دستکاری مدیران، مدیریت شرکت و مشارکت بازار محدود Managerial Manipulation, Corporate Governance, and Limited Market Participation

1 Introduction Historically, stock market participation in the U.S. has been low, with fewer than half of U.S. households holding stocks. The low rate of participation in equity markets, despite the sizable equity premium, has been referred to as the stock market participation puzzle (Haliassos and Bertaut (1995) and Campbell (2006)).1 However, there has been a steady growth in stock market participation over the last 30 years: the fraction of households who participate in equity markets increased from 30.6% in 1983 to 43.9% in 2001 and fell slightly to 40.6% during the Great Recession (Favilukis 2013). The purpose of this paper is to analyze the implication of managerial manipulation of financial information for stock market participation and thereby shed light on the role of governance policies and accounting standards in contributing to the observed patterns in equity markets. We construct a simple rational expectations model in which managerial manipulation occurs and the market is uncertain about the degree of managerial manipulation. One crucial element of our model is that there exist heterogeneous expectations of managerial manipulation within the community of potential investors, because they have different degrees of confidence in firms’ internal control systems designed to prevent manipulation. For example, faced with identical earnings reports, investors relatively optimistic about financial reporting credibility would perceive large accruals as a signal of managers possessing private information, whereas investors who are pessimistic about governance stringency would believe that the quality of earnings reports has been compromised by managerial manipulation. Our assumption of heterogeneous beliefs on managerial manipulation is motivated by a growing body of literature suggesting that managerial manipulation reduces earnings quality and thus causes dispersions in financial analysts’ earnings forecasts,2 among which Peng, Yan, and Yan (2012) specifically document an empirical link between heterogeneity in investors’ beliefs and accounting accruals. We show that limited market participation can arise endogenously in equilibrium when we allow for beliefs about managerial manipulation to vary across investors. When the dispersion of investor beliefs about managerial reporting is large, only the investors optimistic about reporting quality, and hence underlying true performance, participate in the equity market. Investors sufficiently pessimistic about the credibility of financial reporting will consider the market price unjustified by firm value and optimally choose not to invest in stocks in the equilibrium, giving rise to limited market participation. We use our model as a natural laboratory to study the determinants of market participation. The equilibrium rate of market participation is determined by how demand for stocks is distributed across investors with heterogeneous beliefs regarding managerial manipulation. If the demand is sensitive to investor beliefs of managerial manipulation, a small portion of the most optimistic investors can demand a large volume of stocks, thus driving up the stock price sufficiently high to force out other investors. A small fraction of investors fully absorb the market in this case. If investors’ demand does not vary much with their beliefs, the equilibrium stock price must adjust to induce a large proportion of investors to hold stocks for the market to clear.