Welcome to Darren Roulstone’s Research Homepage
Published and Working Papers and Works-in-progress by
topic:
Investor Information Demand
Investor Information
Demand: Evidence from Google Search around Earnings Announcements (With Michael Drake and Jake Thornock;
forthcoming at the Journal of Accounting
Research)
The objective of this study
is to investigate factors that influence investor information demand around
earnings announcements and to provide insights into how variation in
information demand impacts the capital market response to earnings. The internet is one channel through which
public information is disseminated to investors and we propose that one way in
which investors express their demand for public
information is via Google searches. We find that abnormal Google search
increases about two weeks prior to the earnings announcement and then spikes
markedly at the announcement with an order of magnitude at least as large as
that of other important corporate events (e.g., acquisition announcements).
When investors search for more information in the days just prior to the
announcement, pre-announcement price and volume changes reflect more of the
upcoming earnings news and there is less of a price and volume response when
the news is announced. This result suggests that when investors demand
more information about a firm, the information content of the earnings
announcement is partially preempted.
What Investors Want: Evidence from
Investors’ Use of the EDGAR Database
(with Michael Drake and Jake Thornock)
Using a novel dataset that
tracks all web traffic on the SEC EDGAR servers, we examine the timing and
extent of investors’ revealed preferences for mandatory financial filings. The
data reveal that investors request millions of filings from EDGAR each week.
The most requested filings include the 10-K, 10-Q, and 8-K, along with insider
trading disclosures filed on Form 4. However, many of the filings that are
required by the SEC are rarely used by investors. Examining the timing of investor
requests, we find that investors commonly request historical disclosures filed
in prior periods and that abnormal demand for historical filings is higher when
lagged and current abnormal stock returns are lower. Examining firm characteristics associated
with the demand for filings, we find that abnormal EDGAR requests are
negatively associated with lagged abnormal returns, and positively associated
with lagged return volatility, media attention, and the presence of earnings
announcements. Thus, we find that
investors turn to mandatory financial filings during periods of time when news
is released, but more specifically when the news is negative and when there is
increased uncertainty about the firm.
The Informativeness of Stale Financial
Disclosures (with Michael Drake and
Jake Thornock; submitted to Journal of Accounting Research)
In a competitive market,
gains to information releases are quickly traded away, rendering the new
disclosures less informative to price. Subsequently, only unsophisticated
investors would be expected to trade on this “stale” information. This study
investigates settings where previously disclosed financial filings are
informative to markets. Using a novel dataset that tracks search requests on
the SEC EDGAR database, we find evidence that investors acquire stale financial
information and trade on it within two hours.
Our evidence is consistent with investors using stale information to
provide context for current events and disclosures and in cases of high prior
information uncertainty. We do not find evidence that trading associated with
stale financial disclosures is driven by unsophisticated investors. Thus, our findings are consistent with
rational investors finding value in financial disclosures that have been in the
public domain for a period of time.
The Impact of Investor Information
Demand on the Market Reaction to Mandatory Periodic SEC Filings (With Michael Drake, Bret Johnson, and Jake Thornock; work-in-progress)
Analysts
Analyst Initiations of
Coverage and Stock-Return Synchronicity
(With Steven Crawford and Eric So; forthcoming at The Accounting Review)
We examine how the
information produced by analysts when they initiate coverage contributes
to the mix of firm-specific, industry-, and market-wide information available
about the firm. We hypothesize that the first analyst to initiate
coverage provides low cost market and industry information allowing him/her to
follow more stocks, whereas subsequent analysts provide firm-specific
information to distinguish themselves from existing analysts. We use stock
return synchronicity to measure the mix of information available about a firm,
with higher synchronicity indicating more industry and market
information. Coverage initiations of firms with no prior analyst coverage
increase synchronicity suggesting that analysts produce industry- and
market-wide information. In contrast, analysts initiating coverage on
firms with existing coverage appear to focus on producing firm-specific
information as these initiations lead to reduced synchronicity. Together, our
findings indicate that the type of information analysts produce at initiation
depends on the information provided by other analysts.
The Time-Dynamics of Analysts’ Consensus
EPS Forecasts (With Steven Crawford
and Eric So)
This paper examines the
time-varying accuracy of analysts’ consensus EPS forecasts within a
firm-quarter. The results identify attributes of the information environment
that affect the evolution of analysts’ information acquisition and processing.
We find that while analysts appear to learn about the upcoming EPS figure over
time, both firm and industry level factors significantly influence the speed
and degree of learning. Specifically, consensus accuracy improves to a greater
degree within a firm-quarter for firms with volatile net income, high accruals,
and prior losses and for firms that issue managerial guidance and which report
later than their industry peers.
Alternatively, consensus accuracy is less sensitive to time for large
firms and firms with high levels of analyst coverage. Consistent with analysts
learning from dynamic intra-industry signals, we find that consensus forecast
accuracy is increasing in contemporaneous earnings announcements and managerial
guidance from industry peers. We also show that intra-quarter changes to consensus forecast errors,
incremental to the level, possess information about the market surprise during
the announcement window. This result is consistent with intra-quarter consensus
changes reflecting analysts’ information acquisition.
The Influence of
Analysts, Institutional Investors, and Insiders on the Incorporation of Market,
Industry and Firm-Specific Information into Stock Prices (With Joseph D. Piotroski; Accounting Review Volume 79 No. 4, 2004)
This
paper investigates whether analysts, institutional investors and insiders
increase the amount of firm-specific versus industry-specific information found
in prices. We measure firm and industry
specific information in two ways: stock return synchronicity with market and
industry returns (Morck, Yeung and Yu [2000]); and
firm and industry-earnings response coefficients (Ayers and Freeman
[1997]). Using both measures we find
that analyst activity contributes to the incorporation of both types of
information; however, industry effects are greater than firm-level
effects. Contrarily, insider
transactions and changes in institutional holdings have the net effect of
increasing the amount of firm-specific information in prices. These results are consistent with the notion
that insiders have the greatest access to firm information, while analysts have
more limited access to this information.
Analyst Following and
Market Liquidity (Contemporary
Accounting Research, Volume 20 (Fall) 2003)
This paper investigates the
relationship between analyst characteristics (number of analysts following a
firm and their forecast dispersion) and market liquidity characteristics
(bid-ask spreads and depths and the adverse-selection component of the spread). Prior research has found contradictory
results on the relation between analyst following and market liquidity and has
offered differing theories on how analysts affect liquidity. While prior research has posited analysts as
proxies for privately informed trade or as signals of information asymmetry, I
hypothesize that analysts provide public information, implying that analyst
following (forecast dispersion) should have a positive (negative) association
with liquidity. Cross-sectional OLS and
simultaneous estimations provide support for this hypothesis. The results are both statistically
significant and economically important.
Granger-causality tests indicate that analyst characteristics lead market
liquidity characteristics. I also find
that depths are negatively correlated with the adverse-selection component of
the spread, a finding that reinforces the view that market makers adjust both
spreads and depths in reaction to information asymmetry problems. These results clarify the role of analysts in
providing information to financial markets and highlight benefits of increased
analyst following.
Analyst Coverage Initiations and Institutional
Holdings (With Steven Crawford and
Eric So; work-in-progress)
Security analysts and
institutional owners are two of the major contributors to the information
environment of a firm and a long line of research has investigated the benefits
and costs of coverage by security analysts and institutions. We investigate the relation between initiations
of analyst coverage and changes in the level and breadth of institutional
holdings in order to provide evidence on these questions. We are in the preliminary data analysis phase
of this project.
Insider Trading
Evidence on the
Non-linear Relation between Insider Trading Decisions and Future Earnings
Information (With Joseph D.
Piotroski; Journal of Law, Economics, and
Policy, Volume 4 No. 2)
In this paper, we provide
evidence that the relations between insider trading decisions and next year's
earnings are not strictly linear. We find that insider purchases are
positively related to next year's earnings innovation and that this relation is
attenuated in the case of extreme positive innovations. We also find that
insider selling and option exercises are negatively related to next year's
earnings innovation and that these relations are attenuated in the case of
extreme positive and negative innovations. We conclude that the observed
variation in trading decisions is consistent with the existence of potential
legal liability costs. Our estimations also suggest that aversion to
trading due to legal liability concerns is stronger for insider selling and
option exercises than for insider purchasing. Finally, we investigate the
role of earnings persistence as an alternate explanation for our results. We find that insiders only trade on
persistent, future earnings innovations, and that, after controlling for
persistence, insiders still curtail trading when innovations are extreme.
Do Insider Trades
Reflect Both Contrarian Beliefs and Superior Knowledge about Future Cash-Flow
Realizations? (With Joseph D.
Piotroski; Journal of Accounting and
Economics, Volume 39 No.1, 2005, pages 55-82)
This
paper examines whether insider trades reflect superior knowledge of future cash
flow realizations, as proxied by the firm’s future
return and earnings performance. We find
strong evidence that insider trades are positively associated with the firm’s
future earnings performance. This relation
is shown to be incremental to the book-to-market and past return relations
documented in Rozeff and Zaman (1998), suggesting that insiders trade on both
transitory security misvaluation and private information about future cash-flow payoffs. These results are shown to be robust to
several measures of insider trading behavior and future earnings
innovations. We show that the relation
between insider trades and future earnings performance is amplified
(attenuated) as the likely ex ante benefits (costs) to trading on financial performance
information increase. Finally, we find
that insider trading behavior within book-to-market portfolios varies with the
horizon of the subsequent earnings news, with the sign of the relation between
insider purchases and contemporaneous earnings being negative (positive) for
glamour (value) firms.
The Relation Between Insider-Trading Restrictions and Executive
Compensation (Journal of
Accounting Research, Volume 41
(June) 2003)
This paper investigates the impact of firm-level,
insider-trading restrictions on executive compensation. Using a trading-window proxy for the
existence of such restrictions I test theoretical predictions that insiders
will demand compensation for these restrictions and that firms will need to
increase incentives to restricted insiders.
I find that firms that restrict insider trading pay a premium in total
compensation after controlling for standard economic determinants of pay. Further, these firms use more incentive-based
compensation relative to firms that do not restrict insider trading, e.g.,
equity grants and bonuses are higher for these firms. Finally, insiders at these firms hold larger
equity positions than insiders at “unrestricted” firms. These results hold after controlling for the
endogeneity of the decision to impose the restrictions and support the idea
that insider trading plays a role in rewarding and motivating executives.
Insider Trading and the Incorporation of Future
Earnings into Stock Prices (with
Steven Crawford and DuRi Park)
We show that insider trading is associated
with a greater incorporation of future earnings news into stock prices. We
extend this basic result by showing that trades by CEOs and CFOs increase the
association between returns and future earnings news. Our results are incremental to the effects of
analyst following, institutional ownership, and management forecasts as
documented in prior research (e.g., Ayers and Freeman, 2003).
Early Evidence on Insider-Trading Activity (With Suraj Srinivasan and Joseph D. Piotroski)
We examine insider trades
reported to the SEC between 1935 and 1944, a time period marked by lax
enforcement of insider-trading laws (Jaffe, 1973). Our goal is to assess the relative ability of
insiders during this regulatory era to exploit private information as compared
to insiders in the modern era (e.g., after passage of the Insider Trading
Sanctions Act of 1984). Insider trading
activity in the early time period is hand-collected from the official SEC
summaries of insider activity. We
document that while insiders appear to not exploit private knowledge of
earnings surprises, they do earn roughly 0.5% per month in the six months
following their purchases, a number quite close to the abnormal returns earned
by insiders in the modern era.
Insider Trading and the Information Content of
Earnings Announcements
This paper addresses the
question of whether the net effect of insider trading is to promote accurate
pricing of stocks by conveying insiders’ private information to market
participants. I investigate this
question by examining the relation between insider trading and the information
content of earnings announcements. I
document two main findings: first, decisions to trade are influenced by future
earnings surprises and announcement returns.
Second, insider purchases and sales executed and disclosed prior to an earnings announcement preempt news in the
announcement and have a negative relation with market reactions to the
announcement, consistent with insider trading informing the market. These relations hold after controlling for
the endogenous relation between trading and market reactions and are of an
economically significant magnitude (particularly for insider purchases). These findings are consistent with insiders
trading on private information and their trading conveying information to the
market, two necessary conditions for insider trading to have a net positive
effect on securities pricing.
Effects of Insider-Trading Legislation on Trade
Timing, Litigation Risk, and Profitability (With Alan Jagolinzer)
Prior research indicates that
insiders avoid trading ahead of major disclosure events such as quarterly
earnings announcements and that this avoidance is associated with firm policies
restricting the timing of insider trades (Bettis,
Coles and Lemmon, 2000; Roulstone, 2003). Garfinkel (1997)
provides evidence that this behavior increased in response to the Insider
Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA). Using a 24-year sample of insider trades we
show that insiders are, over time, increasingly trading after earnings
announcements especially since passage of ITSFEA. This finding is robust to controls for
insider incentives to trade around earnings announcements. We investigate the economic effects of these
changes by documenting a relation between litigation risk (measured by the
expected probability of 10b-5 litigation) and insider trade timing. Specifically, litigation risk is decreasing
in the extent to which insiders trade following
earnings announcements rather than before earnings announcements. However, while insiders are increasingly
trading during times of lower litigation risk, we fail to find a decrease in
insider-trading profitability over our sample period, suggesting that
regulation (economy-wide and firm-specific) has not limited the ability of
insiders to exploit private information.
Disclosure
The Mechanisms of Information Transfer (With Michael Drake, Jared Jennings, and Jake Thornock; submitted to Review
of Accounting Studies)
The literature on
intra-industry information transfers finds that one firm’s information release
is associated with market reactions at related firms. While the literature
provides evidence that this phenomenon exists, it is relatively silent as to
how such transfers occur. We examine the extent to which earnings-related
information transfers to related firms through three important information
channels: the internet, analyst forecast revisions, and media reports. We find
evidence of information transfer around earnings announcements through each
channel; in particular, investors greatly increase internet search about peer
firms at the time of earnings announcements. Moreover, we find that the level
of information transfer varies by the magnitude of the announcing firm’s
earnings news. Finally, we find that increases in information transfers through
each of these channels are associated with increases in trading volume at peer
firms, consistent with investors revising beliefs about peer firms as a result
of the transferred information.
Management Earnings Forecasts and Forward-Looking
Statements (with Andrew Van Buskirk
and Zahn Bozanic)
We
examine managers’ disclosures of qualitative forward-looking statements and, in
particular, how the decision to issue those statements differs from that of
quantitative earnings forecasts. We find
that, while positively correlated, forward-looking statements and earnings
forecasts are two distinct disclosure decisions – one is not a substitute for
the other. We then show that the market
assesses qualitative information as credible: forward-looking statements help
explain market reactions to earnings announcements and the “surprise” in the
tone of forward-looking statements is associated with
quarterly stock price performance. In
other words, just as forecast accuracy can be evaluated by comparison to realized earnings, the accuracy of forward-looking
statements can be evaluated ex post
by comparing the tone of forward-looking statements from one period to the tone
of non-forward-looking statements in the next period. We then study the determinants of both types
of disclosures, focusing on two factors that are widely-believed to affect a
manager’s willingness to disclose information about the firm’s future: uncertainty and competition. We find that managers prefer to issue qualitative
forward-looking information (relative to forecasts) when uncertainty about
future earnings is greater. We find
(weaker) evidence that changes in competition are associated with managers’
issuing quantitative versus qualitative forward-looking information. Our findings support the use of qualitative
forward-looking statements as a credible tool for managerial disclosure.
Effect of the SEC
Financial Reporting Release No. 48 on Derivative and Market Risk Disclosures (Accounting
Horizons, Volume 13 (December) 1999)
This study compares the
disclosures about derivatives and market risk made by 25 SEC registrants in the
years before (1996) and after (1997) the adoption of Financial Reporting
Release No. 48 (SEC 1997) (FRR No. 48).
FRR No. 48 requires firms to disclose how they account for derivatives
and provide quantitative and qualitative disclosures about exposures to market
risk. Market risk disclosures,
encouraged but not required under FAS No. 119, improved greatly under FRR No.
48 but varied widely in detail and clarity.
The majority of registrants provided quantitative and qualitative
disclosures of market risk; however, only about half of these firms discussed
the details and limitations of their risk measurement models and
disclosures. Further, certain required
or strongly recommended contextual disclosures were almost completely
absent. Firms appear to prefer
relatively complicated but more discreet disclosure formats to simpler but more
revealing disclosure formats. Overall,
while registrants greatly increased their disclosures about market risk, the
disclosures leave room for improvement in future filings. These findings have significance for
disclosure choice in general and the adoption of FAS No. 133 in particular.
Valuation and Mispricing
Acquirer Valuation and Acquisition Decisions:
Identifying Mispricing using Short Interest (With Itzhak Ben-David and Michael Drake; submitted to Journal of Financial and Quantitative
Analysis)
We use short interest as a
new investor-based measure of over/undervaluation that more sharply
distinguishes misvaluation vs. Q theories of mergers
and acquisitions. Using this measure, we find that misvaluation
is a strong determinant of merger decision making. Specifically, after
controlling for known determinants of acquisitions, firms in the top quintile
of short interest are 54% more likely to engage in stock mergers within the
next month and 22% less likely to engage in cash acquisitions within the next
month. Further, post-merger return is strongly correlated with pre-merger short
interest. Finally, stock (but not cash) acquirers have higher short interest
than their targets. We conclude that overvalued firms self-select to become
stock acquirers, while undervalued firms engage in cash acquisitions.
Management’s Information Advantage and Insider Trading (with Itzhak Ben-David and Andy Van Buskirk)
Hutton et al. (2012,
forthcoming JAR) analyze management
and analyst information advantages in the context of forecast accuracy. We extend this research by investigating whether
factors affecting forecast accuracy also affect managers’ trading
profitability. Among our preliminary
findings is the fact that managers at highly idiosyncratic firms earn higher
returns than managers at systematic firms.
Discussions
Discussion of
‘Large-Sample Evidence of Firms’ Year-over-year MD&A Modifications’(Journal of
Accounting Research, Volume 49 No. 2, 347-357)
Discussion of ‘Intangible
Investment and the Importance of Firm-Specific Factors in the Determination of Earnings’ (Review of
Accounting Studies, Volume 16 No. 3, 574-586)
Accounting, Finance, and Economics Research Links:
Journal of Accounting Research
Journal of Accounting and
Economics
American Accounting
Association Homepage
The American Finance Association
and the Journal of Finance
Journal of Financial Economics
Social Science Research Network
Selected Online Business
and Economics Journals