The Tale of Silent Dogs: Do Stock Prices Fully Reflect the Implication of News Withholding?, with Frank Zhou (Accounting)
Abstract: We investigate whether investors exhibit limited strategic thinking when interpreting the lack of management forecasts. Limited strategic thinking occurs when information receivers underestimate the relation between information senders’ actions and their private information. We ﬁnd that, for ﬁrm quarters without management forecasts, investors underestimate the magnitude of bad news implied by non-guidance, which generates 40 basis points predictable negative abnormal stock returns around the earnings announcement and up to 100 basis points for some subsamples. The results are consistent with limited strategic thinking: investors underestimate the relation between management’s withholding information behaviors and management’s private information, which leads to an initial overpricing of the implication of non-guidance and a subsequent correction around the earnings announcement that (partially) reveals the information. We contribute to the literature by showing that investors are constrained in understanding managers’ strategic disclosure decisions. As a result, management is able to withhold bad news without suﬀering much negative capital market consequence, even when investors know information endowment.
The Racial and Ethnic Disparities in Non-Cognitive Skills, with Todd Elder (Economics)
Abstract: While the disparity in cognitive skills between white and black children has been studied extensively, the racial gap in non-cognitive skills has attracted much less attention. In this paper, we use two cohorts of the ECLS-K to show that there are significant differences in non-cognitive skills between white and black students, even after controlling for a large set of background variables. We present evidence that teacher-reported measures of non-cognitive skills likely understate the actual racial gaps due to subjective bias in favor of black students. The bias is primarily driven by systematic differences across schools in what the teacher reports measure. Using a counterfactual distribution approach in the spirit of Dinardo, Fortin, and Lemieux (1996) to address this between-school bias, we find that the corrected racial gaps are substantially larger than the corresponding uncorrected gaps.