Frank D. Hodge

The Impact of Expertise and Investment Familiarity on Investors' Use of Online Financial Report Information

In this study we use a unique dataset to examine whether professional and nonprofessional investors use different online quarterly financial information when making investment decisions, and whether the online information they use depends on whether they are researching a new investment or evaluating a current investment. Our results suggest that professional investors prefer to view PDF-formatted quarterly reports and tend to rely directly on the financial statements compared with nonprofessional investors who prefer to view HTML-formatted reports and have a tendency to rely more on managements discussion of the quarters results. Our results also suggest that, for nonprofessional investors, investment familiarity (i.e., whether they are evaluating a current investment or researching a new investment) strongly affects the type of financial information they view within a firms quarterly reports. Our results have implications for the design of experimental studies, and provide information useful to managers, financial report users, standard setters, and researchers as they attempt to better understand the types of information that professional and nonprofessional investors use when making investment decisions.

Does Voluntary Adoption of a Clawback Provision Improve Financial Reporting Quality

We examine whether financial reporting quality improves after firms voluntarily adopt a compensation clawback provision. Clawback provisions allow companies to recoup excess incentive pay in the event of an accounting restatement, and are intended to ex ante deter managers from publishing misstated accounting information and to ex post penalize managers who do so. For the period 2007-2009, our difference-in-differences analysis reveals significant improvements in both actual and perceived financial reporting quality following clawback adoption, relative to a propensity-matched set of control firms. We also find an increase in compensation for CEOs who are subject to new clawback provisions, as well as an increase in the sensitivity of cash compensation to accounting performance. In cross-sectional tests, our findings indicate that “robust�? clawback provisions, those that apply to restatements caused by either intentional or unintentional errors, have an incrementally larger impact on financial reporting quality and compensation than do clawback provisions that apply only to restatements involving fraud.

How Disclosure Medium Affects Investor Reactions to CEO Bragging, Modesty, and Humblebragging

We examine if investor expectations of two common disclosure mediums (conference calls and Twitter) interact with a CEOs communication style to influence investor judgments. Consistent with theory, results show that when the disclosure medium is a conference call, investors are less willing to invest when the CEO is modest about positive firm performance compared to when the CEO brags. In contrast, when the disclosure medium is Twitter, investors are less willing to invest when the CEO brags about positive firm performance compared to when the CEO is modest. Further analysis reveals that perceived CEO credibility mediates the influence of a CEOs communication style and disclosure medium on investor judgments. Additionally, we find that regardless of the disclosure medium, investors are less willing to invest in a firm when the CEO humblebrags about positive firm performance relative to when he brags or is modest. Our study contributes to the emerging literature on social media and disclosures, and to the literature investigating how style features of disclosures influence investor judgments. Our results also have practical implications for firms and managers developing communication strategies for new disclosure mediums like Twitter.

Investor Behavior and the Benefits of Direct Stock Ownership

Using an experiment to rule out reverse causality, we examine whether a small investment in a company’s stock leads investors to purchase more of the company’s products and adopt other views and preferences that benefit the company. We pre-register our research methods, hypotheses, and supplemental analyses via the Journal of Accounting Research’s registration based editorial process. We find little evidence consistent with these hypotheses for the average investor in our sample using our planned univariate hypothesis tests, and planned Bayesian parameter estimation shows substantial downward belief revision for more optimistic ex ante expectations of the treatment effects. In planned supplemental analyses, however, we do find that the effects of ownership on product purchase behavior and on regulatory preferences are intuitively stronger for certain subgroups of investors — namely, for investors who are most likely to purchase the types of products offered by the company and for investors who are most likely to vote on political matters. The results contribute to our understanding of the benefits of direct stock ownership and are informative to public company managers and directors.

The Effects of the Method of Earnings Management and its Underlying Motive on Shareholders’ Assessments of Cash Flows, Trust in Managers, and Investment Decisions

Accruals-based earnings management that benefits shareholders has been described as costless to a firm because this form of earnings management does not adversely affect the firm’s cash flows. To examine this issue further, we conduct an experiment that considers how shareholders react to the method of earnings management and its underlying motive. Our findings complement prior research by showing that accruals-based earnings management does not impair shareholders’ assessments of a firm’s cash flows. However, our findings also extend prior research by highlighting that accruals-based earnings management is costly because it adversely affects shareholders’ trust in managers and ultimately shareholders’ willingness to invest in a firm. Specifically, when the motive underlying earnings management is consistent with shareholders’ interests, we find that accruals-based earnings management reduces shareholders’ trust in managers while real earnings management does not. Overall, we find that the method of earnings management and its underlying motive indirectly affect investment decisions through their differential effects on shareholders’ assessments of a firm’s cash flows and trust in managers. Accordingly, our study suggests that practitioners and researchers should consider the roles of shareholders’ assessments of both a firm’s cash flows and trust in managers when examining how shareholders react to earnings management.

How Suspicions of the Method of Earnings Management and Its Underlying Motive Affect Investors’ Trust in Managers and Willingness to Invest in the Firm

Accruals-based earnings management that benefits shareholders has been described as costless to a firm because this form of earnings management does not adversely affect the firm’s cash flows. To examine this issue further, we conduct an experiment that considers how shareholders react to the method of earnings management and its underlying motive. Our findings complement prior research by showing that accruals-based earnings management does not impair shareholders’ assessments of a firm’s cash flows. However, our findings also extend prior research by highlighting that accruals-based earnings management is costly because it adversely affects shareholders’ trust in managers and ultimately shareholders’ willingness to invest in a firm. Specifically, when the motive underlying earnings management is consistent with shareholders’ interests, we find that accruals-based earnings management reduces shareholders’ trust in managers while real earnings management does not. Overall, we find that the method of earnings management and its underlying motive indirectly affect investment decisions through their differential effects on shareholders’ assessments of a firm’s cash flows and trust in managers. Accordingly, our study suggests that practitioners and researchers should consider the roles of shareholders’ assessments of both a firm’s cash flows and trust in managers when examining how shareholders react to earnings management.

Do Compensation Clawback and Holdback Provisions Change Executive Reporting Choices

The Dodd-Frank Act requires firms to include a clawback or holdback clause in executive compensation contracts. Using an experiment, we examine how executives react to the enforcement of these clauses after a restatement. We find that executives generally reduced the riskiness of their financial reporting choices after enforcement. An exception was executives who made relatively conservative reporting choices prior to the restatement. Amongst these executives, those covered by a clawback clause made riskier reporting choices after the restatement than those covered by a holdback clause. Theory argues and supplemental analysis supports that this effect is due to executives becoming angry when they did not feel responsible for the restatement, but were nevertheless required to physically return their bonus. Our results are important because they provide evidence about how executives react to the enforcement of a clawback or holdback clause, and where their reactions might produce unintended consequences.