Three essays on the impact of information and transparency in firms
This dissertation consists of three essays on the information and transparency in firms. In the first essay, we provide some of the first evidence regarding the impact of safety expenditures on moral hazard induced by increases in workers' compensation benefits. Prior studies have inferred the effect of safety incentives by testing the relation between claims frequency and benefit increases. However, these studies have not explicitly modeled the impact of actual safety expenditures. Using a proprietary dataset containing policy-level data for several thousand policies over a 13-year period we show that safety expenditures play a positive role in reducing the moral hazard response to changes in workers' compensation benefits. In the second essay, we investigate financial strength ratings of insurance companies which have received considerable attention, with good reason due to recent insolvencies in financial institutions. Interestingly, observations of market returns around downgrades in insurer financial strength ratings (IFSR) become significantly negative, suggesting that some sophisticated investors anticipate the price reaction to downgrades which are vieas negative news. Research argues that short sellers are informed investors as current short selling relates inversely with future returns. However, empirical results have yet to determine whether short sellers trade on private information before, say, an upcoming negative new events or whether short sellers are superior in their ability to process public information. This paper takes a step in this direction by examining short selling around IFSR by examining short-selling activity around A.M. Best ratings changes. While we find abnormal short selling prior to ratings downgrades, we also find that an insurers' asset and liability opaqueness negatively affects the level of short selling activity prior to a financial strength ratings downgrade. We are left to conclude that while short sellers anticipate IFSR downgrades, they do not appear to be superior in their information processing ability around IFSR changes. In the third essay, due to the advent of Enterprise Risk Management (ERM) a growing body of research related to its determinants, organization, and value-relevance has been motivated. While several recent studies test whether ERM benefits firms, there is an absence of studies that examine how ERM can generate value. Our paper provides some initial evidence on one potential source of value from an ERM program; an increase in transparency regarding the firm's risk profile. Using dispersion in analyst earnings forecasts as a proxy for transparency we find that firm-level transparency increases following the adoption of an ERM initiative. The increase in transparency is greatest for firms that are operationally and financially opaque.
enterprise risk management, risk management, safety, short selling, Finance
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