Brett Trueman

Information quality and the valuation of new issues

Abstract The prevailing belief in the marketplace holds that the choices of auditor and investment banker affect the price of an initial public offering. This belief reflects the idea that the auditor and investment banker quality provides information about the firms true value. This paper presents a model giving this belief theoretical support. Under plausible conditions, it is shown that an entrepreneur with favorable information about his firms value chooses a higher-quality auditor and investment banker than an entrepreneur with less favorable information. As a result, firm value is an increasing function of auditor and investment banker quality.

Why do managers voluntarily release earnings forecasts

Abstract Managers often release earnings forecasts in advance of actual earnings announcements. It would appear that managers should at best be indifferent to such release given that the actual earnings will be disclosed at a future date. However, if the managers objective is to maximize his firms market value and he has control of production decisions, he may be motivated to release an earnings forecast. The reason is that the forecast release gives investors a more favorable assessment of the managers ability to anticipate economic environment changes and to adjust production plans accordingly. Forecast release can thereby translate into a higher firm market value.

Public disclosure, private information collection, and short-term trading

Abstract This paper examines how public disclosure affects private inforamtion acquisition activity in a market economy. We analyze a setting where traders with short-term investment horizons are allowed to trade on their private information prior to a public disclosure. We demonstrate in this setting that public disclosure stimulates investment in private information acquisition. This result is shown to have implications for the magnitude of the pre-announcement and announcement price reactions to the disclosure.

The Relationship between the Level of Capital Expenditures and Firm Value

When a firms management needs to raise external capital in order to finance an investment project, it is likely to have better information about the projects future return than do potential investors. In such a case, as has been shown in the literature, management may be able to signal its information through the use of certain financial variables. However, the possibility that management may be able to use the level of investment in the project itself to signal their information has not been considered. The purpose of this paper is to examine this possibility. It is shown here that the level of capital investment may be able to perfectly reveal managements information, with a higher input level signalling more favorable information. It is further demonstrated that even in this equilibrium, financial variables still play an important role. Among other results, it is shown, in contrast to a conclusion of a study by Leland and Pyle, that in this setting the number of shares held by management may be negatively correlated with the favorableness of their information.

Managerial Disclosures and Shareholder Litigation

This paper explores the link between shareholder lawsuits brought under Rule 10b-5 of the Securities Exchange Act of 1934 and managerial disclosures of prospective information. When the managers information is such that there is no affirmative duty to disclose under Rule 10b-5, previous research has shown that the manager will withhold his information if it is sufficiently unfavorable and will disclose it otherwise. When the managers information is such that there exists an affirmative duty to disclose under Rule 10b-5, it is shown here that the manager will release either good news or news that is sufficiently bad. Further, the good news disclosures are expected to be more precise than those that reflect unfavorable information. It is also demonstrated that the probability of a disclosure will increase with both the precision of the managers information and the variability of his firms earnings.

Anomalous Stock Returns Around Internet Firms' Earnings Announcements

This paper presents evidence of anomalies in internet firms’ stock returns surrounding their quarterly earnings announcements. There is a general runup in prices in the days prior to the earnings announcements, followed by a price reversal lasting for several days. The magnitude of the market-adjusted returns associated with these price movements exceeds 11 percent over a 10-day period. We find little evidence to suggest that these returns can be explained either by the earnings news disclosed or by risk changes. Additional analyses suggest that these return patterns are driven, at least in part, by price pressure. r 2002 Elsevier Science B.V. All rights reserved. JEL classification: M41; G14

The Interpretation of Information and Corporate Disclosure Strategies

This paper analyzes a setting in which a firms manager can credibly disclose facts, but not their valuation implications. Consequently, he is uncertain as to how those disclosed facts will be interpreted by investors. Introducing such uncertainty affects the managers disclosure strategy in two important ways. First, it becomes a function of the markets prior valuation of the firm since that valuation provides a clue as to how future disclosures are likely to be interpreted by investors. Second, the disclosure strategy is no longer characterized, in general, by a single good news/bad news partition of the managers private information.

Overnight Returns and Firm-Specific Investor Sentiment

We examine the suitability of using overnight returns to measure firm-specific investor sentiment by analyzing whether they possess characteristics expected of a sentiment measure. We document short-term overnight-return persistence, consistent with existing evidence of short-term persistence in the share demand of sentiment-influenced investors. We find that short-term persistence is stronger for harder-to-value firms, consistent with existing evidence that sentiment plays a larger role for such firms. We show that stocks with high (low) overnight returns underperform (outperform) over the longer term, consistent with prior evidence of temporary sentiment-driven mispricing. Overall, our evidence supports using overnight returns to measure firm-specific sentiment.

The Impact of Analyst Industry Expertise on Market Prices

Security analysts are often considered experts in the industries they follow. We analyze the impact of such expertise on market prices and returns in a setting where firms’ earnings components may differ in their levels of persistence over time. In this context we show that a firm’s post-earnings announcement price is a function of the analyst’s prior earnings forecast even though that forecast does not contain any incremental information about current period earnings. This is because the forecast provides information about the firm’s individual earnings components, which is useful in predicting its future earnings. We demonstrate how this result can serve as a theoretical underpinning for the observed market premium earned by firms that meet or beat consensus analyst forecasts and how it can explain the premium’s empirical link to future earnings performance. This result also provides a rational justification for the practice of expectations management. We derive the optimal expectations management strategy in our setting and compare its effectiveness to that of earnings management.

Discussion of Operating Decisions and the Disclosure of Management Accounting Information

In this paper, the authors examine how operating decisions can serve as an alternative to direct disclosure of information. They do so in the context of a two-period model in which an entrepreneur must decide at the end of the first period whether or not to replace an asset. This decision is made after the entrepreneur observes a noisy private signal, y, of the firms first-period earnings. The entrepreneur must also choose whether or not to reveal y publicly. If he does so, he incurs a cost of c. However, even if he does not release y, investors learn something about its value through the entrepreneurs asset replacement decision. The authors focus on the case where the entrepreneur precommits with the supplier of the asset at the beginning of the first period as to the replacement policy he will follow as a function of y. The efficient policy, assuming no asymmetric information, would be to replace the asset if the entrepreneurs expectation of its first-period return is below the expected return that can be earned from purchasing a new asset. However, because the entrepreneur possesses private information, he may deviate from this efficient policy. In considering such a deviation, the entrepreneur weighs two factors. On the negative side, a deviation adversely affects the firms earnings. On the positive side, since the replacement decision provides information to investors, a deviation from the efficient policy might reduce the probability that the entrepreneur would later choose to disclose his private information directly. If so, it would also reduce the expected level of disclosure costs. The entrepreneur