Two essays on firms' business interactions with government and the voluntary disclosures of financial and non-financial performance

Abstract

Firms often interact with the government by playing a role as the suppliers and contractors. Government business can affect firms’ voluntary disclosure through two mechanisms: the privileged access to government’s information and the government’s monitoring for the policy objectives. This thesis comprises two essays corresponding to the above two mechanisms, respectively. In the Chapter One, I examine how firms respond to the constrained information access to the government. Specifically, the enactment of the Stop Trading on Congressional Knowledge (STOCK) Act restricts the stock trading of government officials and Congress politicians (politicians hereafter) and hence compromises politicians’ willingness to interact with firms. Using this exogenous disruption of private communication, I adopt a difference-in-differences approach and show that firms with major government customer reduce the frequency of management forecasts to a greater extent than other firms in virtue of the STOCK ACT. Such reduction is more pronounced for the firms with government sales being of greater importance for firm performance and the firms being both the supplier and contractor of the government. In addition, the adverse effect of the STOCK Act on firm’s voluntary disclosure is more pronounced for those firms relying more on the political connections, as proxied by firm’s discussion of political risk and political contribution, and for those firms susceptible to policy impact, as proxied by the higher level of competition within the industry. The main inferences hold for alternative samples and various sample periods. In contrast, there is no significant effect of the STOCK Act on the non-financial disclosures of these firms. Collectively, these results suggest that firms’ business interactions with the government constitute a private communication channel through which managers obtain private information from politicians. The Chapter Two of the thesis examines whether firms with government business make more disclosures of corporate social responsibility (CSR) activities in the conference calls than those without. Given that the government has a policy goal of enhancing CSR performance, I expect that a business relationship with government makes firms more compliant with the government by disclosing more CSR activities. Consistent with this notion, I document a positive association between the presence of firms’ government business and the frequency of CSR disclosures. Such a positive association survives the use of the 2009 American Recovery and Reinvestment Act as an exogeneous increase in firms’ business ties with the government. My cross-sectional analyses show a more pronounced positive association for those firms having higher political costs, receiving greater attention from stakeholders, and facing fewer financial constraints. In the additional analyses, I find that firms with government business provide more CSR disclosures on the investment opportunities, the climate change risks, and the human capital activities; these firms also have less toxic emission in the next year. Furthermore, a higher level of CSR disclosure leads to a lower likelihood of being punished by the Environmental Protection Agency (EPA) for firms with government business. Overall, these results shed light on the role of government business as a monitoring tool for the government to advance policy goals.