REVISION: Investor Relations and the Flow of Information through Investor Networks
This study develops a model to examine how companies' investor relations can impact the dissemination of information and how the dissemination of information affects the time-series behavior of bid-ask spreads. In our model, investors become aware of the information release either directly from investor relations or via person-to person communication. The person-to-person communication then spreads in a network of heterogeneous individuals, where some serve as 'hubs' with high connectivity to others. We show that the optimal investor relations strategy relies on targeting highly connected investors, especially for time-sensitive and complex information. We also show that targeted disclosure can reduce bid-ask spreads over long horizons, indicating a benefit in terms of lower trading costs. We also show that investor relations activities to expand the investor base facilitate the optimal information release by increasing the number of hub-type investors who follow the company and ...
REVISION: Credit Cycles and Financial Verification
We examine the effect of credit cycles on banks’ verification of commercial borrower financial performance. Using difference-in-difference specifications, we find that banks substantially reduced the collection of independently verified financial reports from construction firms during the housing boom relative to firms in other industries. This trend reversed in the year that the housing crisis ensued. Moreover, banks with lower levels of borrower financial verification at the height of the boom suffered more severe losses during the subsequent crisis. Our paper provides direct evidence on how verification standards change with the credit cycle and how they relate to loan portfolio quality.
REVISION: Financial Statements as Monitoring Mechanisms: Evidence from Small Commercial Loans
We examine when banks use financial statements to monitor small commercial firms. Theoretical research offers competing predictions surrounding the use of financial statements as a monitoring device in such settings where reporting between firms and banks is not mandated. Using a proprietary dataset of bank information requests after loan initiation, we examine these predictions and find that financial statements are requested for only half of the loans in the sample. This variation is mediated by borrower credit risk, contracting mechanisms, such as collateral, and alternative information sources, such as tax returns. However, the relations we identify are not straightforward — the relation between borrower risk and financial statement requests is nonlinear and financial statements can be both substitutes and complements to the alternative mechanisms. Collectively, our results provide novel evidence of the fundamental demand for financial reporting in the small commercial loan ...
New: Knowledge, Compensation, and Firm Value: An Empirical Analysis of Firm Communication
Knowledge is central to managing an organization, but its presence in employees is difficult to measure directly. We hypothesize that external communication patterns reveal the location of knowledge within the management team. Using a large database of firm conference call transcripts, we find that CEOs speak less in settings where they are likely to be relatively less knowledgeable. CEOs who speak more are also paid more, and firms whose CEO pay is not commensurate with CEO speaking have a lower industry-adjusted Tobin’s Q. Communication thus appears to reveal knowledge.
REVISION: Financial Reporting Choices of U.S. Private Firms: Large-Sample Analysis of GAAP and Audit Use
We examine the financial statement production of privately held U.S. firms using a comprehensive panel dataset of all tax returns from firms with more than $10 million in assets during the years 2008 to 2010. We find that more than 60% of these firms — controlling nearly $4 trillion in assets in 2010 — do not prepare audited GAAP financial statements. In contrast to recent assertions, the rate of audited GAAP financial statement production is remarkably persistent at both the population and firm levels over our time horizon. For firms that do switch, we find that producing audited GAAP financial statements is associated with characteristics of growth opportunities — young, high-growth, loss-making firms with intangible assets and expanding ownership — while the termination of audited GAAP statements is associated with financial distress. Firms raising new capital without an audit are typically mature, profitable firms with tangible assets. Collectively, our findings offer new ...
REVISION: A Measure of Competition Based on 10-K Filings
In this paper we develop a measure of competition based on management’s disclosures in their 10-K filing and find that firms’ rates of diminishing marginal returns on new and existing investment vary significantly with our measure. We show that these firm-level disclosures are related to existing industry-level measures of disclosure (e.g. Herfindahl index), but capture something distinctly new. In particular, we show that the measure is associated with the rates of diminishing marginal retu
New: The Value of Verification in Debt Financing: Evidence from Private U.S. Firms
I examine how verification of financial statements influences debt pricing. I use a large proprietary database of privately-held U.S. firms, an important business sector in which the information environment is opaque and financial statement audits are not mandated. I find that audited firms have a significantly lower cost of debt and that lenders place more weight on audited financial information in setting the interest rate. Further, I provide evidence of a mechanism for this increased financia