Dissertation Defenses
Students who have successfully defended their dissertation:
Kwadwo Asare (Kojo)
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| Sue Newell, PhD program director; Mohammad Abdolmohammadi, Kwadwo (Kojo) Asare, who successfully defended his dissertation: “Essays on the Influence of Corporate Governance on Financial Analysts’ Forecast-related Judgments”; Jim Hunton, professor of Accountancy and Bill Read, professor of Accountancy. Ali, Jim and Bill were on Kojo's PhD Committee. |
Kojo's thesis combines three related studies investigating if and how corporate governance influences analysts' earnings forecast and asset allocation recommendations.
The first paper was based on an experiment in which analysts from the US and the UK are asked to estimate a firm's earnings forecast. Analysts were presented with information about a company's earnings and were also told that either the firm in question had above or below average corporate governance performance. Good corporate governance would involve, for example, having independent board members or a separation between the roles of Chairman of the Board and CEO. As expected, analysts increased the range of their earnings forecast for the firm (that is, their level of uncertainty increased) when corporate governance quality was believed to be below average and decreased the range (that is, their uncertainty declined) when it was above average. What was striking was that UK analysts' forecasts were much more influenced when they were told the firm had poor corporate governance quality, while the US analysts' forecasts were more influenced when they believed corporate governance quality was above average. The paper considered potential reasons for these different reactions. For example, the findings suggest that UK analysts presume the quality of corporate governance to be good, and so are more surprised to find otherwise while US analysts presume the quality of corporate governance to be bad, and so are more surprised when they learn that it is good. There is also potentially a cultural explanation, part of which can be traced to a more collegial relationship between shareholders and the firms in which they invest in the UK versus a more adversarial relationship between US investors and the companies they invest in.
Also based on an experiment, the second paper tested how the quality of corporate governance affects investors' asset allocations in independent market settings. Financial analysts were allocated to four independent market settings, each with its own prevailing quality of corporate governance (above average, average, below average, and no corporate governance information available) and asked to allocate an investment amount to four stocks with different combinations of risk and return. The analysts in the above average corporate governance market setting allocated the largest portion of their investments to the higher-risk-higher-return assets than analysts in the other settings. Analysts in the average corporate governance market in turn, made larger allocations to higher-risk-higher-return assets than those in the below average corporate governance setting, whose allocations were not different from those in the setting with no corporate governance information. The results demonstrate the potential impact of investors' trust in a firm's corporate governance on asset values. This provides some explanation for recent phenomenon in the US financial sector where lack of transparency on the value of mortgage-backed securities resulted in a flight to safer assets like US Treasuries.
The final paper used archival data to demonstrate that overly powerful CEOs (for example CEOs who are also Chairman of the Board) can negatively influence the financial markets because they are more likely to provide biased information to analysts, resulting in larger analysts' earnings forecast errors. The study found this phenomenon to be more prevalent in large firms than small firms. One potential reason for this is that smaller firms are more likely to be younger, and so are closer to the original investors who have a better understanding of how the business works. Thus the CEOs of smaller and younger firms are more likely to have their interests aligned with the owners'; an alternative way to view it is that CEOs of small firms generally find it more difficult to put their own interests above the interests of the owners.
