Clarification Announcement Anomaly, Corporate Governance Failure And Trust Crisis

Since1996, China Securities Regulatory Commission (CSRC) requires listed companies to issue clarification announcement when a rumor emerges in the stock market. However, the argument that "Clarification announcement blurs the truth" never stops since then. The CSRC, Shanghai Exchange and Shenzhen Exchange modified the requirement several times to improve the disclosure quality. Companies are required to promise "no asset restructuring activity in three months" in the clarification announcement. However, the clarification announcement can not offset the influence of the rumor, and investors are heavily influenced by the announcement. My study select clarification announcement in China stock markets from2005to2012, mainly focus on asset restructuring event to explore the causes of clarification announcement anomalies.Asset restructuring rumors counts for half of the rumors in China capital market, even though standard setter sets strict rules to regulate the disclosure, for example, requires companies to promise "not engage in asset restructuring activity in three months", investors always complain that "clarification announcement blurs the truth". In my research, case study, archival study and experiment study are jointed to explore the causes of clarification anomalies. My study is proposed to answer the following questions:How the companies use the different ways to clarify the same rumor? How the wording differentiates the abnormal return? Are the investors confused by the clarification announcement? Do the managers strategically disclose the announcement to manipulate the stock price? Is corporate governance related to the clarification? Are the investors biased over the clarification announcement? Do the investors trust the companies? How investors make the final investment decision?The study summarizes the clarification announcement since2005and demonstrate the prevalence of "blurring clarification". Further, the study adopted textual analysis and categorize the clarification into "complete deny","partially deny","promise" and "no promise". I test the abnormal return by category and the abnormal trading volume as the proxy of belief heterogeneity among investor, In order to study the causes of the clarification announcement anomalies, I conduct the test from two perspectives:managers and investor. Corporate governance failure the trust crisis on managers are two major causes.The dissertation is arranged as follows:Chapter1. Introduction. This chapter introduces the background, the significance, methodology and structure.Chapter2. Literature review and theoretical basis. The paper joint the archival and behavior method to explore the clarification anomalies. Accounting research heavily relies the cognitive psychology and social psychology. My study systematically summarizes the psychology theory applied in accounting and finance research, and demonstrate how accounting behavior research apply these theories in the most recent two decades. Based on the literature, the dissertation proposes a framework to study the information disclosure and investor protection. In the framework, archival and behavior methodology are jointed applied to study the same phenomenon. A research can conduct a research form different perspectives, including market, corporate governance and investor decision making, to test the efficiency and effectiveness of the information disclosure thus propose a better investor protection setting.Chapter3, Clarification announcement requirement and "blurring the truth". The chapter introduces the requirement of clarification announcement and how the standard setters modify the requirement over20years. This chapter also summarizes the clarification announcement between2005to2012, and provides summary statistics on the nature of the rumor, the media and the features of the companies. I also demonstrate the prevalence of "blurring truth" by cases.Chapter4, Clarification announcement and market reaction, In this chapter, the study adopted textual analysis and categorize the clarification into "complete deny","partially deny","promise" and "no promise". The study tests the abnormal return of both the rumor and the clarification announcement by category to demonstrate how the wording of clarification announcement influences the market reaction. Also, abnormal trading volume is used as the proxy of investor heterogeneous of investor belief to test whether investors are confused by the clarification announcement.Chapter5, Clarification announcement and Corporate governance failure. I test the corporate governance failure in two steps. First, test the restructuring activity in three months, six months, nine months and one year after company clarify the rumor. Because asset restructuring is a long complicates process, in this way, we can test the predictive power of the wording in the clarification announcement for the real restructuring activity, and test whether the managers are truthful when they issuing the clarification announcement. Second, I demonstrate how board of directors, board of supervisors, independent directors and audit committee influence the clarification announcement decision.Chapter6,"blurring truth and investor decision". In this chapter, an experiment is conducted to test how the investors make investment decision. The instrument applied the disclosure in real situation, including "complete deny","partially deny","promise" and "no promise". Investors based upon the disclosure to evaluate the chance of restructuring and stock price and make investment decisions. Understanding the decision path, I try to explain the anomalies.Chapter7, Clarification and trust crisis. This chapter tests the investors'trust on managers by an experiment, In the experiment, I manipulate the nature of the rumor (routine event and asset restructuring), disclosure format (conforming the requirement and non conforming). Investors evaluate the credibility and truth worth of the managers and make the decision to invest based on the provided information. In this experiment, I can demonstrate the influence of credibility on investment decision.Chapter8:This chapter includes the main conclusion, policy implications and research limitation, and proposed for future research.Main findings in this dissertation are as follows:1. Consistent with prior literature, both the rumor and the clarification can induce abnormal market reaction. Additional to replicate the result of the literature, I find that the wording in the clarification announcement can significantly influence the abnormal return, the stronger the wording to clarify the rumor, the lower the abnormal return is.2. The clarification announcement can attract investors, which causes significantly increase trading volume. The strength of deny can cause the heterogenity of belief. I use abnormal trading volume as the proxy of the heterogenity of belief to demonstrate the confusion among investor. In the event day of rumor clarification, the announcement causes confusion among investors because of the ambiguity of the wording.3. About70%companies have asset restructuring activity, even all the companies denied the rumor. The wording of clarification has predictive value for the future restructuring event. There are two reasons that a company issue an ambiguous announcement. First, the asset restructuring event has uncertainty, and Second, the managers strategically manipulate the stock price.4. Corporate governance failure is one of the main causes of "blurring truth". The supervisory directors, auditors and block shareholders actively prevent ambiguous clarification. However, the board of directors, including independent directors do not work as supposed to prevent the ambiguity of the clarification.5. The wording can influence the investor decision through the effect on the chance of the future restructuring activity. Investors ignore belief of the event, even they believe a specific restructuring can be bad news in the long run, they invest into the rumor company as the price would go up with the restructuring event. The "three month promise" does not work well. Investors believe the company has a higher chance of restructuring even the company promise.5. The investors attribute the disclosure to the credibility of the management. In the routine event, investment decision is based on the credibility of the management and the chance of the good news.6. In asset restructuring event, the investors ignore the credibility of the managers. The investment decision is based on the chance of restructuring. Investors are already tired of "asset restructuring" rumors, which is the half of the total rumors. Investors might rationale that the rumor is spread by managers. So they ignore the credibility of the managers.Major improvement and innovation are evident in the following aspect:1. The dissertation proposed a framework to study information disclosure and investor protection. Under the framework, a scholar can study disclosure form different perspective, such as investor bias and manager incentive.2. Explore the causes of "blurring truth" from different perspectives. There are mainly two causes:corporate governance failure and investor trust crisis. The ex ante and ex post test demonstrate the validity of the corporate governance test. The experiment allows me to explore the investment decision path.3. Introduce the psychological theory to explain the reason to "blurring truth". The attribution theory and limited attention theory allow me to explain the decision bias of investors. My study extends literature by demonstrating the limitation of investor cognition which causes decision bias. The understanding of investor decision making can help standard setters improve the regulation.