| The study in Chapter 1, "Information Quality and Stock Returns," seeks to determine the relation between firm information quality and stock returns. Using analyst forecast measures to proxy for the quality of the information environment, the results of Fama-MacBeth cross-sectional tests and a Fama and French (1993) factor model indicate high information firms outperform low information firms. The results are contrary to risk-based theories and may be related to investors skeptically regarding messages from low information firms as low information firms with large increases in earnings have relatively modest stock returns. An investment strategy based on information quality is shown to produce zero-cost returns of 11.5% per year, producing positive returns in 17 out of 19 years.;The study in Chapter 2, "International Differences in Financial Transparency," examines determinants of international differences in financial transparency using 42 countries. Financial transparency is hypothesized to be a function of country-specific, firm-specific, and management discretionary components. The country-specific variables include macroeconomic factors (inflation and change in Gross Domestic Product) and corporate governance structures (legal environment, ownership structure, and accounting disclosure). The firm-specific characteristics include firm size, earnings-to-price ratio, and profitability. Profitability is also used to analyze discretionary disclosure as firms in bad times may have incentives to reduce transparency. The dispersion and error of analyst forecasts are used to proxy for transparency. The testing utilizes portfolio sorts, country-level regression analysis, and firm-level regression analysis. The results are consistent with overall firm transparency levels being comprised of country and firm-specific components. Important determinants of transparency include the accounting disclosure level, firm size, and earnings-to-price ratio. Large, value firms and firms in countries with high accounting disclosure levels are relatively more transparent. The largest component of transparency, however, is related to profitability. In over 90% of the sample countries, loss firms are significantly less transparent than profit firms. Furthermore, greater forecast optimism is associated with loss firms suggesting these firms are offering vague or misleading information to the market. Additional show that in over 80% of the countries, the transparent firms outperform the opaque firms. |
