External Reviews and Green Bond Credibility (Journal of Climate Finance, 2024), with Elsa Allman.
Abstract: In an effort to alleviate greenwashing concerns, firms are increasingly commissioning voluntary external reviews of their green bond issues. This paper examines the certification role of external parties in the corporate green bond market and the effects on green bond pricing at issuance. Using a comprehensive sample of 1242 corporate green bonds issued between 2013 and 2020, we initially find that external reviews have no significant on average effect on the green bond premium (i.e., the difference in yield between a green bond and a similar conventional bond). However, we predict and find that external reviews have a larger impact on the green bond premium (i.e., a 50 basis point premium) for issuers domiciled in common law countries. Funding costs are also lower when issuers obtain external reviews from more reputable reviewers. Overall, our results suggest that the pricing implications of green bond external reviews depend crucially on both the location of the issuer and the reputation of the external reviewer.
The ChatGPT Artificial Intelligence Chatbot: How Well Does It Answer Accounting Assessment Questions? (Issues in Accounting Education, 2023), crowdsourced study with David Wood and 326 others.
Abstract: ChatGPT, a language-learning model chatbot, has garnered considerable attention for its ability to respond to users’ questions. Using data from 14 countries and 186 institutions, we compare ChatGPT and student performance for 28,085 questions from accounting assessments and textbook test banks. As of January 2023, ChatGPT provides correct answers for 56.5 percent of questions and partially correct answers for an additional 9.4 percent of questions. When considering point values for questions, students significantly outperform ChatGPT with a 76.7 percent average on assessments compared to 47.5 percent for ChatGPT if no partial credit is awarded and 56.5 percent if partial credit is awarded. Still, ChatGPT performs better than the student average for 15.8 percent of assessments when we include partial credit. We provide evidence of how ChatGPT performs on different question types, accounting topics, class levels, open/closed assessments, and test bank questions. We also discuss implications for accounting education and research.
Soft Information in the Financial Press and Analyst Revisions (The Accounting Review, 2021), with Mark Bradshaw, Xue Wang, and Dexin Zhou.
Abstract: Both sell-side analysts and the media are information intermediaries in capital markets. This study investigates the association between sell-side analyst research and information in firm-specific news coverage. More frequent recent news coverage is associated with stronger market reactions to analysts’ research revisions, and primarily explained by soft information in news coverage. The primary result is robust to using both an instrumental variable and a quasi-natural experimental setting to generate exogenous variation in media coverage, alleviating concerns about endogeneity. In addition, using textual analysis, we document that explicit media references in analyst research reports are significantly associated with more frequent analyst revisions and stronger market reactions to revisions. Our study provides empirical evidence of analysts’ assimilation of information from the financial press and their role in the efficiency of capital markets.
Executive Extraversion: Career and Firm Outcomes (The Accounting Review, 2019), with T. Clifton Green and Russell Jame.
Abstract: Psychology research identifies extraversion as the personality trait most closely associated with leadership emergence. We examine executive extraversion, as measured by speech patterns during conference calls, and find extraverts experience significant career benefits. Controlling for executive and firm characteristics, including firm fixed effects, we find that extraverted CEOs and CFOs earn 6–9 percent higher salaries. Moreover, extraverted CEOs are less likely to experience job turnover, have longer tenures, serve on more outside boards, and hold directorships at larger firms, and extraverted CFOs are more likely to be promoted to CEO. Executive extraversion is also linked with firm outcomes. Analyzing a sample of manager transitions, we find that increases in CEO extraversion are associated with improvements in investor recognition and sales growth. Further, extraverted CEOs are associated with higher acquisition announcement returns. Our findings highlight the role of personality traits in explaining executive career and firm outcomes.
The Impact of Media Coverage on Voluntary Disclosure. Conditionally Accepted at Contemporary Accounting Research. Code
Abstract: This study investigates whether and how firm-specific news media coverage affects corporate voluntary disclosure. I predict that media coverage influences managers’ disclosure decisions by directing investor attention towards firms and increasing investor demand for firm information. I find that managers are more likely to issue earnings guidance if their recent earnings guidance receives more media coverage. The relation between media coverage and guidance issuance is stronger for news articles that purely disseminate information quickly and are published by news outlets that target institutional investors. Consistent with my hypothesis that media coverage influences investor demand for information, I find evidence that guidance media coverage positively relates to subsequent institutional information search activity, which in turn positively relates to future guidance issuance. Examining sources of plausibly exogenous variation in media coverage, I find further corroborative evidence of a positive relation between media coverage and earnings guidance. Overall, my analyses indicate that the news media influence managers’ provision of voluntary disclosure.
Optimistic Gatekeepers: Credit Rating Optimism in M&A Deals, with Sam Bonsall, Kevin Koharki, and Monica Neamtiu. Revising for 2nd Round submission to Management Science.
Abstract: We investigate how the major credit rating agencies (CRAs) perform their role as gatekeepers in M&A. Consistent with their stated emphasis on long-term credit risk, we provide evidence that CRAs provide some acquirers with a grace period (temporary rating optimism) when they expect M&A-related deterioration in credit metrics to be temporary. We also find that, on average, CRAs are not able to correctly identify which M&As lead to only temporary increases in credit risk: greater rating optimism around mergers is predictive of a higher likelihood of post-merger rating downgrades and negative merger outcomes. CRAs are more optimistic for acquirers that publicly commit to quantitative post-M&A leverage targets, consistent with managers’ disclosures influencing CRAs’ beliefs that M&A-related increases in credit risk are temporary. Finally, acquirers that benefit from rating optimism are more likely to remain overleveraged relative to their industry peers following the current and subsequent acquisitions. Our findings suggest that the major agencies’ focus on long-term creditworthiness and their inaccuracy distinguishing temporary from long-term increases in acquisition credit risk weakens their governance role in M&As.
Rating Agencies' Forecasts and Credit Rating Quality, with Samuel Bonsall, Kevin Koharki, and Monica Neamtiu.
Abstract: This study examines the informative value of forecasts made by Moody’s Investors Service. Using a sample of credit opinion reports that provide regular forward-looking analysis of the creditworthiness of issuers rated by Moody’s, we extract forecasts of revenue, leverage, and profitability and calculate the accuracy and bias of these forecasts. We find that both inaccuracy and optimistic bias decrease with a longer Moody’s relationship and a higher quality information environment. We also find that forecast bias is larger for issuers with recent poor performance and upcoming debt issuances. More importantly, we provide evidence that less accurate, more optimistically biased, and less certain forecasts are associated with lower quality credit ratings and that optimism in forecasts is associated with future rating downgrades and widening bond yield spreads. Overall, our study provides important implications for the evaluation of credit rating quality by showing that rating agencies’ forecasts—because of their regularity, short-horizon realizations, and usage as key inputs in the rating process—provide a valuable signal of the underlying quality of credit ratings.