| This dissertation investigates two important current issues in governance and financial reporting: the role of activist hedge funds and the behavioural biases of corporate managers.;The role of activist hedge funds is currently at the center of a heated debate. Do these sophisticated investors merely behave as vultures in their investees, or do they contribute to better governance or transparency? In the first paper, I study the relation between the presence of activist hedge funds and governance practices at the board level. Relying on a unique shareholder activist database, empirical results reveal that board governance practices are positively related to the presence of activist hedge funds. The latter are associated with lower director entrenchment, lower CEO power, and higher board ratings. Further, the initiation of a public activist campaign to voice concerns over boards of directors reinforces the influence of activist hedge funds on governance practices.;In the second paper, I investigate whether there are side effects of intensive monitoring performed by activist hedge funds. To this end, I study the relation between the presence of activist hedge funds and earnings quality in their investee firms. Consistent with the perverse effect of "over monitoring" discussed in Tirole (2010), I document a negative relation between earnings quality and aggregate activist hedge fund ownership. Specifically, I provide evidence of a positive association between the use of real-based earnings management and the presence of activist hedge funds, particularly in firms exhibiting a high degree of information asymmetry, and for firms that are more suspected of managing their earnings. Further, the earnings response coefficient, a proxy for the perceived credibility of earnings surprises, is decreasing in the level of aggregate hedge fund ownership. This provides evidence that activist hedge funds are related to higher moral hazard.;In the third paper, I analyse how market participants perceive the credibility of earnings announcements for firms run by overconfident managers. In the academic literature, managerial overconfidence is associated with lower financial reporting quality including misreporting. I document that market participants apply a discount to earnings surprises announced by overconfident managers, as suggested by a lower earnings response coefficient for those firms. Further, strong governance mechanisms do not moderate this finding. As such, market participants seem to incorporate this behavioural bias of corporate managers into their market valuations, without regard for the strength of governance. |
