Essays on corporate reporting and disclosure

Abstract

This dissertation consists of two empirical studies on the role of disclosure and financial reporting in mitigating information and agency problems. In the first study, I examine the relation between textual risk disclosures in IPO prospectuses and initial underpricing using data from Australian IPOs. I find that the quantity of disclosures in the risk factor section itself has no significant impact on initial underpricing. However, an increase in the informativeness of risk factor disclosures is associated with lower IPO underpricing. The result suggests that IPOs that provide informative risk factor disclosures have less ex ante uncertainty, in the sense that the disclosures help investors estimate the dispersion of secondary market value. The effect of informative risk factor disclosures on IPO underpricing is more pronounced for IPOs with less prestigious lead underwriters and is mainly driven by younger firms, smaller firms, and firms with poorer operating performance prior to their IPOs. In the second study, I examine how well the customer director is informed while serving on the supplier’s board and the association between customer board representation and the supplier’s accounting conservatism. I compare the returns earned by customer directors from trading the suppliers’ shares to those earned by supplier executives to indirectly measure the amount of inside information the customer director collects while serving on the board. I find that there is not a significant difference between the returns earned by customer directors and those earned by supplier executives in the 180 days after the open-market purchases. However, supplier executives earn higher returns than customer directors when making open-market sales for a subsample of suppliers with lower firm risks. To the extent that insiders are likely to sell shares when they have bad news about the firm and purchase when they have good news, the results suggest that customer directors are not less well informed relative to supplier executives about good news, but are less well informed about bad news. I find that customers use conservative accounting as a complementary source of information to assist them with effective monitoring of the suppliers when they have greater concerns with expropriation problems.