Jeffrey Ng

The effect of information quality on liquidity risk

I investigate whether information quality affects the cost of equity capital through liquidity risk. Liquidity risk is the sensitivity of stock returns to unexpected changes in market liquidity; recent asset pricing literature has emphasized the importance of this systematic risk. I find that higher information quality is associated with lower liquidity risk and that the reduction in cost of capital due to this association is economically significant. I also find that the negative association between information quality and liquidity risk is stronger in times of large shocks to market liquidity.

The Effect of Information Quality on Liquidity Risk

I investigate whether information quality affects the cost of equity capital through liquidity risk. Liquidity risk is the sensitivity of stock returns to unexpected changes in market liquidity; recent asset pricing literature has emphasized the importance of this systematic risk. I find that higher information quality is associated with lower liquidity risk and that the reduction in cost of capital due to this association is economically significant. I also find that the negative association between information quality and liquidity risk is stronger in times of large shocks to market liquidity.

Bank Competition and Financial Stability: Evidence from the Financial Crisis

We examine the link between bank competition and financial stability using the recent financial crisis as the setting. We utilize variation in banking competition at the state level and find that banks facing less competition are more likely to engage in risky activities, more likely to face regulatory intervention, and more likely to fail. Focusing on the real estate market, we find that states with less competition had higher rates of mortgage approval, experienced greater inflation in housing prices before the crisis, and experienced a steeper decline in housing prices during the crisis. Overall, our study is consistent with greater competition increasing financial stability.

Media Coverage and the Stock Market Valuation of TARP Participating Banks

Abstract We examine the impact of media coverage of the Capital Purchase Program (CPP) under the Troubled Assets Relief Program on the equity market valuation of participating bank holding companies (CPP banks). We document substantial negative coverage of the CPP and its participants over the five quarters following the programs initiation. We find that the extent of negative media coverage about the CPP exerted substantial downward pressure on the stock returns of CPP banks, decreasing their valuation relative to bank holding companies not participating in the program. We show that our findings cannot be explained by differences in the banks’ financial viability at the CPPs initiation, new information about their performance being released to the market after the CPPs initiation or preceding stock returns causing the negative media coverage. Our findings highlight the importance of investor sentiment, as reflected by the tone of media coverage, in banks’ valuation during a period of high uncertainty in financial markets.

The Effect of Board Independence on Information Asymmetry

Boards have an important role in ensuring that investors’ interests are protected. Our paper first examines whether the independence of a firms board affects information asymmetry among investors. We provide evidence that greater board independence leads to lower information asymmetry. Next, we provide evidence that more voluntary disclosure and greater analyst coverage are two underlying mechanisms via which greater board independence reduces information asymmetry. Of the two mechanisms, we find that analyst coverage is more significant in influencing how board independence affects information asymmetry. Overall, our paper contributes to a better understanding of the effect of board independence on information asymmetry.

Corruption in Bank Lending: The Role of Timely Loan Loss Recognition

Building on the recent literature on corruption in bank lending, we examine the effect of country-level timely loan loss recognition by banks on lending corruption using a unique World Bank dataset that covers more than 3,600 firms across 44 countries. We find evidence consistent with timely loan loss recognition constraining lending corruption because it increases the likelihood of problem loans being uncovered earlier. In further analysis, we find timely loan loss recognition to be less associated with reduced corruption in countries where there is significant government ownership in the banking system and deposit insurance schemes. This evidence is consistent with timely loan loss recognition being less of a deterrent to lending corruption when banks are less disciplined by their capital providers. & 2016 Elsevier B.V. All rights reserved.

Institutional Cross-Ownership and Corporate Financing of Investment Opportunities

When institutional blockholders cross-own multiple firms within the same industry, they are expected to have more private information about each individual firm, which, in turn, can improve monitoring and coordination. We document that cross-ownership facilitates external financing of investment opportunities, consistent with expectations of better post-financing outcomes with the presence of institutional blockholders. We show further that the effect of cross-ownership is stronger for firms that have poorer quality public disclosure, indicating that private information of institutional blockholders could mitigate difficulties in monitoring opaque firms. Our paper sheds light on how the nature of a firm’s existing owners can affect its ability to raise capital. JEL classification: G10, G23, G32.

Not Clawing the Hand That Feeds You: The Case of Co-Opted Boards and Clawbacks

Clawbacks can create significant tension between boards and management because the enforcement of clawbacks in the event of financial misreporting requires boards to recover compensation that has already been paid to management. We examine how board co-option, defined as the fraction of the board comprising directors appointed after the CEO assumed office, is related to clawbacks. We find that more co-opted boards are less likely to have clawbacks and this finding is robust to the use of director deaths as an instrument for board co-option. Moreover, we find that board co-option is an important underlying mechanism through which longer-tenured CEOs reduce the likelihood of clawbacks. Finally, we find that the negative effect of co-opted boards on clawbacks is more pronounced when there are co-opted directors on the compensation committee and when there is a higher likelihood of future enforcement of clawbacks. Our paper contributes to a better understanding of how board beholdenness can influence policies to punish management for financial misreporting.

The Effect of Shareholder-Initiated Corporate Governance on Accrual-Based and Real Earnings Management

Shareholder activism is an important source of corporate governance. Using a dynamic regression discontinuity design on shareholder proposals that pass or fail by a small margin of votes in shareholder meetings, we analyze the effect of shareholder-initiated corporate governance on earnings management. We find that both accrual-based and real earnings management diminish after shareholder proposals are passed. However, when we focus on proposals to improve auditor independence or to approve clawback provisions (i.e., proposals targeted at firms’ financial reporting), we find that accrual-based earnings management decreases while real earnings management increases, suggesting a substitution effect. Consistent with one of these proposals’ objectives, dealing with weakness in financial reporting due to “entrenched�? auditors, we find that the substitution effect is stronger for firms with entrenched auditors. The substitution effect is also stronger when a firm has less analyst coverage and lower institutional investor ownership, suggesting a shift to potentially more costly real earnings management when there is weaker external monitoring. Overall, our paper contributes to the literature on shareholder activism by demonstrating that shareholder-initiated corporate governance can affect earnings management and that the effect can vary depending on the nature of the activism.

Economic Policy Uncertainty and Accrual Estimates: Evidence from the Banking Industry

Policy uncertainty (PU) is an increasingly important issue in many economies. Extensive evidence indicates that higher PU is associated with future negative macroeconomic and microeconomic conditions. In this paper, we examine how PU affects banks’ accruals for loan losses. Consistent with banks signaling more expected loan losses, we document that in times of higher PU, banks make more loan loss provisions. This positive association is more pronounced for banks that were previously less prudent in their risk-taking and loan loss reserving, indicating that less prudent banks are more adversely affected by loan losses in difficult times. We also show that higher attention paid to a banks’ financial reporting strengthens the role of loan loss provisions as a signal of expected loan losses. Overall, our paper offers insight into how, in the face of PU, banks convey information about their loan portfolios to their stakeholders.