Essays on ESG and Alliances

In the first chapter, I examine the audit consequences associated with financial misconduct by a firm within a strategic alliance. Core earnings restatements, which involve corrections to a firm's primary operational activities, such as revenues, cost of goods sold, and selling, general and administrative expenses, are particularly relevant to its alliance partners. I find evidence that audit fees increase for allied partners following a core earnings restatement. This increase does not appear to be driven by more audit effort but from an increased risk premium, to compensate for the higher perceived audit risk, and is concentrated on contractual alliances rather than joint ventures. Additional analyses indicate that this effect is not limited to core earnings restatements but extends to fraudulent restatements. Cross-sectional tests show that the spillover effect deriving from core earnings restatements is concentrated among firms with lower accruals quality, while, on the contrary, the spillover effect deriving from fraudulent restatements is concentrated among firms with better accruals quality. Overall, this study indicates that financial misconduct in one firm has detrimental consequences to allied partners’ perceived audit risk, which translates into higher audit fees. In the second chapter (co-authored with Hami Amiraslani, Annita Florou and Peter F. Pope) we examine the effects of a change in ESG scoring methodology by LSEG ESG (formerly Refinitiv ESG) on both the disclosure practices and policy adoption of rated firms. In 2020, LSEG ESG implemented two major modifications to its ESG scoring approach: (1) the "summing the percentile" methodology, which penalizes firms that selectively disclose quantitative data, and (2) the "default-value removal," which rewards firms that adopt more ESG-friendly policies. Our findings indicate an increase in quantitative data disclosure and policy adoption, particularly within the Environmental and Social pillars. Cross-sectional analysis reveals that this effect is more pronounced among firms with higher levels of institutional ownership as of March 2020. Overall, this study suggests that changes in third-party rating methodologies can significantly influence firms' disclosure behaviors and real policy actions. In the third chapter, I plan to explore how the presence of alliances within an industry influences the investment sensitivity of non-allied peer firms and the accuracy of financial analysts' capital expenditure (capex) forecasts. I intend to use a comprehensive dataset of alliances spanning multiple industries in the United States. I hypothesize that the presence of alliances will lead to a reduction in investment sensitivity for non-allied firms, a decline in the accuracy of analysts’ capex forecasts for non-allied firms, and an improvement in the forecast accuracy for allied firms. I further anticipate that these effects will be more pronounced under specific conditions: when alliances involve increased private communication (e.g., through joint ventures), when they pertain to higher-risk projects (e.g., exploration alliances), in high-tech sectors, and in contexts with higher investment irreversibility. Additionally, I expect that the average number of forecasts provided by allied firms within an industry will reinforce the observed decrease in investment sensitivity among non-allied firms. To validate these findings, I plan to use a shock to alliances across seven U.S. states as a falsification test. This study aims to contribute to the literature on information transfers and their impact on peer firm investments, on financial analysts' capex forecasting, and provide insights, albeit to a lesser extent, into the management literature on strategic alliances.