Seasoned equity issuers’ prospectus filings: How informative is their tone?

Seasoned equity issuers file Forms S and 424B with the Securities and Exchange Commission. We find that 424B filings’ weak-modal tone is positively related to offer price discounts and negatively related to offer-day stock returns. Increases in cautionary (weak-modal, uncertain, and negative) tone from the initial to final filing are followed by lower abnormal stock returns. Preliminary evidence indicates that cautionary tone relates positively to litigation risk and increased after the passage of the Sarbanes-Oxley Act. Our findings suggest that the cautionary tone of seasoned equity issuers’ prospectuses has negative information content, which is gradually incorporated into the stock prices

Hometown advantage: The effects of monitoring institution location on financial reporting discretion

We examine the impact of institutional ownership on financial reporting discretion, focusing on whether the impact varies with institutions' cost of acquiring monitoring information. Using geographic distance between the firm and the institutional investor as a proxy for the cost of acquiring monitoring information, we find that corporate managers are less likely to use financial reporting discretion in the presence of local monitoring institutions than distant monitoring institutions. We also find that the impact of monitoring institutions on financial reporting discretion varies with the costs and benefits of financial reporting discretion.Reporting discretion Institutional investors Geographic distance Corporate governance Earnings management