Robert H. Smith School of Business

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    The Spillover Effect of Environmental Disclosures: Evidence from Customers' Net-zero Pledges
    (2024) Castillo, Juan; Hann, Rebecca; Business and Management: Accounting & Information Assurance; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
    This paper investigates the real impact of customers’ voluntary environmental disclosures, specifically, Net-Zero Pledges (NZPs), on the direct greenhouse gas emissions of their suppliers. NZPs represent a growing trend in corporate disclosure, where companies commit to reducing carbon emissions to a minimum level by a specified date, with any remaining emissions being offset by carbon removal actions. Using firms’ connections along the supply chain and a staggered difference-in-differences design, this study provides evidence that suppliers significantly reduce their direct emissions following customers’ NZPs. This effect is more pronounced for NZPs made by customers with greater bargaining power, while suppliers’ reactions are stronger when they have higher carbon intensity and better environmental performance. Furthermore, NZPs of higher quality elicit a stronger response, especially when they limit the use of carbon offsets, set interim targets, and establish public reporting mechanisms. The evidence suggests that this reduction in emissions is achieved by suppliers’ investments in green technologies and innovation, as well as improvements in environmental policies in the years following customers’ NZPs. While these modifications do not seem to change firms’ profitability, they are associated with increased business output and capital investments, though at the expense of additional debt. These findings suggest that customers’ voluntary environmental disclosures can trigger positive spillover effects in upstream suppliers’ real operations, even in the absence of mandatory regulations.
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    CREDIT RATING AGENCIES AS GATEKEEPERS FOR NON-GAAP DISCLOSURE IN THE DEBT MARKET
    (2024) Yan, Lu; Kimbrough, Michael; Business and Management: Accounting & Information Assurance; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
    To aid investors in assessing earnings persistence, managers often voluntarily provide non-GAAP disclosure, which excludes certain items they characterize as non-recurring from GAAP earnings. The quality of non-GAAP disclosures and their impact on the equity market have been well studied. By contrast, there is little evidence on the impact of these disclosures in the debt market. Credit rating agencies (CRAs) serve as gatekeepers in the debt market, playing an important role in evaluating creditworthiness by actively incorporating accounting information from corporate disclosure. Like shareholders, CRAs also seek to isolate the transitory component of GAAP earnings. For example, Moody’s (2006) and Standard & Poor’s (2008), the two largest rating agencies, state that they derive their credit ratings from adjusted accounting figures by excluding non-recurring items that do not reflect long-term credit risks. Thus, in this paper, I explore the possibility that managers’ non-GAAP disclosures are relevant to CRAs. Consistent with CRAs’ emphasis on long-horizon corporate performance, I provide evidence that CRAs exhibit stronger responses to non-GAAP earnings than GAAP earnings. Using mediation analysis, I find that bondholders rely on CRAs to incorporate earnings information, and such reliance is notably greater for non-GAAP earnings than GAAP earnings. While CRAs do not specifically emphasize the direction of exclusions (i.e., gains or losses), they are attentive to identifying high-quality non-GAAP disclosure, as evidenced by the more positive associations observed between their credit ratings and high-quality non-GAAP earnings. I further find that non-GAAP earnings outperform GAAP earnings for non-GAAP reporters in their predictive power for long-term bankruptcy and default risks, validating CRAs’ motivations to incorporate non-GAAP earnings when assigning credit ratings. Finally, managers appear to be aware of CRAs’ utilization of their non-GAAP disclosure and are thus inclined to offer high-quality but conservative non-GAAP metrics to either achieve or maintain higher ratings when approaching rating upgrades or downgrades. My findings collectively suggest that CRAs view non-GAAP metrics as more relevant tools when evaluating borrowers’ long-term performance and default risks, serving as key intermediaries between non-GAAP reporters and bondholders.
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    Are the voices of customers louder when they are seen? Evidence from CFPB complaints
    (2022) Mazur, Laurel Celastine; Hann, Rebecca; Business and Management: Accounting & Information Assurance; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
    This paper exploits a unique policy change in the banking sector – the first disclosure of the customer complaints submitted to the Consumer Financial Protection Bureau (CFPB) – to examine whether regulatory scrutiny represents one mechanism through which the disclosure of customer complaints can affect bank behavior. I find that banks with a higher complaint volume on the disclosure date increase mortgage approval rates relative to banks with fewer complaints in the same county, and that this effect is strongest in financially underserved communities. I further find that the disclosure effect is larger for banks under more regulatory scrutiny, namely, those operating in states with stronger consumer financial protection enforcement and those with prior consumer affairs violations. Taken together, the results suggest that the public disclosure of customer complaints, especially when accompanied by regulatory pressure, can serve as a mechanism for customers to influence banks’ consumer lending behavior.
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    BEYOND RISK: VOLUNTARY DISCLOSURE UNDER AMBIGUITY
    (2022) Rava, Ariel; Zur, Emanuel; Business and Management: Accounting & Information Assurance; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
    In my dissertation, I examine the impact of ambiguity (Knightian uncertainty), alongside that of risk, on firms’ voluntary disclosure decisions. I confirm the well-known result that an increase in risk—uncertainty over outcomes—is associated with an increase in management guidance (earnings and capital expenditure forecasts). Conversely, I find that an increase in ambiguity—uncertainty over the probabilities of outcomes—is associated with less guidance. Furthermore, I show that ambiguity decreases following voluntary disclosures, consistent with managers being aware of and reacting to heightened ambiguity. Finally, I provide novel empirical evidence showing that guidance under ambiguity has adverse capital market consequences. Even though the ways through which risk impacts managers’ disclosure decisions have been extensively studied in the accounting literature, no extant research has examined whether and how ambiguity impacts these decisions. My findings are consistent with the notion that managers’ take into account the ambiguity in the environment, showing that ambiguity has an important and distinct impact on their voluntary disclosure decisions.
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    The Impact of Earnings Manipulation on the Science and Practice of Strategic Management
    (2021) Gibbs, Ralph Anthony; Waguespack, David; Agarwal, Rajshree; Business and Management: Management & Organization; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
    Strategic management research frequently seeks to explain variation in organizational performance using metrics such as accounting profits scaled by firm assets (ROA). Essay 1 addresses a concern with such accrual-based accounting methods—perhaps best illustrated by a large discontinuity in the distribution of ROA around zero for U.S. public firms—that operational and accounting practices will artificially inflate/deflate accounting profit. The essay establishes that such earnings management is common, introduces non-classical noise, and distorts our understanding of broad drivers of firm performance. It concludes with an analysis showing that an alternative performance measure, Cash Flows from Operations on Assets (OCFOA), offers a robust vehicle for checking results using accounting profits. Essay 2 addresses a core prediction of the behavioral theory of the firm—that a firm is more likely to engage in strategic change when its performance falls short of its aspirations. If a firm manipulates income to report above aspirations when otherwise it would have fallen short, this creates a theoretical tension—does the firm engage in strategic change or not? This study utilizes two instrumental variables for a firm’s capability to smooth earnings to analyze the linkage between earnings smoothing and strategic change. The results suggest that public firms actively smoothing earnings have a lower propensity to subsequently change the firm’s major resource allocations, and that avoiding reporting performance below aspirations is a mechanism through which this may occur.
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    CAUSES AND CONSEQUENCES OF SUPPLY CHAIN TRANSPARENCY: EVIDENCE FROM SUPPLIER IDENTITY DISCLOSURE.
    (2021) Choi, Jin Kyung; Hann, Rebecca; Business and Management: Accounting & Information Assurance; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
    This study examines the determinants and consequences of managers’ choices to disclose the identity about their firm’s first-tier suppliers. I find that reputational benefits, informational benefits, and proprietary costs are important determinants in a firm’s voluntary disclosure choices regarding the identity of suppliers. Further analyses reveal that both shareholders and financial intermediaries find supplier identity disclosures useful. I find that shareholder response to supply chain risk events is timelier for firms that disclose supplier identity. Moreover, supplier identity disclosure appears to help analysts improve earnings forecast accuracy. Taken together, my results shed light on the cost-benefit tradeoffs faced by firms in disclosing supplier identity and how capital market participants use the information disclosed.
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    Does Climate Change Transparency Affect Capital Flows? Evidence from Mandatory Greenhouse Gas Emissions Disclosure
    (2021) Zotova, Viktoriya; Hann, Rebecca; Zur, Emanuel; Business and Management: Accounting & Information Assurance; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
    In this study, I exploit a quasi-natural experiment—the introduction of the mandatory Greenhouse Gas Emissions Reporting Program (GHGRP) in the United States—to examine the impact of climate change regulations on corporate investments, in particular, the effect of non-financial carbon disclosures on firms’ capital investment location decisions. Using unique project-level data on inter-state and foreign direct investments (FDI) for a sample of U.S. corporations, I document two sets of findings. Within the U.S., firms reacted by increasing investments in more environmentally-oriented jurisdictions, while decreasing investments in less environmentally-oriented jurisdictions, making the domestic profile of investment greener. Outside of the U.S., in contrast, I find that, against a backdrop of declining global FDI, the reduction of U.S. FDI was significantly smaller in less environmentally-oriented jurisdictions, making the international profile of investment less green. These results are driven by firms with lower environmental reputation. I show that a channel for the Program’s effect on investment location decisions is the presence of capital market pressure, which is in alignment with the goals of the Program to raise awareness among stakeholders. Consistent with investment and disclosure theory, the results suggest that firms with lower environmental reputation respond to investor pressures by geographically shifting investments into more eco-friendly locations at home but not abroad. Overall, the study demonstrates that carbon disclosure policies, such as the GHGRP, can have a significant effect on firms’ real decisions as well as potential international spillovers.
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    Earnings Uncertainty and Nonprofessional Intermediaries
    (2021) Hyman, Cody Alyssa; Seybert, Nick; Business and Management: Accounting & Information Assurance; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
    Prior research is mixed on individual investors’ ability to utilize earnings information and generally credits professional information intermediaries with alleviating processing costs. Over the past decade, individual investors increasingly rely on online social networks to help them process the information they use to trade. This paper investigates the role of earnings uncertainty (persistence, predictability, smoothness, and accrual quality) as a processing cost and the ability of nonprofessional intermediaries to ameliorate this cost. Using comments and trades made on a popular social trading platform as raw and applied information, respectively, I show that raw information is impeded by earnings uncertainty while applied information reduces integration costs to improve the use of earnings information.
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    ARE INDIVIDUAL INVESTORS INFORMED TRADERS? EVIDENCE FROM THEIR MIMICKING BEHAVIOR
    (2020) Polat, M. Fikret; Hann, Rebecca; Business and Management: Accounting & Information Assurance; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
    Evidence from a large stream of research suggests that individual investors are uninformed noise traders, who push equity prices away from fundamentals. Recent studies, however, find that individual investors are sophisticated—their trades contain information about future stock prices. In this study, I shed light on this debate by examining a potential channel through which individual investors become informed: trading disclosures of other market participants. Specifically, I examine whether individual investors exploit the proprietary trading strategies of institutional investors revealed in 13F filings. Using a large sample of retail trades, I find a significant positive association between the order imbalance of retail investors and the first buys of institutional investors around the 13F disclosure deadline, with the positive association concentrated among transient and growth-style institutions. The results suggest that not only do individual investors engage in mimicking trading, but their mimicking behavior is selective. I further find that retail investors’ order imbalance predicts future stock returns, with this predictive ability more pronounced in the week around the 13F disclosure deadline, which suggests that individual investors benefit from their selective mimicking trading. Lastly, I find that mimicking trading accelerates the price discovery of upcoming earnings news. Overall, this study enhances our understanding of how individual investors use public disclosures to become informed and contributes to the debate on whether individual investors are informed traders as well as work on the role of SEC disclosures in leveling the informational playing field.
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    Analysts Unchained—Expanded Information Processing Capacity and Effort Transfer under Technology Adoption
    (2020) Feng, Ruyun; Kimbrough, Michael; Business and Management: Accounting & Information Assurance; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
    Analysts acquire and disseminate information to assist investors in equity valuation. Despite their expertise in equity valuation, sell-side analysts are economic agents with limited time and cognitive resources. The constraint on an analyst’s information processing capacity is reflected by the previously documented negative association between an analyst’s forecast accuracy for a focal firm and the total number of firms the analyst covers. While prior research focuses on analysts’ attributes and portfolio firm characteristics as factors impinging on analysts’ information processing capacity, I examine whether information technology—an exogenous factor—can alleviate this constraint. Using the recent exogenous shock of XBRL adoption, I find that the widespread adoption of XBRL expands analysts’ information processing capacity. I document two consequences of this expanded capacity. As an analyst’s information processing capacity increases, the analyst either improvs the forecast accuracy for non-adopting firms in the existing portfolio or increases the size of the portfolio. This finding indicates that the adoption of XBRL generates a positive externality from the adopting firms due to the transfer of analyst effort away from those firms. This study provides the first evidence that exogenous factors such as the adoption of new technology can expand analysts’ information processing capacity, thereby allowing analysts to improve the overall quality of existing coverage and allowing more firms to enjoy the benefits of analyst coverage. The paper also provides the new insight that information externalities can exist among firms that are fundamentally unrelated by identifying another channel—the effort channel—as a source of such externalities.