Essays in financial accounting and corporate finance

Abstract

This thesis consists of three essays on financial accounting and corporate finance. The first chapter investigates the impact of corporate prosecutions on firm risk and corporate financial policy. Using a unique dataset from Corporate Prosecution Registry compiled by Duke University School of Law and the Legal Data Lab at the University Virginia, this study shows that prosecuted firms experience negative abnormal stock returns around the press release from the Department of Justice (DOJ). Also, prosecuted firms exhibit negative buy-and-hold stock returns and high turnover ratio in the stock market, using univariate tests. Moreover, findings from difference-in-differences regression analyses suggest the risk associated with the prosecuted firms in the stock market significantly increase after the prosecutions, and those firms are likely to hold more cash. Interestingly, prosecuted firms decrease their capital investments when they are imposed heavy regulatory fines, and reduce their mergers and acquisitions regardless of the fine amount. Using a unique United States box office data set, the second chapter investigates the impact of environmental sentiment on corporate environmental and financial performance of the United States listed firms. The influence of mass media on public and investor sentiments is well documented in the existing literature. However, little is known about the effect of movies, although they may influence the public more than other mass media because people, regardless of age and gender, enjoy watching movies. Using the event study methodology and multivariable regression analysis, this study shows that the release of anthropogenic environmental disaster movie(s) creates the environmental sentiment and influences corporate behaviors. Specifically, firms significantly increase their environmental performance in the subsequent year of strong environmental sentiment after a release of the environmental movies. More importantly, the positive effect of corporate environmental performance on financial performance is stronger when the environmental sentiment is stronger. The third chapter investigates the impact of corporate social responsibility (CSR) driven by CEO’s power and driven by long-run value creation on corporate financial performance. There has been debate over the effect of firm’s social performance on its financial performance for past decades. Nowadays, most of the research supports the view that investments in the CSR of a firm have a positive impact on the financial performance of the firm at least in the long run. At the same time, empirical evidence supports the argument that managers often use CSR investment to exploit their private benefits such as media exposure and reputation building. Using the multivariate regression analyses, findings in this study suggest that the more long-term CSR (good CSR) results in better financial performance whereas more power-driven CSR (bad CSR) results in worse financial performance.