Essays on the role of information environment in capital markets

Darendeli, Alper (2018) Essays on the role of information environment in capital markets. Doctoral thesis, University of London: London Business School.

Abstract

This dissertation consists of three essays which examine topics in corporate information environment, voluntary disclosure, and the role of geography in shaping corporate policies. The first essay investigates the relation between summary disclosures and retail investor decisions. Using a novel disclosure setting of mutual fund factsheets, which convey short-form summaries of fund performance and risk, I explore voluntary disclosure of mutual funds and its relation with fund flows. I find evidence that flows are more sensitive to performance and risk metrics when disseminated, and therefore made salient, through factsheets than when they are not. Consistent with individual investors with limited attention driving the results, the effect is stronger for flows pertaining to retail share classes. The findings might be of interest to regulators and standard setters as they explore alternative ways of simplifying the communication of relevant information to investors. In the second essay, we examine the role of geography in shaping competitive environment of a firm. As such, we develop a time-varying firm-specific measure of localized competition faced by a given firm in a given year based on firms' disclosures about economically relevant U.S. states in their 10-K filings. We define the competitive effect experienced at firm-level as a combination of the competitive effects of each geographically segmented individual localized market that a firm operates given geographically segmented nature of U.S. market. Then, we validate this measure using major customer and U.S. Census data and document its association with the rate of mean reversion of profitability. Using this novel measure, we show that higher level of localized competition is associated with higher levels of innovation and higher levels of cash and is incremental to alternative measures of product market competition. Further, the economic relevance of the localized competition measure is greater in industries with high geographic segmentation and for firms which are geographically concentrated. The measure also predicts earnings volatility and earnings levels. Overall, our findings suggest that localized competition is one channel by which geography matters for firm?s fundamental performance. Finally, in the last essay, we analyse the way in which corporate investment decisions differ with respect to foreign versus domestic markets. Adapting the design of Biddle et al. (2009) we find evidence that a significant portion of MNCs tend to over-invest in the US while under-investing abroad, consistent with the notion of home bias. Further analysis reveals that the likelihood of an MNC exhibiting home-bias declines when boards are more geographically diverse and when they invest in foreign markets with high quality financial reporting. Preliminary evidence indicates that investors recognize the home bias inherent in MNCs investment decisions. Finally, we document that MNCs tend to cut foreign investment before domestic investment, even when the economics would suggest otherwise, with these firms subsequently experiencing significantly poorer future performance. Taken together our results suggest that managers exhibit a home bias in their investment decisions which may destroy value.