This article examines whether foreign investor heterogeneity plays a role in stock liquidity in a sample of 27,828 firms from thirty-nine countries worldwide. Foreign direct ownership is negatively associated with stock liquidity, while foreign portfolio ownership is positively associated with stock liquidity. Consistent with theoretical predictions, foreign ownership explains stock liquidity through both trading activity and information channels. The value-enhancing benefits of foreign direct investors’ monitoring efforts outweigh their liquidity costs and high adverse selection premium. However, the positive impact of foreign portfolio ownership on firm performance becomes negative and is not robustly significant after controlling for liquidity.

This paper examines the effect of earnings management on financial leverage and how this relation is influenced by institutional environments by employing a large panel of 25,777 firms across 37 countries spanning the years 1989–2009. We find that firms with high earnings management activities are associated with high financial leverage. More importantly, this positive relation is attenuated by strong institutional environments. Our results lend strong support to the notions that (1) both corporate debt and institutional environments can be served as external control mechanisms to alleviate the agency cost of free cash flow; and (2) it is less costly to rely on institutional environments than debt. After meticulously addressing the possible endogeneity issues and conducting various robustness tests, our main conclusions remain confirmed.

ABSTRACT This paper presents a comprehensive analysis of the role of credit default swaps (CDS) in information production surrounding earnings announcements. First, we demonstrate that the strength of CDS price discovery prior to earnings announcements is related to the presence of private information and the illiquidity of the underlying corporate bonds, consistent with the CDS market being a preferred venue for informed trading. Next, we ask how the information revealed through CDS trading influences the output of equity and credit rating analysts. We find that post-CDS trading, the dispersion and error of earnings per share forecasts are generally reduced, and downgrades by both types of analysts become more frequent and more timely before large negative earnings surprises, suggesting that the CDS market conveys information valuable to financial analysts.

ABSTRACT We examine how language barriers affect the capital market reaction to information disclosures. Using transcripts from non-U.S. firms' English-language conference calls, we find that the calls of firms in countries with greater language barriers are more likely to contain non-plain English and erroneous expressions. For non-U.S. firms that hire an English-speaking manager, we find less use of non-plain English and fewer erroneous expressions. Calls with a greater use of non-plain English and more erroneous expressions show lower intraday price movement and trading volume. The capital market responses to non-plain English and erroneous expressions are more negative when the firm is located in a non-English-speaking country and has more English-speaking analysts participating in the call. Our results highlight that, when disclosure happens verbally, language barriers between speakers and listeners affect its transparency, which, in turn, impacts the market's reaction.

In this study, we forecast the realized volatility of the S&P 500 index using the heterogeneous autoregressive model for realized volatility (HAR-RV) and its various extensions. Our models take into account the time-varying property of the models’ parameters and the volatility of realized volatility. A dynamic model averaging (DMA) approach is used to combine the forecasts of the individual models. Our empirical results suggest that DMA can generate more accurate forecasts than individual model in both statistical and economic senses. Models that use time-varying parameters have greater forecasting accuracy than models that use the constant coefficients. The superiority of time-varying parameter models is also found in volatility density forecasting.

ABSTRACT In this paper, we examine why Chinese reverse merger (RM) firms have lower financial reporting quality than U.S. IPO firms. We find that the financial reporting quality of U.S. RM firms is similar to that of matched U.S. IPO firms, but Chinese RM firms exhibit lower financial reporting quality than Chinese ADR firms. We also find that Chinese RM firms exhibit lower financial reporting quality than U.S. RM firms. These results indicate that the use of the RM process is associated with poor financial reporting quality only in firms from China, where legal enforcement and investor protection are weak. In addition, we find that compared with Chinese ADR firms, Chinese RM firms have weaker bonding incentives (as measured by CEO turnover-performance sensitivity) and poorer corporate governance. These factors, in turn, contribute to the lower financial reporting quality of Chinese RM firms. Overall, our results suggest that the less scrutinized RM process allows the Chinese firms with weak bonding incentives and poor governance to gain access to U.S. capital markets, resulting in poor financial reporting quality. JEL Classifications: G15; G24; G34; G38.

We introduce a new method to measure the temporal discounting of money. Unlike preceding methods, our method requires neither knowledge nor measurement of utility. It is easier to implement, clearer to subjects, and requires fewer measurements than existing methods. (JEL C91, D11, D12, D91)