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Essays on liquidity shocks and firms' financial reporting quality Lo, Kin Ying


Problems of endogeneity often cloud interpretation in studies on the relation between firm disclosure and external financing. This dissertation uses two different liquidity shocks as natural experiments to provide new evidence in this research area. The first essay makes use of tightened liquidity supply in the banking industry following monetary contractions for examining the impact of credible accounting information on corporate financing and investments. Theory suggests that asymmetric information will restrict banks’ ability to raise additional financing to offset the liquidity losses caused by monetary contractions. The attendant liquidity shortfall will force banks to hold back their investments (i.e., lending). Using external audits to proxy for accounting credibility and a sample of 9,910 small banks for which audits are voluntary, this paper finds that audited banks enjoy greater access to outside financing than other banks. Correspondingly, the lending of audited banks is less affected by policy-induced liquidity issues. Further results indicate that audited banks disclose higher quality accounting information that gives them greater reporting credibility and reduced information problems. In summary, this paper offers new evidence that credible disclosure facilitates corporate financing and investments. The second essay identifies negative shocks to the supply of bank loans as exogenous events that motivate firms’ disclosure of management forecasts. Following loan supply distortions, borrowers have greater motives to finance through alternate capital sources. If forecasts enhance firms’ access to the public capital markets, borrowers have incentives to increase forecasts to facilitate capital raising to substitute for previously available loans. The test exploits the emerging-market financial crises in the late 1990s. These events were plausibly external to the U.S. loan markets, yet their effect was transmitted through U.S. banks' large loss exposures to the crisis areas which ultimately limited the lending of exposed banks. Accordingly, I predict and find evidence consistent with borrowers of exposed banks increasing forecasts following the crises to ease access to public financing. Further, these borrowers changed forecast characteristics in ways consistent with the use of forecasts to reduce investor uncertainty. Overall, these disclosure changes provide new evidence on how capital supply affects firms' incentives to issue forward-looking information.

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