Abstract

This thesis is comprised of three essays on informational issues that revolve around financial reporting, governance, and disclosure. The first essay focuses on how International Financial Reporting Standards (IFRS) adoption by the Canadian fund industry impacts the funds’ reported performance and managers’ behavior. When Canada implemented IFRS for publicly accountable enterprises (PAEs) in 2011, it received much attention from international researchers, professionals, and regulators mainly for three reasons: (1) IFRS were more mature when adopted in Canada as nine amendments had been made from 2005 through 2010, and issues and uncertainties faced by earlier adopters such as firms from EU members may or may not exist in Canada; (2) pre-IFRS Canadian accounting standards were very close to that of the US, and thus, the Canadian experience has strong implication to the largest capital market which has not accepted IFRS as primary standards yet; (3) Canadian accounting and financial regulations have been shown to be more effective in controlling risks during the 2008 financial crisis compared to those of other major economies; how IFRS can strengthen such a tight system is to be examined and is important to IFRS proponents and standard setters. In 2014, Canada took the lead by being the first common law jurisdiction mandating IFRS for investment funds while most other countries hold up IFRS adoption in this particular industry due to various complications. This paper shows that IFRS adoption does affect the funds’ outcomes and managers’ behavior in Canadian closed-end investment funds, and voluntary disclosure of cash flows also strongly affects fund managers’ return and valuation discretion. The implication is that if a country is not ready to fully implement IFRS in the fund industry because of complications at the accounting and financial levels, mandatory disclosure of cash flows could lead to better accounting quality as well, since one major difference between IFRS and GAAP is the disclosure of cash flows which constrains manager’s discretion on asset appraisals.
The second essay studies the implications from outside directors’ turnover. Outside directors have been extensively studied as a governance factor, but their behaviors are not well documented in the literature, partly because most agency theory-based research concentrates on the behavior of managers, not that of directors. While the majority of studies in the governance literature analyze characteristics of directors in a static way, I look at this question in a dynamic way which considers directors’ behaviors. This paper studies S&P 500 companies that have boardroom turnovers due to outside directors’ unexpected departures. The departures of these non-executive directors usually do not trigger investors’ concerns. However, our results show that when they do not provide concrete reasons, the firms from which they resigned experience underperformance afterward. This result suggests that directors may have resigned ahead of sub performance because of information they became privy to. The implication is strong to both regulators and investors. While governance regulations require a certain proportion of outside directors on compensation and audit committees with the intention of achieving efficient governance and releasing timely and reliable information, such mechanisms are substantially affected if outside directors do not fulfill their responsibilities when firms face challenges. Investors who take long positions should be alerted about outside directors’ unexplained departure, and investors who take short positions may find opportunities when a company has boardroom turnover.
The third essay examines a financial question around mergers and acquisitions announcements. In a tender offer, the bidder contacts shareholders of a target firm directly by announcing a public offer to tender their shares. The risk arises because the acquisition may or may not go through. Insiders typically have a better appreciation of the likelihood of a successful acquisition than outsiders, who have very limited access to strategic and private information. As a result, outsiders are at the disadvantageous position during mergers and acquisitions. This paper documents that besides official and public releases, outsiders can also rely on stock returns around announcements to infer private information to reduce information asymmetry. While current regulations and reporting standards do not have effective ways to minimize information asymmetry during mergers and acquisitions, this study highlights an avenue that indirectly mitigates outsiders’ information disadvantage.