Information Dissemination in Capital Markets
Seeking to bridge economic theory and the role of individuals, Professor Brochet researches the transmission of information in capital markets. He has investigated the effects of information dissemination in areas including insider trading, executive turnover, and goodwill impairment.
Professor Brochet has examined insider trading information before and after the 2002 passage of the Sarbanes-Oxley Act, and he wrote the first study to demonstrate that the timely disclosure of insider purchases triggers economically meaningful market reactions in the United States. He has found that the more stringent filing requirements mandated by Sarbanes-Oxley have made the filings of insider purchases much more informative. His work documents that insiders are less likely to sell shares immediately prior to negative stock returns and ahead of unfavorable earning news, suggesting that the act has decreased informed insider selling. He has also discovered, after controlling for confounding factors, that stock returns around such filings have become significantly more negative.
Professor Brochet’s findings also have implications for financial disclosure because they indicate that insider trade disclosures are a sizable component of market participants’ information set.
Professor Brochet has studied executive turnover in two contexts. Regarding earnings guidance, he has looked at both CEO turnover and little-studied CFO turnover and found different effects. The findings show that CEOs participate in firm-level policy decisions, and that breaks in guidance when they leave are essentially permanent, though endogenously driven by poor performance. On the other hand, turnovers among CFOs, who are involved in the implementation of guidance, result in less serious breaks that seem to reflect uncertainly on the part of the new CFO.
Professor Brochet’s research on corporate executives and security analysts, conducted in collaboration with Professor Suraj Srinivasan of HBS, has documented that some analysts “follow” top executives who move to new firms, provided the firms meet economic criteria—such as industry affiliation and market capitalization—that fit into their coverage space. Prior to the executives’ moves, the analysts who follow them exhibit more intense and accurate coverage of the old firm, and meet with the executives more often than other analysts. The findings shed light on the importance of and limitations to relationships between managers and capital market participants in analysts’ coverage decisions.
Executives and goodwill impairment
In a study aimed at explaining the impact of the professional background of top executives on financial reporting choices, Professor Brochet has examined goodwill impairment, which is highly subject to managerial discretion. With a focus on the decision making of top executives with backgrounds in investment banking, management consulting, and private equity or venture capital, Professor Brochet has found that CFOs with prior experience in those fields are significantly more likely to impair goodwill in a timely and informative manner. In contrast, CEOs with prior transaction experience are more likely to impair goodwill when their career concerns are low, or when they are subject to stricter monitoring, suggesting that these executives are subject to their own opportunistic motives. Overall, the findings show that executive functional background affects reporting choices, and that the effect is best understood in the context of upper echelons and agency theories.