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The Quality of Financial Disclosure and its Implications on Stock Prices for Credit Downgraded Firms

Paiement, Alexandre LU and Chura, Zoriana (2016) BUSN89 20161
Department of Business Administration
Abstract
Over the last decade, financial disclosure and its impact on equity markets has increasingly become an area of interest. Firms suffering from poor operating performance have been shown to disclose bias earnings estimates as a means of evading negative market reactions. In this thesis, we attempt to discern whether managers purposefully bias their earnings estimates in periods of credit quality deterioration. Furthermore, we investigate the potential link between the quality of financial disclosure and the subsequent market reactions associated with firms having experienced a credit rating downgrade.
We base our study on a sample of credit rating downgrades from January 2010 to December 2015 by Standard and Poor’s for public firms in the... (More)
Over the last decade, financial disclosure and its impact on equity markets has increasingly become an area of interest. Firms suffering from poor operating performance have been shown to disclose bias earnings estimates as a means of evading negative market reactions. In this thesis, we attempt to discern whether managers purposefully bias their earnings estimates in periods of credit quality deterioration. Furthermore, we investigate the potential link between the quality of financial disclosure and the subsequent market reactions associated with firms having experienced a credit rating downgrade.
We base our study on a sample of credit rating downgrades from January 2010 to December 2015 by Standard and Poor’s for public firms in the United States. We find that there are no systematic changes in the quality of disclosure in the periods closest to the credit rating downgrade. Additionally, the evidence for the possible association of a change in disclosure quality and equity returns remains ambiguous akin to previous works on the matter. Through a sub sample of times-series and cross-sectional analyses, we reconfirm previous results on control variables and their respective associations to equity returns. We control for variables playing the role of proxies for the announcement effects and market anticipation. In general, we discuss the possible discrepancies between the option based view of debt and equity, the Wealth Redistribution Hypothesis, and Tversky and Kahneman’s (1991) “Loss Aversion” theories with regards to our observations. (Less)
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author
Paiement, Alexandre LU and Chura, Zoriana
supervisor
organization
course
BUSN89 20161
year
type
H1 - Master's Degree (One Year)
subject
language
English
id
8891369
date added to LUP
2016-09-13 15:02:59
date last changed
2016-09-13 15:02:59
@misc{8891369,
  abstract     = {Over the last decade, financial disclosure and its impact on equity markets has increasingly become an area of interest. Firms suffering from poor operating performance have been shown to disclose bias earnings estimates as a means of evading negative market reactions. In this thesis, we attempt to discern whether managers purposefully bias their earnings estimates in periods of credit quality deterioration. Furthermore, we investigate the potential link between the quality of financial disclosure and the subsequent market reactions associated with firms having experienced a credit rating downgrade.
We base our study on a sample of credit rating downgrades from January 2010 to December 2015 by Standard and Poor’s for public firms in the United States. We find that there are no systematic changes in the quality of disclosure in the periods closest to the credit rating downgrade. Additionally, the evidence for the possible association of a change in disclosure quality and equity returns remains ambiguous akin to previous works on the matter. Through a sub sample of times-series and cross-sectional analyses, we reconfirm previous results on control variables and their respective associations to equity returns. We control for variables playing the role of proxies for the announcement effects and market anticipation. In general, we discuss the possible discrepancies between the option based view of debt and equity, the Wealth Redistribution Hypothesis, and Tversky and Kahneman’s (1991) “Loss Aversion” theories with regards to our observations.},
  author       = {Paiement, Alexandre and Chura, Zoriana},
  language     = {eng},
  note         = {Student Paper},
  title        = {The Quality of Financial Disclosure and its Implications on Stock Prices for Credit Downgraded Firms},
  year         = {2016},
}