PhD Oral Exam - Mahmoud Delshadi, Business Administration

When studying for a doctoral degree (PhD), candidates submit a thesis that provides a critical review of the current state of knowledge of the thesis subject as well as the student’s own contributions to the subject. The distinguishing criterion of doctoral graduate research is a significant and original contribution to knowledge.

Once accepted, the candidate presents the thesis orally. This oral exam is open to the public.

Abstract

This thesis consists of three essays on issues related to conditional accounting conservatism. In the first essay, we explore how options trading influences the demand for conditional accounting conservatism. The ongoing developments in the options market as well as the documented effects of options trading on information environments, motivate us to explore how trading in this market influences the financial reporting strategy of firms. Using a large sample of US firms for the period 1997-2019, we provide evidence that options trading is negatively related to the degree of conditional conservatism. Furthermore, a difference in differences analysis provides evidence that firms reduce their level of conditional conservatism after being listed on the options market. We find that the negative impact of options trading on conditional conservatism is accentuated when the expected information asymmetries are high. We find that options trading has little or no effect when economic policy uncertainty is high. We observe that the presence of financial analysts strengthens the negative association between options trading and conditional conservatism. We also document that options trading prominently influences conditional conservatism when investor sentiment is high. Overall, our findings suggest that as options trading enhances information environments and alleviates information asymmetries, it reduces the demand for conditional conservatism from users of financial statements. This essay shows how the ongoing development in the options market may influence the demand for conditional conservatism.

The second essay explores how a peer’s bankruptcy affects financial reporting by other firms within the industry. It is well documented that a peer firm bankruptcy announcement raises investors’ perception of the risk of same industry firms, resulting in higher external financing costs. It is well documented that conditional accounting conservatism ameliorates information asymmetries by reporting bad news in a timely manner. We argue that following a peer firm bankruptcy filing, a firm in the same industry, may exhibit a higher degree of conditional conservatism to provide more verifiable information and reassure outsiders about its operation. Consistent with our argument, we find that firms use more conditional conservatism following a peer firm bankruptcy filing. Our robustness tests rule out that industry conditions or financial crisis drive our results. We find that the results are insignificant for placebo bankruptcies one and two years before the actual bankruptcies. In additional analyses, we document that the spillover effects are more pronounced for firms in low concentrated industries, for those that undertake new equity or debt financing, and for ones with higher percentage of independent directors. This essay highlights the importance of conditional conservatism in times of uncertainty.

The third essay provides a review of research on the economic consequences of conditional accounting conservatism. This essay focuses on the effects of conditional conservatism on debt-contracting efficiency, information environments, cost of equity capital, and investment decisions. This survey shows that it is well documented that conditional conservatism contributes to debt contracting efficiency. The preponderance of the evidence suggests that conditional conservatism leads to positive economic consequences. However, I find some disparities in the findings of prior research. I highlight the potential sources of these disparities. Finally, I present promising future research avenues to address the disparities in the prior studies.