Frank Heflin

A test of risk clientele effects via an examination of trading volume response to earnings announcements

Abstract This research investigates whether volume reactions to a public announcement are related to changes in the risk of securities (i.e., investors undertake portfolio rebalancing when the risk of their portfolio becomes misaligned with their respective risk preferences). Our results document that an average (40 percent) change in beta is associated with a 0.10 percent increase in the number of shares traded in a ten-day period around the earnings announcement. Although risk clientele effects are less important than information effects, they are empirically significant.

Disclosure policy and intraday spread patterns

Purpose - The purpose of this paper is to study the relation between financial analysts’ ratings of firms’ disclosure policies and the intraday pattern in spreads between specialists’ bid and ask price quotes. Design/methodology/approach - Measure of the disclosure policy is based on financial analysts’ ratings of the quality of firms’ annual reports, quarterly and other information, and investor relations activities. The bid-ask spread is the ask price minus the bid price. Time-weighted bid-ask spreads were measured over half-hour trading intervals. Generalized method of moments is used to estimate regressions of bid-ask spreads on disclosure policy ratings and controls for trading volume, price volatility, and share price. Findings - It was found that spreads are uniformly lower for firms with higher-rated disclosure policies in all half-hour trading intervals during the day. In addition, increases in spreads in the first two half-hours of trading are smaller for firms with higher-rated disclosures. Finally, our evidence suggests spreads increase more in the last half-hour of trading for firms with better disclosure policies, and subsequent tests suggest this is due to greater end-of-day liquidity trading. Research limitations/implications - These results suggest that disclosure policy is a determinant of both the level and pattern of intraday bid-ask spreads. Firms with higher-rated disclosure policies have a more liquid market for their shares, which is theoretically linked to a lower cost of capital. In addition, better disclosure mitigates the decrease in market liquidity typically observed at the open of daily trading. Practical implications - Better disclosures can help reduce market frictions. Originality/value - This paper is the first to study the relation between disclosure policy and intraday spread patterns.

The BP Oil Spill: Shareholder Wealth Effects and Environmental Disclosures: THE BP OIL SPILL

We use the BP oil spill to provide new evidence regarding the consequences of, and motivations for, environmental disclosures. We find that among oil and gas firms drilling in US waters, those with greater environmental disclosure suffered smaller negative shareholder wealth effects following the spill. This suggests that shareholders believed firms with more environmental disclosures were better prepared to address future environmental regulations and less likely to experience similar environmental incidents. We also document an increase in environmental disclosure, specifically disclosures of disaster readiness plans, in the year following the spill. Firms with poorer past environmental performance were more likely to increase disaster readiness plan disclosures. The increased disclosure by the poor pre‐spill environmental performers is not entirely window dressing, as their post‐spill environmental performance improved. The totality of our evidence is most consistent with the voluntary disclosure theory of environmental disclosure.

A Re-Examination of the Cost of Capital Benefits from Higher Quality Disclosures

Prior research suggests a negative relation between disclosure and costs of capital, but Francis, Nanda, and Olsson (2008; hereafter, FNO) find the relation weakens considerably or disappears after controlling for earnings quality. Their results suggest that prior research may incorrectly attribute the capital market benefits of earnings quality to disclosure quality. FNO utilize a self-constructed disclosure measure similar to Botosan (1997), while considerable cost of capital research relies on AIMR disclosure ratings. We posit that AIMR ratings can capture elements of disclosure quality that affect capital costs even in the presence of earnings quality. We introduce earnings quality into the designs of three prominent studies documenting capital market benefits from higher AIMR-rated disclosures. We find that inferences from prior research suggesting that better disclosure quality is associated with lower costs of equity, bid-ask spreads, and costs of debt are robust to conditioning on earnings quality. Further, the economic significance of disclosure quality and earnings quality for costs of capital are roughly equivalent. Additional analyses using non-AIMR disclosure measures suggest that differences between the AIMR ratings and the FNO disclosure measure, rather than differences in sample period, likely explain the disparity in our and FNO’s results. We conclude earnings quality does not subsume disclosure quality in explaining costs of capital.