Abstract
The separation of management and ownership in modern corporations and the flexibility inherent in accounting standards such as US GAAP grant managers certain degree of discretion on choice of firm financial policies and corporate information disclosure. With such managerial autonomy, corporate decision-makers may deliberately engage in various opportunistic activities (e.g., earnings manipulation) or reveal unreported inside information (e.g. corporate social responsibility) to enhance transparency. In this thesis, therefore, we explore the impact of numerous factors that induce managerial discretion and further the potential consequences. Specifically, we first investigate the relation between CFO career concerns and corporates’ earnings management behaviour because CFO bears the ultimate responsibility for firms’ financial policies and reporting process. Then we examine the impact of CSR strategies, of a voluntary or discretionary nature, on firm survivability especially during post-crisis periods. Lastly, considering that cash is the most liquid firm asset subject to the highest level of managerial discretion, we analyse how climate-changing uncertainty affects companies’ cash policies and the value of cash savings.Firstly, we report strong evidence that newly public companies led by Chief Financial Officers (CFOs) with longer career prospects are less likely to engage in either accrual-based or real earnings management in the offering year than those led by CFOs with shorter career prospects. Results from instrumental variables regression and entropy balancing approach further alleviate endogeneity concerns. we also document that the negative effect of CFOs career prospects on matched abnormal accruals is stronger among firms with greater external and internal monitoring. Moreover, using state level changes in the enforcement of non-compete agreements to perform a quasi-natural experiment, we document that their effect on earnings management is weak when there are restrictions on mobility.
Secondly, we analyse the relationship between the extent of a firm’s corporate social responsibility (CSR) and its long-term survival probability. We conjecture that a better CSR rating is associated with a lower probability of corporate failure and a longer survival period. Consistent with this, we document that four CSR dimensions (environment, community, employee relations, and product) out of six are positively related to firms’ survival probability. The positive association between CSR ratings and firm survival is stronger for firms operating in more competitive industries and those with weaker governance. We find that a firm’s engagement in CSR activities is particularly crucial for firm survival during pandemics and under adverse climate conditions. We establish causality in the relation between a firm’s CSR activities and its survival probability using instrumental variable (IV) and Heckman two-step analyses. Finally, we find that better financial performance, less stringent financial constraints, greater managerial discipline, and enhanced labor productivity are some of the channels through which firms engaging in more CSR activity achieve longer survival times.
Finally, we examine the causal effects of temperature change on companies’ cash policies. We find that US corporates increase their cash reserves in response to increasing climate risks. The empirical results show that firms with greater mean temperature departure hold more cash. The increase in cash reserves is attributed to growing public awareness of climate-related risks (e.g. global warming). The positive effect of temperature change is stronger among financially constrained firms, socially responsible firms, and companies in high-carbon-emission industries. Further, we demonstrate that investors increase their valuation of cash in unconstrained corporates and in better monitored firms. Overall, my findings support the precautionary motive for a company’s cash savings.
| Date of Award | 14 Feb 2022 |
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| Original language | English |
| Awarding Institution |
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| Supervisor | Dimitrios Gounopoulos (Supervisor) & David Newton (Supervisor) |