UC San Diego

This dissertation comprises three papers examining several questions in finance and accounting. A common thread is investigating the strategic interactions between public firms and stock market investors. Chapter 1 studies how investors with short-term horizons can impact firms' behaviors. Chapters 2 and 3 examine the impact of corporate disclosure and the market pricing of information.

In Chapter 1, I use the unique features of the margin trading system in China to identify the causal impact of transient investors on managerial myopia. Specifically, I employ a regression discontinuity design that exploits the ranking procedure that determines a stock's margin trading eligibility. I find that margin traders are extremely short-term oriented and cause a sharp increase in stock share turnover. Moreover, marginable firms cater to these transient investors by manipulating current earnings and reducing long-term investments. Consistent with managerial myopia, these firms experience a short-term price increase but a long-term decline in operating performance.

Chapter 2 is joint work with John Hughes, Jun Liu, and Dan Yang. We reexamine the relation between disclosure indices and cost of equity capital employing an empirical specification similar to that of \citet{botosan97} for a substantially larger sample over an extended time frame made possible by textual analysis. Our results provide no support for a hypothesis of a negative relation between disclosure indices and implied cost of equity capital. Rather, consistent with a bias of implied cost of equity capital as a proxy for expected return depicted by \citet{Hughes2009}, we find strong evidence of a positive relation.

Chapter 3 is joint work with Yibin Liu. We exploit an earnings-based delisting policy and examine its adverse effect on investor trust in earnings news. Besides providing prominent visual evidence of large-scale earnings management at the required earnings threshold, we find that firms close to this threshold are trusted less by investors, regardless of whether they have manipulated earnings. Moreover, we provide causal evidence by studying firms that approach this threshold due to a plausibly exogenous profitability shock. Our results suggest that earnings-based regulations with harsh punishment may lead to a decline in investor trust.