The Effect of Information Disclosure on Corporate Governance and Mutual Funds

Abstract

This thesis consists of three empirical essays that investigate the impact of information disclosure on firm corporate governance and mutual fund investment. The first essay studies the direct association between media tone and CEO benefits through the effects of media tone on CEO dominance. Using CEO pay slice (CPS) as a measure of CEO dominance, we find that negative media tone is associated with a reduction in CEO dominance. We further investigate the effect of media tone on the average of the top four (Top4) non-CEO executives’ compensation in moderating CEO dominance. The finding extends the theoretical framework explaining the importance and influence of media on corporate governance. Consistent with theoretical predictions, we find that media serves as an effective external governance mechanism in firms with good internal governance. The evidence suggests that media tone plays an important role as an external monitor, moderating corporate governance through the dissemination of news. The second essay investigates the association between media uncertainty and a comprehensive set of corporate risk-taking behaviour measures that capture firm, corporate investment, and financial risk. We find that media uncertainty leads to greater future stock return volatility. Additional analysis reveals that the increase in media uncertainty is associated with more risky investments and higher financial risk. Our findings are robust to endogeneity concerns and additional tests, thereby supporting the effect of media in providing important external signals that influence firm risk. This essay is consistent with the view that uncertainty increases firms’ risk-taking behaviour by influencing market participants’ perceptions of future firm profitability. The third essay studies the relationship between mutual fund trades and financial disclosure. Our finding contributes to the mutual fund literature that negative financial disclosure tone increases funds’ sells but not funds’ buys. We further investigate that fund managers’ propensity to trade stocks in responding to negative financial disclosure tone increases subsequent fund performance. Moreover, we find that transient investors prefer to sell stocks that experience higher negative financial reporting tone when compared with dedicated and quasi-indexing investors. This thesis contributes to development of finance and accounting literature by providing insight into the effect of textual disclosure on corporate governance and mutual fund investment. It also contributes to the financial behavioural literature by exploring the effect of textual disclosure on CEO dominance, firm risk-taking, and mutual funds’ trading and performance.