Bohui Zhang

The Governance Effect of the Media’s News Dissemination Role: Evidence from Insider Trading

We investigate whether the media plays a role in corporate governance by disseminating news. Using a comprehensive data set of corporate and insider news coverage for the 2001–2012 period, we show that the media reduces insiders’ future trading profits by disseminating news on prior insiders’ trades available from regulatory filings. We find support for three economic mechanisms underlying the disciplining effect of news dissemination: the reduction of information asymmetry, concerns regarding litigation risk, and the impact on insiders’ personal wealth and reputation. Our findings provide new insights into the real effect of news dissemination.

The Invisible Hand of Short Selling: Does Short Selling Discipline Earnings Management?

We hypothesize that short selling has a disciplining role vis-a-vis firm managers that forces them to reduce earnings management. Using firm-level short-selling data for thirty-three countries collected over a sample period from 2002 to 2009, we document a significantly negative relationship between the threat of short selling and earnings management. Tests based on instrumental variable and exogenous regulatory experiments offer evidence of a causal link between short selling and earnings management. Our findings suggest that short selling functions as an external governance mechanism to discipline managers.

Commonality in News Around the World

Motivated by the pioneering study of Morck, Yeung, and Yu (2000), this paper investigates whether and how news commonality varies according to a country׳s institutional environments. Using a unique global news data set across 41 countries for the 2000–2009 period, we document three notable findings. First, firm-level news comoves more in countries with weaker institutional environments than in those with stronger institutional environments. Second, news commonality is positively associated with both stock return comovement and stock liquidity commonality. Third, the effect of news commonality on stock return and liquidity comovement is higher in countries with stronger institutions than in those with weaker institutions. These results suggest that a country׳s institutional environments affect firm-specific information production and, more importantly, support the information-efficiency view that lower price synchronicity is caused by greater capitalization of firm-specific information.

Foreign Institutional Ownership and the Global Convergence of Financial Reporting Practices

This paper investigates whether foreign institutional investors affect the global convergence of financial reporting practices. Using several measures of reporting convergence, we show that U.S. institutional ownership is positively associated with subsequent changes in emerging market firms’ accounting comparability to their U.S. industry peers. We identify this association using an instrumental variable approach that exploits exogenous variation in U.S. institutional investment generated by the JGTRRA Act of 2003. Further, we provide evidence of a specific mechanism—the switch to a Big Four audit firm—through which U.S. institutional investors affect reporting convergence. Finally, we show that, for emerging market firms, an increase in comparability to U.S. firms is associated with an improvement in the properties of foreign analysts’ forecasts.This paper investigates whether institutional investors have a significant influence on the comparability of their investee firms’ financial reporting. Using the comparability measure developed in De Franco et al. (2011), we show that emerging market firms with a higher level of U.S. mutual fund ownership experience an increase in their financial statement comparability with their U.S. industry peers. To address the possibility of reverse causality and omitted variables, we adopt a changes-in-changes specification and an instrumental variables approach, both of which suggest changes in institutional ownership drive comparability changes. Consistent with our interpretations, we find no evidence that non-U.S. foreign institutional ownership affects firms’ comparability with their U.S. industry peers. Further, the documented comparability increase is particularly strong when U.S. mutual funds’ positions are concentrated in large blocks and have been held for over a year. Finally, we show that the appointment of independent U.S. directors to the board and audit committee and the hiring of a big-four auditing firm appear to be important channels through which U.S. institutions affect non-U.S. investees’ financial reporting practices. JEL classifications: G32; G34; G38; M41; M48

How Do Foreign Institutional Investors Enhance Firm Innovation

We examine the effect of foreign institutional investors on firm innovation. Using firm-level data across 26 non-U.S. economies between 2000 and 2010, we show that foreign institutional ownership has a positive, causal effect on firm innovation. We further explore three possible underlying mechanisms through which foreign institutions affect firm innovation: foreign institutions act as active monitors, provide insurance for firm managers against innovation failures, and promote knowledge spillovers from high-innovation economies. Our paper sheds new light on the real effects of foreign institutions on firm innovation.

The World Price of Political Uncertainty

We investigate the pricing of global political uncertainty in international equity markets. Using a sample of firms across 38 countries for the period from 1991 to 2010, we find that global political uncertainty, measured by the Baker, Bloom and Davis (2015) U.S. economic policy uncertainty index, positively impacts the cost of equity capital for non-U.S. firms. The estimates suggest that a one standard deviation increase in global political uncertainty leads to a 29 basis point (3%) increase in the cost of capital. Countries that are more integrated into the international economy suffer a higher pricing impact from global political uncertainty, especially those countries with fewer veto players. The findings highlight the significance of a global political risk premium.We investigate the pricing of global political uncertainty in international equity markets. Using a sample of firms across 38 countries for the period from 1991 to 2010, we find that global political uncertainty, measured by the Baker, Bloom and Davis (2015) U.S. economic policy uncertainty index, positively impacts the cost of equity capital for non-U.S. firms. The estimates suggest that a one standard deviation increase in global political uncertainty leads to a 29 basis point (3%) increase in the cost of capital. Countries that are more integrated into the international economy suffer a higher pricing impact from global political uncertainty, especially those countries with fewer veto players. The findings highlight the significance of a global political risk premium.

What Drives Investment-Cash Flow Sensitivity around the World? An Asset Tangibility Perspective

Motivated by ongoing debates on investment–cash flow sensitivity (ICFS) and its documented decline and disappearance in the U.S., we investigate the determinants of ICFS. Using firm-level data across 41 countries for the 1993–2013 period, we document an important role of asset tangibility in explaining the patterns in ICFS. Asset tangibility affects ICFS through two channels: investment intensity and cash flow persistence. As the share of tangible capital, investment and cash flow persistence has fallen in developed economies, ICFS has declined. In contrast, as developing economies operate with more tangible capital, have higher investment rates and more persistent cash flows, their ICFS is more stable. The results support our explanation of ICFS as a reflection of capital (investment) intensity and income predictability, rather than a measure of financial constraints.

Financial Liberalization and Innovation

We investigate the impact of financial liberalization on technological innovation. Using a fixed effects identification strategy and a sample of 51 developed and emerging economies between 1980 and 2008, we find that external equity finance dependent industries exhibit a disproportionately higher level of innovation output after financial liberalization. The relaxation of financial constraints, the utilization of human capital, and the transmission of foreign technology are three plausible underlying economic channels through which financial liberalization promotes innovation. Our paper provides new insights into the real effects of financial liberalization on the economy and growth.

The Value Impact of Stock Liquidity: An International Evidence

This study addresses an important issue about the role of stock market in corporate finance by directly examining the effect of stock liquidity on firm value on a broad sample of firms from 53 countries for the period 1981-2010. Consistent with finance theory, we document a strong positive association between stock liquidity and firm value at both the firm and country levels. This finding is robust to alternative stock liquidity measures and is not driven by the endogeneity problem. We further explore how country characteristics on investor protection affect the value impact of liquidity. The results show that strong investor protection and transparent financial reporting environments magnify the importance of stock liquidity to firm value. However, global market integration weakens the effects of local countrys investor protection regimes.

Innovation and Productivity Growth: Evidence from Global Patents

We explore the relation between a country’s patents and its economic and productivity growth. Consistent with patents reflecting important innovations, a one standard deviation increase in patent stock leads to a 1.58% (1.52%) elevation in GDP (TFP) growth. Patent stock has a stronger impact on growth than other previously documented determinants, including human capital and capital stock. The effect of private firms’ patents on both GDP and TFP growth are double that of public firms. These results support a growing innovation literature, which uses various patent variables as proxies for firm-level innovation, and contends that private firms are more innovative.