This study explores the impact that conflict risk has on firms’ investment efficiency using a sample of U.S.-listed MNEs that have subsidiaries in conflict-affected regions; specifically, I test whether conflict risk results in suboptimal investment. The results indicate that when MNEs are exposed to relatively high conflict risk, they are more likely to defer or bypass investment opportunities. In addition, the results suggest that the higher the conflict risk that MNEs are exposed to, the poorer the overall quality of their financial reports. To operate in conflict-intense regions, firms may need to rely on local social networks, increasing off-the-book transactions. These transactions can be difficult to track and monitor, which creates opportunities for manipulation of financial reports. This study finds supporting evidence for a significant negative association between conflict intensity and financial reporting quality when using an aggregated proxy for overall financial reporting quality.
This study also tests the relationship between financial reporting quality and investment efficiency. Consistent with prior research (e.g., Biddle et al., 2009; Chen et al., 2011), financial reporting quality is found to be negatively associated with both underinvestment and overinvestment, showing that better financial quality helps to mitigate both underinvestment and overinvestment.
5.2.2 Study 2: The Impact of Terrorism on Financial Markets: Intra-day Evidence from Foreign Exchange Market Reactions to ISIS Attacks
Study two examines the influence of ISIS terrorist attacks on the highly liquid foreign exchange market. Most announcements of ISIS terrorist events showed no systematic pattern of returns
in response to the attacks; only a few ISIS attacks created a negative impact on foreign exchange returns. Specifically, the first major ISIS attack in the region at the Jewish Museum in Belgium, the London Bridge attacks, and to a lesser extent, the November Paris Attack were associated with a depreciation in exchange rates. Depreciation was most pronounced around the announcement of the confirmation of casualties. The effects are mostly short-lived and foreign exchange markets are typically able to recover within a day of the attack. There is also an increase in volatility around some attacks, however, any reaction is short-lived and markets recover within a day.
5.2.3 Study 3: The Role of Product Markets in Asymmetrically Timely Gain and Loss Recognition: Evidence from the U.S. Oil and Gas Industry
This study examines the role of product markets in asymmetrically timely gain and loss recognition. I argue that product market prices provide complementary information for future cash flows, in addition to stock returns and operating cash flow changes. Employing a sample of firms in the U.S. O&G sector for the period 2002–2016, this study shows that earnings respond asymmetrically to lagged crude oil price changes, that bad news (negative oil price shocks) are recognized more fully and in a more timely fashion than good news (positive oil price shocks) after controlling for stock returns and changes in operating cash flows. The results however suggest that the asymmetric impact of changes in product market prices on earnings is subsumed in the effect of the changes in sales when indicators of changes in sales and changes in prices are both included in the model. Empirical results are robust when additional economic and reporting factors are controlled for.
When oil prices decrease, firms recognize goodwill impairments in a timelier manner compared with oil price increase periods. This study shows evidence that, in comparison to successful- effort, firms under the full-cost method are more sensitive to changes in oil prices. For full-cost firms, both tangible asset write downs and earnings are asymmetrically associated with oil price returns.
Contributions
The contributions of the three studies presented in this thesis include the following. Study one contributes to three streams of literature. First, it advances understanding on the link between conflict risk and firm-level investments. Driffield et al. (2013) studied the prevalence of firms investing in conflict countries and found that countries with weaker institutions and fewer concerns about corporate social responsibility are more likely to invest in conflict regions. Dai et al. (2006) suggest that conflict risk reduces the likelihood of survival for foreign subsidiaries in conflict regions. This study takes a step further, to explore MNEs’ investment performance in conflict-affected environments.
Second, study one contributes to the literature in terms of the relation between uncertainties and economic outcomes. Most research has focused on political uncertainties (e.g., Bialkowski et al., 2008; Cao et al., 2017; Jens, 2017; Kesten & Mungan, 2015; Pástor & Veronesi, 2013). This study extends the current understanding on the impact of violent conflicts (within the broad category of political uncertainties) on economic outcomes. Third, study one contributes to the literature examining the association between reporting quality and investment efficiency (e.g., Biddle et al., 2009; Lara et al., 2015) and ownership structure (e.g., Chen et al., 2011; Chen et al., 2011). This study adds to the literature by examining the impact of geographically defined risks, rarely studied, on firms’ investment decisions and performance.
Risk disclosure has received attention because of apparent increased uncertainty in the business environment (Brown et al., 2018). SEC (2013) suggested that a more appropriate approach to risk disclosures needs to be considered and highlighted the importance of disclosures relating to non-U.S. operations. By examining the association between conflict risks and investment efficiency, study one provides evidence that sufficient disclosure on overseas operations, especially those in conflict zones, is of importance to assessing investment efficiency.
Study two contributes to the literature to provide a better understanding of the dissemination of information in financial markets. First, this study extends prior research focusing on the aftermath of 9/11 (e.g., Carter & Simkins, 2004; Charles & Darne, 2006; Coleman, 2012; Karolyi & Martell, 2010), to examine a recent series of ISIS attacks in Europe. This study shows that in the post-9/11 period, the economic importance of terrorist attacks in Western countries is declining. While terrorist attacks attract much attention in the media, their impacts on financial markets are limited.
Second, this study adds to the literature examining the impact of unexpected exogenous shocks on financial markets. Terrorist attacks have a clearly identifiable event time, attract wide and immediate media coverage and are free from privileged information (e.g., Coleman, 2012, Kollias et al., 2012), which enables more precise testing and understanding of market reactions to new information. Third, this study contributes to the literature employing intra-day foreign exchange return data to explore the immediate influence of terrorism shocks on markets. Many of the prior studies employing daily data to examine the impact of terrorist attacks on financial markets can be problematic. Using daily data is unlikely to capture the instant movement in stock prices and returns immediately after attacks occur. Financial markets are able to recover
the recent attacks, the impact on foreign exchange markets is short-lived and can be recovered within one day.
Study three contributes to the literature by examining the role of product market prices in accounting decisions. This study extends prior research to show that accounting-based earnings respond asymmetrically to changes in product market prices. Studies of conditional conservatism typically rely on firm-reported performance measures, such as cash flows and sales (e.g., Ball & Shivakumar, 2006; Banker et al., 2017), and examine their impact on concurrent earnings. This study shows that one-year lagged oil price returns have an asymmetric impact on O&G firms’ net income, indicating that product market prices are able to signal changes in future cash flows ahead of accounting-based performance measures. This study is also of value to stakeholders who demand accounting conservatism, for example lenders and investors. This shows that accounting reflects changes in product market prices in a delayed fashion. Product market price changes are able to signal potential sacrifices of earnings quicker than other accounting-based performance measures, providing investors with an opportunity to reduce their downside risk by taking protective actions early. This study examines the asymmetric association between product market prices and earnings in a single industry. Generalization of the results to other industries therefore would require caution. Further research could examine how the findings extrapolate to other sectors.
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