much information market participants have about (1) firm fundamentals and (2) managers' misreporting incentives, and the effects of the market's information on earnings quality and price efficiency. The market knows 76.5% of fundamental and 36.8% of misreporting incentives information contained in current earnings reports before managers issue their current earnings reports. A 1% increase in the market's fundamental information will increase earnings quality by 0.89% and price efficiency by 1.25%. A 1% increase in the market's misreporting incentives information will decrease earnings quality by 0.16% and increase price efficiency by 0.07%. Reported earnings differ from true earnings by 74.1% of the standard deviation of true earnings. An average firm is mispriced by $0.38 billion due to information asymmetry.
Abstract: Standard Bayesians' beliefs converge when they receive the same piece of new information. However, when agents have uncertainty about the precision of a signal, their beliefs might instead diverge more despite receiving the same information. We demonstrate that this divergence leads to a unimodal effect of the absolute surprise in the signal on trading volume. We show that this prediction is consistent with the empirical evidence using trading volume around earnings announcements of US firms. We find evidence of elevated volume following moderate surprises and depressed volume following more extreme surprises, a pattern that is more pronounced when investors are more uncertain about earnings' precision. Because investors can disagree even further after receiving the same piece of news, the relationship between news and trading volume is not necessarily linear, suggesting that trading volume may not be an appropriate proxy for market liquidity.
Henry Friedman, Mirko S. Heinle, Irina Luneva (Working), A Theoretical Framework for ESG Reporting to Investors.
Abstract: We provide a theoretical framework for reporting of firms' environmental, social, and governance (ESG) activities to investors. In our model, investors receive an ESG report and use it to price the firm. Because the manager is interested in the firm's price, disclosing an ESG report provides effort and greenwashing incentives. We analyze the impact of different reporting characteristics on the firm's price, cash flows, and ESG performance. In particular, we investigate the consequences of whether the report captures ESG inputs or outcomes, how the report aggregates different ESG dimensions, and the manager's tradeoffs regarding ESG efforts and reporting bias. We find that, for example, an ESG report that weights efforts by their impact on the firm's cash flows tends to have a stronger price reaction than an ESG report that focuses on the ESG impact per se. ESG reports aligned with investors' aggregate preferences provide stronger incentives and lead to higher cash flows and ESG than reports that focus on either ESG or cash flow effects individually. Additionally, in the presence of informative financial reporting, ESG reports that focus on ESG impacts lead to the same cash flow and better ESG results than reports focusing on cash flow impacts alone.
Strategic Cost Analysis is the process of analyzing and managing costs in order to improve the strategic position of the business. This goal can be accomplished by having a thorough understanding of which activities and costs support an organization's strategic position and which activities and costs either weaken it or have no impact. Subsequent cost management efforts can then focus on reducing or limiting expenditures on activities that add little or no strategic value, while increasing expenditures on activities that support the strategic position of the organization. Performance can then be evaluated to ensure that the chosen actions are taken, and that these actions are yielding improved strategic performance. Throughout the course, a strategic cost analysis and management framework will be applied across functions and organizations to highlight the cost analysis and performance evaluation methods available to forecast financial performance and improve strategic position.