Christian Leuz

New: Internalizing Externalities: Disclosure Regulation for Hydraulic Fracturing, Drilling Activity and Water Quality
Date Posted:Mon, 01 Aug 2022 10:17:02 -0500
The rise of shale gas and tight oil development has triggered a major debate about hydraulic fracturing (HF). In an effort to mitigate risks from HF, especially with respect to water quality, many U.S. states have introduced disclosure mandates for HF wells and fracturing fluids. We use this setting to study whether targeting activities with dispersed environmental externalities with disclosure regulation reduces their environmental impact. We find significant improvements in water quality, examining salts that are considered signatures for HF impact, after the disclosure mandates are introduced. We document effects along the extensive and the intensive margin, though most of the improvement comes from the latter. Supporting this interpretation, we find that, after the disclosure mandates, operators pollute less per unit of production, use fewer toxic chemicals, and cause fewer spills and leaks of HF fluids and wastewater. We also present evidence that disclosure enables public ...

REVISION: Know Your Customer: Informed Trading by Banks
Date Posted:Tue, 26 Jul 2022 05:00:05 -0500
This study analyzes the trading behavior of banks with lending relationships, combining detailed German data on banks' proprietary trading with lending data from the central bank. We examine banks' trades in stocks of their clients around important corporate events and find that relationship banks build up positive (negative) trading positions in the two weeks before events with positive (negative) news, even when these events are unscheduled, and unwind positions shortly after the event. This trading pattern is more pronounced in situations when banks are likely to possess private information about their borrowers, and cannot be explained by banks specializing their lending and trading in certain industries or certain firms. Our results suggest that banks' lending
relationships inform their trading, underscoring the potential for conflicts of interest in universal banking, which have been a prominent concern in the regulatory debate for a long time.

REVISION: Know Your Customer: Informed Trading by Banks
Date Posted:Thu, 07 Jul 2022 04:37:54 -0500
This study analyzes the trading behavior of banks with lending relationships, combining detailed German data on banks' proprietary trading with lending data from the central bank. We examine banks' trades in stocks of their clients around important corporate events and find that relationship banks build up positive (negative) trading positions in the two weeks before events with positive (negative) news, even when these events are unscheduled, and unwind positions shortly after the event. This trading pattern is more pronounced in situations when banks are likely to possess private information about their borrowers, and cannot be explained by banks specializing their lending and trading in certain industries or certain firms. Our results suggest that banks' lending
relationships inform their trading, underscoring the potential for conflicts of interest in universal banking, which have been a prominent concern in the regulatory debate for a long time.

REVISION: Who Falls Prey to the Wolf of Wall Street? Investor Participation in Market Manipulation
Date Posted:Wed, 27 Apr 2022 13:46:39 -0500
Manipulative communications touting stocks are common in capital markets around the world. Although the price distortions created by so-called “pump-and-dump” schemes are well known, little is known about the investors in these frauds. By examining 421 “pump-and-dump” schemes between 2002 and 2015 and a proprietary set of trading records for over 110,000 individual investors from a major German bank, we provide evidence on the participation rate, magnitude of the investments, losses, and the characteristics of the individuals who invest in such schemes. Our evidence suggests that participation is quite common and involves sizable losses, with nearly 6% of active investors participating in at least one “pump-and-dump” and an average loss of nearly 30%. Moreover, we identify several distinct types of investors, some of which should not be viewed as falling prey to these frauds. We also show that portfolio composition and past trading behavior can better explain participation in touted ...

REVISION: Who Falls Prey to the Wolf of Wall Street? Investor Participation in Market Manipulation
Date Posted:Mon, 25 Apr 2022 10:27:55 -0500
Price distortions created by so-called “pump-and-dump” schemes are well known, but relatively little is known about the investors in these frauds. By examining 470 “pump-and-dump” schemes using a proprietary set of trading records for over 110,000 individual investors from a major German bank, we provide evidence on the participation rate, magnitude of the investments, the losses, and the characteristics of the individuals who invest in such schemes. Our evidence suggests that participation is quite common with nearly 8% of active investors participating in at least one “pump-and-dump” losing on average nearly 30%. We identify several distinct types among participating investors, some of which (i.e., day trader) should not be viewed as falling prey to the schemes. We show that investor types respond differently to market manipulation, which poses challenges in designing investor protections. We also show that portfolio composition and past trading behavior better explain tout ...

REVISION: Who Falls Prey to the Wolf of Wall Street? Investor Participation in Market Manipulation
Date Posted:Fri, 22 Apr 2022 10:42:09 -0500
Price distortions created by so-called “pump-and-dump” schemes are well known, but relatively little is known about the investors in these frauds. By examining 470 “pump-and-dump” schemes using a proprietary set of trading records for over 110,000 individual investors from a major German bank, we provide evidence on the participation rate, magnitude of the investments, the losses, and the characteristics of the individuals who invest in such schemes. Our evidence suggests that participation is quite common with nearly 8% of active investors participating in at least one “pump-and-dump” losing on average nearly 30%. We identify several distinct types among participating investors, some of which (i.e., day trader) should not be viewed as falling prey to the schemes. We show that investor types respond differently to market manipulation, which poses challenges in designing investor protections. We also show that portfolio composition and past trading behavior better explain tout ...

Update: The Death of a Regulator: Strict Supervision, Bank Lending, and Business Activity
Date Posted:Mon, 18 Apr 2022 00:42:33 -0500
An important question in banking is how strict supervision affects bank lending. Supervisors forcing banks to recognize losses could choke off lending and amplify local economic woes. But strict supervision could also change how banks assess and manage loan portfolios and credit risk. Estimating such effects is challenging. We exploit the extinction of the thrift supervisor (OTS) to analyze the effects of strict supervision on bank lending and bank management. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects and show that former OTS banks on average increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized banks and especially those that changed bank management practices following the supervisory transition. We also show that the supervisory-induced increase in credit supply is not fully explained by a reallocation from mortgage to small ...
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REVISION: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Thu, 14 Apr 2022 10:27:07 -0500
An important question in banking is how strict supervision affects bank lending. Supervisors forcing banks to recognize losses could choke off lending and amplify local economic woes. But strict supervision could also change how banks assess and manage loan portfolios and credit risk. Estimating such effects is challenging. We exploit the extinction of the thrift supervisor (OTS) to analyze the effects of strict supervision on bank lending and bank management. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects and show that former OTS banks on average increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized banks and especially those that changed bank management practices following the supervisory transition. We also show that the supervisory-induced increase in credit supply is not fully explained by a reallocation from mortgage to small ...

REVISION: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Tue, 12 Apr 2022 23:57:07 -0500
An important question in banking is how strict supervision affects bank lending and in turn local business activity. Supervisors forcing banks to recognize losses could choke off lending and amplify local economic woes. But stricter supervision could also change how banks assess and manage loans. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) to analyze economic links between strict supervision, bank lending and business activity. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects. We show that former OTS banks increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized banks, those more affected by the new regime, and cannot be fully explained by a reallocation from mortgage to small business lending after the crisis. These findings suggest that stricter supervision operates not only through ...

Update: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Tue, 12 Apr 2022 06:32:43 -0500
An important question in banking is how strict supervision affects bank lending. Supervisors forcing banks to recognize losses could choke off lending and amplify local economic woes. But strict supervision could also change how banks assess and manage loan portfolios and credit risk. Estimating such effects is challenging. We exploit the extinction of the thrift supervisor (OTS) to analyze the effects of strict supervision on bank lending and bank management. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects and show that former OTS banks on average increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized banks and especially those that changed bank management practices following the supervisory transition. We also show that the supervisory-induced increase in credit supply is not fully explained by a reallocation from mortgage to small ...
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REVISION: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Wed, 06 Apr 2022 13:32:32 -0500
An important question in banking is how strict supervision affects bank lending. Supervisors forcing banks to recognize losses could choke off lending and amplify local economic woes. But strict supervision could also change how banks assess and manage loan portfolios and credit risk. Estimating such effects is challenging. We exploit the extinction of the thrift supervisor (OTS) to analyze the effects of strict supervision on bank lending and bank management. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects and show that former OTS banks on average increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized banks and especially those that changed bank management practices following the supervisory transition. We also show that the supervisory-induced increase in credit supply is not fully explained by a reallocation from mortgage to small ...

REVISION: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Mon, 04 Apr 2022 05:23:11 -0500
An important question in banking is how strict supervision affects bank lending. Supervisors forcing banks to recognize losses could choke off lending and amplify local economic woes. But strict supervision could also change how banks assess and manage loan portfolios and credit risk. Estimating such effects is challenging. We exploit the extinction of the thrift supervisor (OTS) to analyze the effects of strict supervision on bank lending and bank management. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects and show that former OTS banks on average increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized banks and especially those that changed bank management practices following the supervisory transition. We also show that the supervisory-induced increase in credit supply is not fully explained by a reallocation from mortgage to small ...

REVISION: Reporting Regulation and Corporate Innovation
Date Posted:Thu, 24 Mar 2022 03:49:57 -0500
We investigate the impact of reporting regulation on corporate innovation. Exploiting thresholds in Europe’s regulation and a major enforcement reform in Germany, we find that forcing firms to publicly disclose their financial statements discourages innovative activities. Our evidence suggests that reporting regulation has significant real effects by imposing proprietary costs on innovative firms, which in turn diminish their incentives to innovate. At the industry level, positive information spillovers (e.g., to competitors, suppliers, and customers) appear insufficient to compensate the negative direct effect on the prevalence of innovative activity. The spillovers instead appear to concentrate innovation among a few large firms in a given industry. Thus, financial reporting regulation has important aggregate and distributional effects on corporate innovation.

New: Mandatory Corporate Carbon Disclosures and the Path to Net Zero
Date Posted:Mon, 21 Mar 2022 06:30:50 -0500
To advance the world’s progress toward a net zero carbon economy, the authors recommend that governments impose a mandate on corporations requiring them to report their annual direct carbon emissions.

REVISION: Reporting Regulation and Corporate Innovation
Date Posted:Wed, 09 Mar 2022 13:20:41 -0600
We investigate the impact of reporting regulation on corporate innovation. Exploiting thresholds in Europe’s regulation and an enforcement reform in Germany, we find that forcing firms to publicly disclose their financial statements reduces the total number of innovating firms in the industry, but not total innovation spending. Our findings suggest that reporting regulation imposes proprietary costs on innovative firms, especially smaller ones, thereby discouraging their innovation activity. At the same time, reporting regulation provides positive information spillovers to other firms (e.g., competitors, suppliers, and customers), especially larger ones, thereby concentrating innovation spending among a few large firms. Thus, financial reporting regulation has aggregate and distributional effects on corporate innovation that are important to consider by policy makers.

REVISION: Reporting Regulation and Corporate Innovation
Date Posted:Wed, 09 Mar 2022 11:45:42 -0600
We investigate the impact of reporting regulation on corporate innovation. Exploiting
thresholds in Europe’s regulation and an enforcement reform in Germany, we find
that forcing firms to publicly disclose their financial statements reduces the total
number of innovating firms in the industry, but not total innovation spending. Our
findings suggest that reporting regulation imposes proprietary costs on innovative
firms, especially smaller ones, thereby discouraging their innovation activity. At the
same time, reporting regulation provides positive information spillovers to other firms
(e.g., competitors, suppliers, and customers), especially larger ones, thereby
concentrating innovation spending among a few large firms. Thus, financial reporting
regulation has aggregate and distributional effects on corporate innovation that are
important to consider by policy makers.

New: Determinants and Career Consequences of Early Audit Partner Rotations
Date Posted:Sun, 06 Feb 2022 15:59:31 -0600
We examine how often and why some audit partners rotate off client engagements before the end of the maximum five-year cycle period. Specifically, we investigate whether audit quality issues play a role for engagement partners and clients to separate prematurely. For a sample of about 4,000 within-audit firm partner rotations for Big 6 clients over the 2008 to 2014 period, we find that client characteristics such as financial leverage or performance have little explanatory power. In contrast, severe audit quality issues such as financial restatements or PCAOB inspection findings are associated with early partner rotations. These associations are more pronounced for early rotations that are not explained by scheduled retirements, promotions, or temporary leaves as well as for large clients and when partners are less experienced. We also find that female partners have a higher likelihood of early rotation for audit quality reasons. Early rotations have career consequences. Partners are ...

REVISION: Large-Sample Evidence on the Impact of Unconventional Oil and Gas Development on Surface Waters
Date Posted:Fri, 10 Dec 2021 05:11:11 -0600
The impact of unconventional oil and gas development on water quality is a major environmental concern. We built a large, geo-coded database that combines surface water measurements with horizontally drilled wells stimulated by hydraulic fracturing (HF) for several shales to examine whether temporal and spatial well variation is associated with anomalous salt concentrations in U.S. watersheds. We analyzed four ions that could indicate water impact from unconventional development. We found very small concentration increases associated with new HF wells for barium, chloride and strontium, but not bromide. All ions showed larger, but still small-in-magnitude increases 91-180 days after well spudding. Our estimates were most pronounced for wells with larger amounts of produced water, wells located over high-salinity formations, and wells closer and likely upstream from water monitors.

REVISION: Mandatory Corporate Carbon Disclosures and the Path to Net Zero
Date Posted:Mon, 25 Oct 2021 07:30:36 -0500
The overwhelming majority of publicly listed companies around the world still does not disclose their carbon emissions, and even fewer privately held companies do so. We argue that mandatory carbon disclosures for public and private companies can make an elementary but essential contribution to the global drive towards a net zero economy. They deliver much of what policy makers and asset managers need to manage carbon transition risk, and perhaps more importantly, are likely to accelerate the pace of future carbon emission reductions. For this, it is important that mandatory carbon disclosures are kept simple and straightforward to interpret, and that such a mandate be enforced.

REVISION: Large-Sample Evidence on the Impact of Unconventional Oil and Gas Development on Surface Waters
Date Posted:Thu, 16 Sep 2021 19:31:26 -0500
The impact of unconventional oil and gas development on water quality is a major environmental concern. We built a large, geo-coded database that combines surface water measurements with horizontally drilled wells stimulated by hydraulic fracturing (HF) for several shales to examine whether temporal and spatial well variation is associated with anomalous salt concentrations in U.S. watersheds. We analyzed four ions that could indicate water impact from unconventional development. We found very small concentration increases associated with new HF wells for barium, chloride and strontium, but not bromide. All ions showed larger, but still small-in-magnitude increases 91-180 days after well spudding. Our estimates were most pronounced for wells with larger amounts of produced water, wells located over high-salinity formations, and wells closer and likely upstream from water monitors.

REVISION: Know Your Customer: Relationship Lending and Bank Trading
Date Posted:Mon, 16 Aug 2021 06:10:27 -0500
In this study, we analyze the trading behavior of banks with lending relationships. We combine detailed German data on banks’ proprietary trading and market making with lending information from the credit register and then examine how banks trade stocks of their borrowers around important corporate events. We find that banks trade more frequently and also profitably ahead of events when they are the main lender (or relationship bank) for the borrower. Specifically, we show that relationship banks are more likely to build up positive (negative) trading positions in the two weeks before positive (negative) news events, and also that they unwind these positions shortly after the event. This trading pattern is more pronounced for unscheduled earnings events, M&A transactions, and after borrower obtain new bank loans. Our results suggest that lending relationships endow banks with important information, highlighting the potential for conflicts of interest in banking, which has been a ...

REVISION: Who Falls Prey to the Wolf of Wall Street? Investor Participation in Market Manipulation
Date Posted:Mon, 26 Jul 2021 09:54:05 -0500
Manipulative communications touting stocks are common in capital markets around the world. Although the price distortions created by so-called “pump-and-dump” schemes are well known, little is known about the investors in these frauds. By examining 421 “pump-and-dump” schemes between 2002 and 2015 and a proprietary set of trading records for over 110,000 individual investors from a major German bank, we provide evidence on the participation rate, magnitude of the investments, losses, and the characteristics of the individuals who invest in such schemes. Our evidence suggests that participation is quite common and involves sizable losses, with nearly 6% of active investors participating in at least one “pump-and-dump” and an average loss of nearly 30%. Moreover, we identify several distinct types of investors, some of which should not be viewed as falling prey to these frauds. We also show that portfolio composition and past trading behavior can better explain participation in touted ...

Update: Mandatory CSR and Sustainability Reporting: Economic Analysis and Literature Review
Date Posted:Wed, 21 Jul 2021 02:57:55 -0500
This study collates potential economic effects of mandated disclosure and reporting standards for corporate social responsibility (CSR) and sustainability topics. We first outline key features of CSR reporting. Next, we draw on relevant academic literatures in accounting, finance, economics, and management to discuss and evaluate the potential economic consequences of a requirement for sustainability reporting for U.S. firms, including effects in capital markets, on stakeholders other than investors and on firm behavior. We also discuss issues related to the implementation and enforcement of CSR and sustainability reporting standards as well as two approaches to sustainability reporting that differ in their overarching goals and materiality standards. Our analysis yields a number of insights that are relevant for the current debate on mandatory CSR and sustainability reporting. It also points scholars to avenues for future research.
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Update: Mandatory CSR and Sustainability Reporting: Economic Analysis and Literature Review
Date Posted:Tue, 20 Jul 2021 06:07:37 -0500
This study collates potential economic effects of mandated disclosure and reporting standards for corporate social responsibility (CSR) and sustainability topics. We first outline key features of CSR reporting. Next, we draw on relevant academic literatures in accounting, finance, economics, and management to discuss and evaluate the potential economic consequences of a requirement for sustainability reporting for U.S. firms, including effects in capital markets, on stakeholders other than investors and on firm behavior. We also discuss issues related to the implementation and enforcement of CSR and sustainability reporting standards as well as two approaches to sustainability reporting that differ in their overarching goals and materiality standards. Our analysis yields a number of insights that are relevant for the current debate on mandatory CSR and sustainability reporting. It also points scholars to avenues for future research.
New PDF Uploaded

REVISION: Who Falls Prey to the Wolf of Wall Street? Investor Participation in Market Manipulation
Date Posted:Fri, 02 Jul 2021 08:01:38 -0500
Price distortions created by so-called “pump-and-dump” schemes are well known, but relatively little is known about the investors in these frauds. By examining 470 “pump-and-dump” schemes using a proprietary set of trading records for over 110,000 individual investors from a major German bank, we provide evidence on the participation rate, magnitude of the investments, the losses, and the characteristics of the individuals who invest in such schemes. Our evidence suggests that participation is quite common and involves sizable losses, with nearly 8% of active investors participating in at least one “pump-and-dump” and an average loss of nearly 30%. Moreover, we identify several distinct types of investors, some of which should not be viewed as falling prey to these frauds. We show that portfolio composition and past trading behavior can better explain participation in touted stocks than demographics. We also document broader and longer lasting ramifications of these schemes for ...

REVISION: Who Falls Prey to the Wolf of Wall Street? Investor Participation in Market Manipulation
Date Posted:Thu, 24 Jun 2021 04:09:56 -0500
Price distortions created by so-called “pump-and-dump” schemes are well known, but relatively little is known about the investors in these frauds. By examining 470 “pump-and-dump” schemes using a proprietary set of trading records for over 110,000 individual investors from a major German bank, we provide evidence on the participation rate, magnitude of the investments, the losses, and the characteristics of the individuals who invest in such schemes. Our evidence suggests that participation is quite common and involves sizable losses, with nearly 8% of active investors participating in at least one “pump-and-dump” and an average loss of nearly 30%. Moreover, we identify several distinct types of investors, some of which should not be viewed as falling prey to these frauds. We show that portfolio composition and past trading behavior can better explain participation in touted stocks than demographics. We also document broader and longer lasting ramifications of these schemes for ...

REVISION: Accounting for Financial Stability: Bank Disclosure and Loss Recognition in the Financial Crisis
Date Posted:Tue, 08 Jun 2021 06:39:11 -0500
This paper examines banks’ disclosures and loss recognition in the 2007-2009 financial crisis and identifies several core issues for the link between accounting and financial stability. We show that, going into the financial crisis, banks’ disclosures about relevant risk exposures were relatively sparse. Such disclosures came later after major concerns about banks’ exposures had arisen in markets. The recognition of loan losses also was slow and delayed relative to prevailing market expectations. Among the possible explanations for this evidence, our analysis indicates that banks’ reporting incentives played a key role, which has important implications for bank supervision and the new expected loss model for loan accounting. We also provide evidence that shielding regulatory capital from accounting losses through prudential filters can dampen banks’ incentives for corrective actions. Overall, our analysis reveals several significant challenges if accounting and financial reporting ...

REVISION: Accounting for Financial Stability: Bank Disclosure and Loss Recognition in the Financial Crisis
Date Posted:Mon, 07 Jun 2021 07:31:52 -0500
This paper examines banks’ disclosures and loss recognition in the 2007-2009 financial crisis and identifies several core issues for the link between accounting and financial stability. We show that, going into the financial crisis, banks’ disclosures about relevant risk exposures were relatively sparse. Such disclosures came later after major concerns about banks’ exposures had arisen in markets. The recognition of loan losses also was slow and delayed relative to prevailing market expectations. Among the possible explanations for this evidence, our analysis indicates that banks’ reporting incentives played a key role, which has important implications for bank supervision and the new expected loss model for loan accounting. We also provide evidence that shielding regulatory capital from accounting losses through prudential filters can dampen banks’ incentives for corrective actions. Overall, our analysis reveals several significant challenges if accounting and financial reporting ...

REVISION: Accounting for Financial Stability: Bank Disclosure and Loss Recognition in the Financial Crisis
Date Posted:Mon, 07 Jun 2021 06:48:41 -0500
This paper examines banks’ disclosures and loss recognition in the 2007-2009 financial crisis and identifies several core issues for the link between accounting and financial stability. We show that, going into the financial crisis, banks’ disclosures about relevant risk exposures were relatively sparse. Such disclosures came later after major concerns about banks’ exposures had arisen in markets. The recognition of loan losses also was slow and delayed relative to prevailing market expectations. Among the possible explanations for this evidence, our analysis indicates that banks’ reporting incentives played a key role, which has important implications for bank supervision and the new expected loss model for loan accounting. We also provide evidence that shielding regulatory capital from accounting losses through prudential filters can dampen banks’ incentives for corrective actions. Overall, our analysis reveals several significant challenges if accounting and financial reporting ...

REVISION: Accounting for Financial Stability: Bank Disclosure and Loss Recognition in the Financial Crisis
Date Posted:Tue, 01 Jun 2021 09:11:01 -0500
This paper examines banks’ disclosures and loss recognition in the 2007-2009 financial crisis and identifies several core issues for the link between accounting and financial stability. We show that, going into the financial crisis, banks’ disclosures about relevant risk exposures were relatively sparse. Such disclosures came later after major concerns about banks’ exposures had arisen in markets. The recognition of loan losses also was slow and delayed relative to prevailing market expectations. Among the possible explanations for this evidence, our analysis indicates that banks’ reporting incentives played a key role, which has important implications for bank supervision and the new expected loss model for loan accounting. We also provide evidence that shielding regulatory capital from accounting losses through prudential filters can dampen banks’ incentives for corrective actions. Overall, our analysis reveals several significant challenges if accounting and financial reporting ...

REVISION: Mandatory CSR and Sustainability Reporting: Economic Analysis and Literature Review
Date Posted:Thu, 20 May 2021 11:04:35 -0500
This study collates potential economic effects of mandated disclosure and reporting standards for corporate social responsibility (CSR) and sustainability topics. We first outline key features of CSR reporting. Next, we draw on relevant academic literatures in accounting, finance, economics, and management to discuss and evaluate the potential economic consequences of a requirement for sustainability reporting for U.S. firms, including effects in capital markets, on stakeholders other than investors and on firm behavior. We also discuss issues related to the implementation and enforcement of CSR and sustainability reporting standards as well as two approaches to sustainability reporting that differ in their overarching goals and materiality standards. Our analysis yields a number of insights that are relevant for the current debate on mandatory CSR and sustainability reporting. It also points scholars to avenues for future research.

REVISION: Accounting for Financial Stability: Bank Disclosure and Loss Recognition in the Financial Crisis
Date Posted:Thu, 20 May 2021 04:00:06 -0500
This paper examines banks’ disclosures and loss recognition in the 2007-2009 financial crisis and identifies several core issues for the link between accounting and financial stability. We show that, going into the financial crisis, banks’ disclosures about relevant risk exposures were relatively sparse. Such disclosures came later after major concerns about banks’ exposures had arisen in markets. The recognition of loan losses also was slow and delayed relative to prevailing market expectations. Among the possible explanations for this evidence, our analysis indicates that banks’ reporting incentives played a key role, which has important implications for bank supervision and the new expected loss model for loan accounting. We also provide evidence that shielding regulatory capital from accounting losses through prudential filters can dampen banks’ incentives for corrective actions. Overall, our analysis reveals several significant challenges if accounting and financial reporting ...

REVISION: Accounting for Financial Stability: Bank Disclosure and Loss Recognition in the Financial Crisis
Date Posted:Wed, 19 May 2021 11:57:47 -0500
This paper examines banks’ disclosures and loss recognition in the 2007-2009 financial crisis and identifies several core issues for the link between accounting and financial stability. We show that, going into the financial crisis, banks’ disclosures about relevant risk exposures were relatively sparse. Such disclosures came later after major concerns about banks’ exposures had arisen in markets. The recognition of loan losses also was slow and delayed relative to prevailing market expectations. Among the possible explanations for this evidence, our analysis indicates that banks’ reporting incentives played a key role, which has important implications for bank supervision and the new expected loss model for loan accounting. We also provide evidence that shielding regulatory capital from accounting losses through prudential filters can dampen banks’ incentives for corrective actions. Overall, our analysis reveals several significant challenges if accounting and financial reporting ...

REVISION: Mandatory CSR and Sustainability Reporting: Economic Analysis and Literature Review
Date Posted:Mon, 17 May 2021 09:57:40 -0500
This study collates potential economic effects of mandated disclosure and reporting standards for corporate social responsibility (CSR) and sustainability topics. We first outline key features of CSR reporting. Next, we draw on relevant academic literatures in accounting, finance, economics, and management to discuss and evaluate the potential economic consequences of a requirement for sustainability reporting for U.S. firms, including effects in capital markets, on stakeholders other than investors and on firm behavior. We also discuss issues related to the implementation and enforcement of CSR and sustainability reporting standards as well as two approaches to sustainability reporting that differ in their overarching goals and materiality standards. Our analysis yields a number of insights that are relevant for the current debate on mandatory CSR and sustainability reporting. It also points scholars to avenues for future research.

REVISION: Mandatory CSR and Sustainability Reporting: Economic Analysis and Literature Review
Date Posted:Thu, 06 May 2021 10:31:08 -0500
This study collates potential economic effects of mandated disclosure and reporting standards for corporate social responsibility (CSR) and sustainability topics. We first outline key features of CSR reporting. Next, we draw on relevant academic literatures in accounting, finance, economics, and management to discuss and evaluate the potential economic consequences of a requirement for sustainability reporting for U.S. firms, including effects in capital markets, on stakeholders other than investors and on firm behavior. We also discuss issues related to the implementation and enforcement of CSR and sustainability reporting standards as well as two approaches to sustainability reporting that differ in their overarching goals and materiality standards. Our analysis yields a number of insights that are relevant for the current debate on mandatory CSR and sustainability reporting. It also points scholars to avenues for future research.

REVISION: Mandatory CSR and Sustainability Reporting: Economic Analysis and Literature Review
Date Posted:Thu, 29 Apr 2021 05:39:25 -0500
This study collates potential economic effects of mandated disclosure and reporting standards for corporate social responsibility (CSR) and sustainability topics. We first outline key features of CSR reporting. Next, we draw on relevant academic literatures in accounting, finance, economics, and management to discuss and evaluate the potential economic consequences of a requirement for sustainability reporting for U.S. firms, including effects in capital markets, on stakeholders other than investors and on firm behavior. We also discuss issues related to the implementation and enforcement of CSR and sustainability reporting standards as well as two approaches to sustainability reporting that differ in their overarching goals and materiality standards. Our analysis yields a number of insights that are relevant for the current debate on mandatory CSR and sustainability reporting. It also points scholars to avenues for future research.

REVISION: Reporting Regulation and Corporate Innovation
Date Posted:Thu, 24 Dec 2020 04:54:47 -0600
We investigate the impact of reporting regulation on corporate innovation. Exploiting thresholds in Europe’s regulation and a major enforcement reform in Germany, we find that forcing firms to publicly disclose their financial statements discourages innovative activities. Our evidence suggests that reporting regulation has significant real effects by imposing proprietary costs on innovative firms, which in turn diminish their incentives to innovate. At the industry level, positive information spillovers (e.g., to competitors, suppliers, and customers) appear insufficient to compensate the negative direct effect on the prevalence of innovative activity. The spillovers instead appear to concentrate innovation among a few large firms in a given industry. Thus, financial reporting regulation has important aggregate and distributional effects on corporate innovation.

REVISION: Going the Extra Mile: Distant Lending and Credit Cycles
Date Posted:Sat, 05 Dec 2020 12:10:57 -0600
A simple proxy for a bank’s credit risk – the average physical distance of small corporate borrowers from their bank’s branches – suggests risky lending before the global financial crisis was pro-cyclical and especially so in banks operating in counties where banking was competitive. Surprisingly, such lending took off as the Fed raised interest rates between 2004 and 2007. We argue that bank responses to the rate hikes led to a shift of bank deposits into counties where banking was competitive. Short-horizon bank management recycled these new deposits into loans to more distant counties where banking was not competitive. Unfortunately, given the difficulty of making distant small business loans, loan quality deteriorated. We discuss the conditions under which a normalization of interest rates can lead to a deterioration in loan quality.

REVISION: Reporting Regulation and Corporate Innovation
Date Posted:Tue, 17 Nov 2020 11:07:12 -0600
We investigate the impact of reporting regulation on corporate innovation activity. Exploiting thresholds in Europe’s regulation and a major enforcement reform in Germany, we find that forcing a greater share of firms to publicly disclose their financial statements reduces firms’ innovative activities. At the same time, it increases firms’ reliance on patenting to protect their innovations, to the extent they continue innovating. Our evidence is consistent with mandated reporting having significant real effects by imposing proprietary costs on innovative firms, which in turn diminishes their incentives to engage in innovative activities. Importantly, we examine aggregate effects at the industry level, net of spillovers. Thus, our results imply that positive information spillovers (e.g., to competitors, suppliers, and customers) within industries are not large enough to compensate the negative direct effect on the prevalence of innovative activity. The spillovers instead appear ...

REVISION: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Tue, 17 Nov 2020 10:52:31 -0600
An important question in banking is how strict supervision affects bank lending and in turn local business activity. Supervisors forcing banks to recognize losses could choke off lending and amplify local economic woes. But stricter supervision could also change how banks assess and manage loans. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) to analyze economic links between strict supervision, bank lending and business activity. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects. We show that former OTS banks increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized banks, those more affected by the new regime, and cannot be fully explained by a reallocation from mortgage to small business lending after the crisis. These findings suggest that stricter supervision operates not only through ...

REVISION: Accounting for Financial Stability: Bank Disclosure and Loss Recognition in the Financial Crisis
Date Posted:Tue, 08 Sep 2020 04:53:05 -0500
This paper examines banks’ disclosures and loss recognition in the financial crisis and identifies several core issues for the link between accounting and financial stability. Our analysis suggests that, going into the financial crisis, banks’ disclosures about relevant risk exposures were relatively sparse. Such disclosures came later after major concerns about banks’ exposures had arisen in markets. Similarly, the recognition of loan losses was relatively slow and delayed relative to prevailing market expectations. Among the possible explanations for this evidence, our analysis suggests that banks’ reporting incentives played a key role, which has important implications for bank supervision and the new expected loss model for loan accounting. We also provide evidence that shielding regulatory capital from accounting losses through prudential filters can dampen banks’ incentives for corrective actions. Overall, our analysis reveals several important challenges if accounting and ...

REVISION: Reporting Regulation and Corporate Innovation
Date Posted:Thu, 27 Aug 2020 03:40:21 -0500
We investigate the impact of reporting regulation on corporate innovation activity. Exploiting thresholds in Europe’s regulation and a major enforcement reform in Germany, we find that forcing a greater share of firms to publicly disclose their financial statements reduces firms’ innovative activities. At the same time, it increases firms’ reliance on patenting to protect their innovations, to the extent they continue innovating. Our evidence is consistent with mandated reporting having significant real effects by imposing proprietary costs on innovative firms, which in turn diminishes their incentives to engage in innovative activities. Importantly, we examine aggregate effects at the industry level, net of spillovers. Thus, our results imply that positive information spillovers (e.g., to competitors, suppliers, and customers) within industries are not large enough to compensate the negative direct effect on the prevalence of innovative activity. The spillovers instead appear ...

REVISION: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Thu, 30 Jul 2020 02:58:40 -0500
An important question in banking is how strict supervision affects bank lending and in turn local business activity. Supervisors forcing banks to recognize losses could choke off lending and amplify local economic woes. But stricter supervision could also change how banks assess and manage loans. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) to analyze economic links between strict supervision, bank lending and business activity. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects. We show that former OTS banks increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized banks, those more affected by the new regime, and cannot be fully explained by a reallocation from mortgage to small business lending after the crisis. These findings suggest that stricter supervision operates not only through ...

REVISION: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Mon, 27 Jul 2020 04:17:08 -0500
An important question in banking is how strict supervision affects bank lending and in turn local business activity. Supervisors forcing banks to recognize losses could choke off lending and amplify local economic woes. But stricter supervision could also change how banks assess and manage loans. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) to analyze economic links between strict supervision, bank lending and business activity. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects. We show that former OTS banks increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized banks, those more affected by the new regime, and cannot be fully explained by a reallocation from mortgage to small business lending after the crisis. These findings suggest that stricter supervision operates not only through ...

REVISION: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Fri, 24 Jul 2020 11:17:54 -0500
An important question in banking is how strict supervision affects bank lending and in turn local business activity. Supervisors forcing banks to recognize losses could choke off lending and amplify local economic woes. But stricter supervision could also change how banks assess and manage loans. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) to analyze economic links between strict supervision, bank lending and business activity. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects. We show that former OTS banks increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized banks, those more affected by the new regime, and cannot be fully explained by a reallocation from mortgage to small business lending after the crisis. These findings suggest that stricter supervision operates not only through ...

REVISION: Accounting for Financial Stability: Bank Disclosure and Loss Recognition in the Financial Crisis
Date Posted:Wed, 08 Jul 2020 08:31:29 -0500
This paper examines banks’ disclosures and loss recognition in the financial crisis and identifies several core issues for the link between accounting and financial stability. Our analysis suggests that, going into the financial crisis, banks’ disclosures about relevant risk exposures were relatively sparse. Such disclosures came later after major concerns about banks’ exposures had arisen in markets. Similarly, the recognition of loan losses was relatively slow and delayed relative to prevailing market expectations. Among the possible explanations for this evidence, our analysis suggests that banks’ reporting incentives played a key role, which has important implications for bank supervision and the new expected loss model for loan accounting. We also provide evidence that shielding regulatory capital from accounting losses through prudential filters can dampen banks’ incentives for corrective actions. Overall, our analysis reveals several important challenges if accounting and ...

REVISION: Accounting for Financial Stability: Bank Disclosure and Loss Recognition in the Financial Crisis
Date Posted:Wed, 08 Jul 2020 03:50:07 -0500
This paper examines banks’ disclosures and loss recognition in the financial crisis and identifies several core issues for the link between accounting and financial stability. Our analysis suggests that, going into the financial crisis, banks’ disclosures about relevant risk exposures were relatively sparse. Such disclosures came later after major concerns about banks’ exposures had arisen in markets. Similarly, the recognition of loan losses was relatively slow and delayed relative to prevailing market expectations. Among the possible explanations for this evidence, our analysis suggests that banks’ reporting incentives played a key role, which has important implications for bank supervision and the new expected loss model for loan accounting. We also provide evidence that shielding regulatory capital from accounting losses through prudential filters can dampen banks’ incentives for corrective actions. Overall, our analysis reveals several important challenges if accounting and ...

REVISION: Accounting for Financial Stability: Bank Disclosure and Loss Recognition in the Financial Crisis
Date Posted:Thu, 02 Jul 2020 03:34:11 -0500
This paper examines banks’ disclosures and loss recognition in the financial crisis and identifies several core issues for the link between accounting and financial stability. Our analysis suggests that, going into the financial crisis, banks’ disclosures about relevant risk exposures were relatively sparse. Such disclosures came later after major concerns about banks’ exposures had arisen in markets. Similarly, the recognition of loan losses was relatively slow and delayed relative to prevailing market expectations. Among the possible explanations for this evidence, our analysis suggests that banks’ reporting incentives played a key role, which has important implications for bank supervision and the new expected loss model for loan accounting. We also provide evidence that shielding regulatory capital from accounting losses through prudential filters can dampen banks’ incentives for corrective actions. Overall, our analysis reveals several important challenges if accounting and ...

New: Reproducibility in Accounting Research: Views of the Research Community
Date Posted:Wed, 01 Jul 2020 10:40:17 -0500
We have little knowledge about the prevalence of irreproducibility in the accounting literature. To narrow this gap, we conducted a survey among the participants of the 2019 JAR Conference on their perceptions of the frequency, causes, and consequences of irreproducible research published in accounting journals. A majority of respondents believe that irreproducibility is common in the literature, constitutes a major problem, and receives too little attention. Most have encountered irreproducibility in the work of others (although not in their own work) but chose not to pursue their failed reproduction attempts to publication. Respondents believe irreproducibility results chiefly from career or publication incentives as well as from selective reporting of results. They also believe that practices like sharing code and data combined with stronger incentives to replicate the work of others would enhance reproducibility. The views of accounting researchers are remarkably similar to those ...

REVISION: Reproducibility in Accounting Research: Views of the Research Community
Date Posted:Tue, 07 Apr 2020 04:25:08 -0500
We have little knowledge about the prevalence of irreproducibility in the accounting literature. To narrow this gap, we conducted a survey among the participants of the 2019 JAR Conference on their perceptions of the frequency, causes and consequences of irreproducible research published in accounting journals. A majority of respondents believe that irreproducibility is common in the literature, constitutes a major problem and receives too little attention. Most have encountered irreproducibility in the work of others (although not in their own work) but chose not to pursue their failed reproduction attempts to publication. Respondents believe irreproducibility results chiefly from career or publication incentives as well as from selective reporting of results. They also believe that practices like sharing code and data combined with stronger incentives to replicate the work of others would enhance reproducibility. The views of accounting researchers are remarkably similar to those ...

REVISION: Reproducibility in Accounting Research: Views of the Research Community
Date Posted:Mon, 06 Apr 2020 03:28:21 -0500
We have little knowledge about the prevalence of irreproducibility in the accounting literature. To narrow this gap, we conducted a survey among the participants of the 2019 JAR Conference on their perceptions of the frequency, causes and consequences of irreproducible research published in accounting journals. A majority of respondents believe that irreproducibility is common in the literature, constitutes a major problem and receives too little attention. Most have encountered irreproducibility in the work of others (although not in their own work) but chose not to pursue their failed reproduction attempts to publication. Respondents believe irreproducibility results chiefly from career or publication incentives as well as from selective reporting of results. They also believe that practices like sharing code and data combined with stronger incentives to replicate the work of others would enhance reproducibility. The views of accounting researchers are remarkably similar to those ...

REVISION: On the Economics of Mandatory Audit Partner Rotation and Tenure: Evidence from PCAOB Data
Date Posted:Tue, 24 Mar 2020 10:02:21 -0500
We provide the first partner tenure and mandatory rotation analysis for a large cross-section of U.S. publicly listed firms over an extended period. We analyze the effects on audit quality as well as on audit pricing and production. On average, we find no evidence for audit quality declines over the tenure cycle and, consistent with this result, little support for fresh-look benefits after five-year mandatory rotations. Nevertheless, partner rotations have significant economic consequences. Audit fees decline and audit hours increase after mandatory rotations, but then reverse over the tenure cycle. We also find evidence that audit firms use “shadowing” in preparation of lead partner turnover. The economic effects differ predictably by competitiveness of the local audit market, client size, and partner experience. When multiple members of the audit team start together at a new client, the transition appears to be more disruptive (but still less so than switching the audit firm) and ...

REVISION: On the Economics of Mandatory Audit Partner Rotation and Tenure: Evidence from PCAOB Data
Date Posted:Tue, 24 Mar 2020 09:58:05 -0500
We provide the first partner tenure and mandatory rotation analysis for a large cross-section of U.S. publicly listed firms over an extended period. We analyze the effects on audit quality as well as on audit pricing and production. On average, we find no evidence for audit quality declines over the tenure cycle and, consistent with this result, little support for fresh-look benefits after five-year mandatory rotations. Nevertheless, partner rotations have significant economic consequences. Audit fees decline and audit hours increase after mandatory rotations, but then reverse over the tenure cycle. We also find evidence that audit firms use “shadowing” in preparation of lead partner turnover. The economic effects differ predictably by competitiveness of the local audit market, client size, and partner experience. When multiple members of the audit team start together at a new client, the transition appears to be more disruptive (but still less so than switching the audit firm) and ...

REVISION: On the Economics of Mandatory Audit Partner Rotation and Tenure: Evidence from PCAOB Data
Date Posted:Mon, 23 Mar 2020 03:52:52 -0500
We provide the first partner tenure and mandatory rotation analysis for a large cross-section of U.S. publicly listed firms over an extended period. We analyze the effects on audit quality as well as on audit pricing and production. On average, we find no evidence for audit quality declines over the tenure cycle and, consistent with this result, little support for fresh-look benefits after five-year mandatory rotations. Nevertheless, partner rotations have significant economic consequences. Audit fees decline and audit hours increase after mandatory rotations, but then reverse over the tenure cycle. We also find evidence that audit firms use “shadowing” in preparation of lead partner turnover. The economic effects differ predictably by competitiveness of the local audit market, client size, and partner experience. When multiple members of the audit team rotate together, the transition appears to be more disruptive (but still less so than switching the audit firm) and more likely to ...

REVISION: Public Oversight and Reporting Credibility: Evidence from the PCAOB Audit Inspection Regime
Date Posted:Thu, 02 Jan 2020 11:11:14 -0600
This paper studies the impact of public audit oversight on financial reporting credibility. We analyze changes in market responses to earnings news after public audit oversight is introduced, exploiting that the regime onset depends on fiscal year-ends, auditors, and the rollout of auditor inspections. We find that investors respond more strongly to earnings news following public audit oversight. Corroborating these findings, we find an increase in volume responses to 10-K filings after the new regime. Our results show that public audit oversight can enhance reporting credibility and that this credibility is priced in capital markets.

REVISION: Public Oversight and Reporting Credibility: Evidence from the PCAOB Audit Inspection Regime
Date Posted:Wed, 11 Dec 2019 10:07:27 -0600
This paper studies the impact of public audit oversight on financial reporting credibility. We analyze changes in market responses to earnings news after public audit oversight is introduced, exploiting that the regime onset depends on fiscal-year ends, auditors, and the rollout of auditor inspections. We find that investors respond more strongly to earnings news following public audit oversight. Corroborating these findings, we find an increase in volume responses to 10-K filings after the new regime. Our results show that public audit oversight can enhance reporting credibility and that this credibility is priced in capital markets.

REVISION: On the Economics of Mandatory Audit Partner Rotation and Tenure: Evidence from PCAOB Data
Date Posted:Thu, 14 Nov 2019 06:04:17 -0600
We provide the first partner tenure and mandatory rotation analysis for a large cross-section of U.S. publicly listed firms over an extended period. We analyze the effects on audit quality as well as on audit pricing and production. On average, we find no evidence for audit quality declines over the tenure cycle and, consistent with this result, little support for fresh-look benefits after five-year mandatory rotations. Nevertheless, partner rotations have significant economic consequences. Audit fees decline and audit hours increase after mandatory rotations, but then reverse over the tenure cycle. We also find evidence that audit firms use “shadowing” in preparation of lead partner turnover. The economic effects differ predictably by competitiveness of the local audit market, client size, and partner experience. When multiple members of the audit team rotate together, the transition appears to be more disruptive (but still less so than switching the audit firm) and more likely to ...

REVISION: Public Oversight and Reporting Credibility: Evidence from the PCAOB Audit Inspection Regime
Date Posted:Wed, 06 Nov 2019 10:07:48 -0600
This paper studies the impact of public audit oversight on financial reporting credibility. We analyze changes in market responses to earnings news after public audit oversight is introduced, exploiting that the regime onset depends on fiscal-year ends, auditors, and the rollout of auditor inspections. We find that investors respond more strongly to earnings news following public audit oversight. Corroborating these findings, we find an increase in volume responses to 10-K filings after the new regime. Our results show that public audit oversight can enhance reporting credibility and that this credibility is priced in capital markets.

New: Public Audit Oversight and Reporting Credibility: Evidence from the PCAOB Audit Inspection Regime
Date Posted:Sat, 02 Nov 2019 09:58:35 -0500
This paper studies the impact of public audit oversight on financial reporting credibility. We analyze changes in market responses to earnings news after public audit oversight is introduced, exploiting that the regime onset depends on fiscal-year ends, auditors, and the roll-out of auditor inspections. We find that investors respond more strongly to earnings news following public audit oversight. Corroborating these findings, we find an increase in volume responses to 10-K filings after the new regime. Our results show that public audit oversight can enhance reporting credibility and that this credibility is priced in capital markets.

REVISION: Public Audit Oversight and Reporting Credibility: Evidence from the PCAOB Audit Inspection Regime
Date Posted:Wed, 23 Oct 2019 11:03:37 -0500
This paper studies the impact of public audit oversight on financial reporting credibility. We analyze changes in market responses to earnings news after public audit oversight is introduced, exploiting that the regime onset depends on fiscal-year ends, auditors, and the rollout of auditor inspections. We find that investors respond more strongly to earnings news following public audit oversight. Corroborating these findings, we find an increase in volume responses to 10-K filings after the new regime. Our results show that public audit oversight can enhance reporting credibility and that this credibility is priced in capital markets.

REVISION: Mandated Financial Reporting and Corporate Innovation
Date Posted:Tue, 17 Sep 2019 04:59:07 -0500
We investigate the impact of reporting regulation on corporate innovation activity. Exploiting thresholds in Europe’s regulation and a major enforcement reform in Germany, we find that forcing a greater share of firms to publicly disclose their financial statements reduces firms’ innovative activities at the industry level. At the same time, it increases firms’ reliance on patenting to protect their innovations, to the extent they continue innovating. Our evidence is consistent with reporting mandates having significant real effects by imposing proprietary costs on innovative firms, which diminishes their incentives to engage in innovative activities. Importantly, we examine and find that this decline in innovative activity is not fully compensated by positive information spillovers (e.g., to competitors, suppliers, and customers) within industries. Thus, our evidence implies that proprietary costs induced by reporting mandates are important consideration for regulators and policy ...

REVISION: Going the Extra Mile: Distant Lending and Credit Cycles
Date Posted:Wed, 04 Sep 2019 03:45:13 -0500
We examine how competition amongst lenders exacerbates risk taking during a boom using a simple proxy for the risk of a bank’s loan portfolio—the average physical distance of borrowers from banks’ branches. The evolution of lending distances is cyclical, lengthening considerably during an economic upturn and shortening again during the ensuing downturn. More distant small business loans are indeed riskier for the bank, and greater lending distance is reflective of more generalized bank risk taking. As competition in banks’ local lending markets increases, their local lending becomes riskier, and their propensity to make (risky) loans at greater distance increases.

REVISION: Adoption of CSR and Sustainability Reporting Standards: Economic Analysis and Review
Date Posted:Fri, 09 Aug 2019 08:30:43 -0500
This study provides an economic analysis of the determinants and consequences of corporate social responsibility (CSR) and sustainability reporting. To frame our analysis, we consider a widespread mandatory adoption of CSR reporting standards in the United States. The study focuses on the economic effects of standards for disclosure and reporting, not on the effects of CSR activities and policies themselves. It draws on an extensive review of the relevant academic (CSR and non-CSR) literatures in accounting, economics, finance, and management. Based on a discussion of the fundamental economic forces at play and the key features and determinants of (voluntary) CSR reporting, we derive and evaluate possible economic consequences, including capital-market effects for select stakeholders as well as potential firm responses and real effects in firm behavior. We also highlight issues related to the implementation and enforcement of CSR reporting standards. Our analysis yields a number of ...

REVISION: Adoption of CSR and Sustainability Reporting Standards: Economic Analysis and Review
Date Posted:Wed, 31 Jul 2019 08:46:10 -0500
This study provides an economic analysis of the determinants and consequences of corporate social responsibility (CSR) and sustainability reporting. To frame our analysis, we consider a widespread mandatory adoption of CSR reporting standards in the United States. The study focuses on the economic effects of standards for disclosure and reporting, not on the effects of CSR activities and policies themselves. It draws on an extensive review of the relevant academic (CSR and non-CSR) literatures in accounting, economics, finance, and management. Based on a discussion of the fundamental economic forces at play and the key features and determinants of (voluntary) CSR reporting, we derive and evaluate possible economic consequences, including capital-market effects for select stakeholders as well as potential firm responses and real effects in firm behavior. We also highlight issues related to the implementation and enforcement of CSR reporting standards. Our analysis yields a number of ...

New: Going the Extra Mile: Distant Lending and Credit Cycles
Date Posted:Mon, 10 Jun 2019 05:27:50 -0500
We examine the degree to which competition amongst lenders interacts with the cyclicality in lending standards using a simple measure, the average physical distance of borrowers from banks’ branches. We propose that this novel measure captures the extent to which lenders are willing to stretch their lending portfolio. Consistent with this idea, we find a significant cyclical component in the evolution of lending distances. Distances widen considerably when credit conditions are lax and shorten considerably when credit conditions become tighter. Next, we show that a sharp departure from the trend in distance between banks and borrowers is indicative of increased risk taking. Finally, we provide evidence that as competition in banks’ local markets increases, their willingness to make loans at greater distance increases. Since average lending distance is easily measurable, it is potentially a useful measure for bank supervisors.

REVISION: Accounting for Financial Stability: Lessons from the Financial Crisis and Future Challenges
Date Posted:Mon, 10 Jun 2019 05:26:04 -0500
This paper investigates what we can learn from the financial crisis about the link between accounting and financial stability. The picture that emerges ten years after the crisis is substantially different from the picture that dominated the accounting debate during and shortly after the crisis. Widespread claims about the role of fair-value (or mark-to-market) accounting in the crisis have been debunked. However, we identify several other core issues for the link between accounting and financial stability. Our analysis suggests that, going into the financial crisis, banks’ disclosures about relevant risk exposures were relatively sparse. Such disclosures came later after major concerns about banks’ exposures had arisen in markets. Similarly, banks delayed the recognition of loan losses. Banks’ incentives seem to drive this evidence, suggesting that reporting discretion and enforcement deserve careful consideration. In addition, bank regulation through its interlinkage with financial ...

REVISION: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Wed, 08 May 2019 11:05:02 -0500
An important question in banking is how strict supervision affects bank lending and in turn local business activity. Forcing banks to recognize losses could choke off lending and amplify local economic woes, especially after financial crises. But stricter supervision could also lead to changes in how banks assess loans and manage their loan portfolios. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) – a large change in prudential supervision, affecting ten percent of all U.S. depository institutions. Using this event, we analyze economic links between strict supervision, bank lending and business activity. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. We then analyze the lending effects of this regulatory change and show that former OTS banks increase small business lending by approximately 10 percent. This increase stems primarily from well capitalized banks and those more affected ...

REVISION: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Sun, 14 Apr 2019 08:59:04 -0500
An important question in banking is how strict supervision affects bank lending and in turn local business activity. Forcing banks to recognize losses could choke off lending and amplify local economic woes. But stricter supervision could also change how banks assess and manage loans. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) -- a large change in prudential supervision - to analyze economic links between strict supervision, bank lending and business activity. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects. We show that former OTS banks increase small business lending by roughly 10 percent. This increase is not entirely accounted by a reallocation of mortgage lending and stems primarily from well-capitalized banks and those more affected by the new regime. These findings suggest that stricter supervision operates not only through ...

REVISION: Who Falls Prey to the Wolf of Wall Street? Investor Participation in Market Manipulation
Date Posted:Sun, 14 Apr 2019 08:56:49 -0500
Manipulative communications touting stocks are common in capital markets around the world. Although the price distortions created by so-called “pump-and-dump” schemes are well known, little is known about the investors in these frauds. By examining 421 “pump-and-dump” schemes between 2002 and 2015 and a proprietary set of trading records for over 110,000 individual investors from a major German bank, we provide evidence on the participation rate, magnitude of the investments, losses, and the characteristics of the individuals who invest in such schemes. Our evidence suggests that participation is quite common and involves sizable losses, with nearly 6% of active investors participating in at least one “pump-and-dump” and an average loss of nearly 30%. Moreover, we identify several distinct types of investors, some of which should not be viewed as falling prey to these frauds. We also show that portfolio composition and past trading behavior can better explain participation in touted ...

REVISION: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Mon, 25 Mar 2019 16:25:08 -0500
An important question in banking is how strict supervision affects bank lending and in turn local business activity. Forcing banks to recognize losses could choke off lending and amplify local economic woes. But stricter supervision could also change how banks assess and manage loans. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) -- a large change in prudential supervision - to analyze economic links between strict supervision, bank lending and business activity. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects. We show that former OTS banks increase small business lending by roughly 10 percent. This increase is not entirely accounted by a reallocation of mortgage lending and stems primarily from well-capitalized banks and those more affected by the new regime. These findings suggest that stricter supervision operates not only through ...

REVISION: Economic Analysis of Widespread Adoption of CSR and Sustainability Reporting Standards: Structured Overview of CSR Literature
Date Posted:Sat, 26 Jan 2019 14:06:32 -0600
In this appendix to Christensen, Hail, and Leuz (2018), “Economic Analysis of Widespread Adoption of CSR and Sustainability Reporting Standards,” Research report (available at SSRN: https://ssrn.com/abstract=3315673), we classify and briefly summarize extant academic literature on corporate social responsibility (CSR) and sustainability reporting. Based on a systematic search and review of articles in leading accounting, economics, finance, and management journals as well as ongoing research, we identify more than 380 published articles and working papers on topics related to CSR and CSR reporting. For each academic study, we provide a summary of the research question and the variables of interest, the research design, and the main results. We also indicate the research methods applied and whether the study specifically relates to CSR reporting issues or rather to CSR activities in general. We group the studies into seven topical areas, each represented by its own summary table, and ...

New: Economic Analysis of Widespread Adoption of CSR and Sustainability Reporting Standards
Date Posted:Fri, 25 Jan 2019 10:55:04 -0600
This report provides an economic analysis for a widespread adoption of corporate social responsibility (or sustainability) disclosure and reporting standards in the United States. It is based on an extensive review of the academic literature in accounting, economics, finance, and management. We discuss possible economic consequences, including capital-market effects, real effects in firm behavior, and implementation issues related to the adoption of CSR standards. The report focuses on the economic effects of standards for disclosure and reporting, not on the economic effects of CSR activities and policies themselves. Our analysis yields a number of insights that are relevant to the current debate on CSR and sustainability reporting standards.

REVISION: Evidence-Based Policymaking: Promise, Challenges and Opportunities for Accounting and Financial Markets Research
Date Posted:Sun, 20 Jan 2019 04:24:07 -0600
The use of evidence and economic analysis in policymaking is on the rise, and accounting standard setting and financial regulation are no exception. This article discusses the promise of evidence-based policymaking in accounting and financial markets as well as the challenges and opportunities for research supporting this endeavor. In principle, using sound theory and robust empirical evidence should lead to better policies and regulations. But despite its obvious appeal and substantial promise, evidence-based policymaking is easier demanded than done. It faces many challenges related to the difficulty of providing relevant causal evidence, lack of data, the reliability of published research, and the transmission of research findings. Overcoming these challenges requires substantial infrastructure investments for generating and disseminating relevant research. To illustrate this point, I draw parallels to the rise of evidence-based medicine. The article provides several concrete ...

REVISION: Public Audit Oversight and Reporting Credibility: Evidence from the PCAOB Inspection Regime
Date Posted:Fri, 18 Jan 2019 04:27:41 -0600
This paper studies the effects of reporting credibility in capital markets and whether public regulatory oversight of the audit profession enhances reporting credibility. We analyze whether market responses to earnings news increase after the introduction of the Public Company Accounting Oversight Board (PCAOB), as predicted by information economics if such oversight enhances reporting credibility. We use a generalized difference-in-differences analysis, exploiting in our design that the new regime affects firms at different points in time, depending on their fiscal year ends, auditors, and the rollout of auditor inspections. We find that investors respond more strongly to earnings news following public audit oversight. Corroborating these findings, we also find an increase in volume responses to firms’ 10-K filings once the new regime is in place. Overall, our results show that public audit oversight can enhance the credibility of audited financial reports, which in turn is priced ...

REVISION: Economic Analysis of Widespread Adoption of CSR and Sustainability Reporting Standards: Structured Overview of CSR Literature
Date Posted:Mon, 14 Jan 2019 08:40:59 -0600
In this appendix to Christensen, Hail, and Leuz (2018), “Economic Analysis of Widespread Adoption of CSR and Sustainability Reporting Standards,” Working paper, we classify and briefly summarize extant academic literature on corporate social responsibility (CSR) and sustainability reporting. Based on a systematic search and review of articles in leading accounting, economics, finance, and management journals as well as ongoing research, we identify more than 380 published articles and working papers on topics related to CSR and CSR reporting. For each academic study, we provide a summary of the research question and the variables of interest, the research design, and the main results. We also indicate the research methods applied and whether the study relates to CSR reporting issues or to CSR activities in general. We group the studies into seven topical areas, each represented by its own summary table, and add a table containing CSR review and summary articles at the end.

REVISION: Public Audit Oversight and Reporting Credibility: Evidence from the PCAOB Inspection Regime
Date Posted:Mon, 24 Dec 2018 04:48:20 -0600
This paper studies the effects of reporting credibility in capital markets and whether public regulatory oversight of the audit profession enhances reporting credibility. We analyze whether market responses to earnings news increase after the introduction of the Public Company Accounting Oversight Board (PCAOB), as predicted by information economics if such oversight enhances reporting credibility. We use a generalized difference-in-differences analysis, exploiting in our design that the new regime affects firms at different points in time, depending on their fiscal year ends, auditors, and the rollout of auditor inspections. We find that investors respond more strongly to earnings news following public audit oversight. Corroborating these findings, we also find an increase in volume responses to firms’ 10-K filings once the new regime is in place. Overall, our results show that public audit oversight can enhance the credibility of audited financial reports, which in turn is priced ...

REVISION: On the Economics of Audit Partner Tenure and Rotation: Evidence from PCAOB Data
Date Posted:Tue, 18 Dec 2018 05:37:35 -0600
We provide the first partner tenure and rotation analysis for a large cross-section of U.S. publicly listed firms over an extended period. We analyze the effects on audit quality as well as economic tradeoffs with respect to audit hours and fees. On average, we find no evidence for audit quality declines over the tenure cycle and, consistent with the former, little support for fresh-look benefits after five-year mandatory rotations. Nevertheless, partner rotations have significant economic consequences. We find increases in audit fees and decreases in audit hours over the tenure cycle, which differ by partner experience, client size, and competitiveness of the local audit market. Our findings are consistent with efforts by the audit firms to minimize disruptions and audit failures around mandatory rotations. We also analyze special circumstances, such as audit firm or audit team switches and early partner rotations. We show that these situations are more disruptive and more likely to ...

REVISION: Who Falls Prey to the Wolf of Wall Street? Investor Participation in Market Manipulation
Date Posted:Tue, 18 Dec 2018 05:37:27 -0600
Manipulative communications touting stocks are common in capital markets around the world. Although the price distortions created by so-called “pump-and-dump” schemes are well known, little is known about the investors in these frauds. By examining 421 “pump-and-dump” schemes between 2002 and 2015 and a proprietary set of trading records for over 110,000 individual investors from a major German bank, we provide evidence on the participation rate, magnitude of the investments, losses, and the characteristics of the individuals who invest in such schemes. Our evidence suggests that participation is quite common and involves sizable losses, with nearly 6% of active investors participating in at least one “pump-and-dump” and an average loss of nearly 30%. Moreover, we identify several distinct types of investors, some of which should not be viewed as falling prey to these frauds. We also show that portfolio composition and past trading behavior can better explain participation in touted ...

REVISION: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Tue, 18 Dec 2018 05:36:46 -0600
An important question in banking is how strict supervision affects bank lending and in turn local business activity. Forcing banks to recognize losses could choke off lending and amplify local economic woes, especially after financial crises. But stricter supervision could also lead to changes in how banks assess loans and manage their loan portfolios. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) – a large change in prudential supervision, affecting ten percent of all U.S. depository institutions. Using this event, we analyze economic links between strict supervision, bank lending and business activity. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. We then analyze the lending effects of this regulatory change and show that former OTS banks increase small business lending by approximately 10 percent. This increase stems primarily from well capitalized banks and those more affected ...

REVISION: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Mon, 17 Dec 2018 05:30:41 -0600
An important question in banking is how strict supervision affects bank lending and in turn local business activity. Forcing banks to recognize losses could choke off lending and amplify local economic woes, especially after financial crises. But stricter supervision could also lead to changes in how banks assess loans and manage their loan portfolios. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) – a large change in prudential supervision, affecting ten percent of all U.S. depository institutions. Using this event, we analyze economic links between strict supervision, bank lending and business activity. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. We then analyze the lending effects of this regulatory change and show that former OTS banks increase small business lending by approximately 10 percent. This increase stems primarily from well capitalized banks and those more affected ...

REVISION: Who Falls Prey to the Wolf of Wall Street? Investor Participation in Market Manipulation
Date Posted:Mon, 17 Dec 2018 05:25:08 -0600
Manipulative communications touting stocks are common in capital markets around the world. Although the price distortions created by so-called “pump-and-dump” schemes are well known, little is known about the investors in these frauds. By examining 421 “pump-and-dump” schemes between 2002 and 2015 and a proprietary set of trading records for over 110,000 individual investors from a major German bank, we provide evidence on the participation rate, magnitude of the investments, losses, and the characteristics of the individuals who invest in such schemes. Our evidence suggests that participation is quite common and involves sizable losses, with nearly 6% of active investors participating in at least one “pump-and-dump” and an average loss of nearly 30%. Moreover, we identify several distinct types of investors, some of which should not be viewed as falling prey to these frauds. We also show that portfolio composition and past trading behavior can better explain participation in touted ...

REVISION: On the Economics of Audit Partner Tenure and Rotation: Evidence from PCAOB Data
Date Posted:Mon, 17 Dec 2018 05:24:36 -0600
We provide the first partner tenure and rotation analysis for a large cross-section of U.S. publicly listed firms over an extended period. We analyze the effects on audit quality as well as economic tradeoffs with respect to audit hours and fees. On average, we find no evidence for audit quality declines over the tenure cycle and, consistent with the former, little support for fresh-look benefits after five-year mandatory rotations. Nevertheless, partner rotations have significant economic consequences. We find increases in audit fees and decreases in audit hours over the tenure cycle, which differ by partner experience, client size, and competitiveness of the local audit market. Our findings are consistent with efforts by the audit firms to minimize disruptions and audit failures around mandatory rotations. We also analyze special circumstances, such as audit firm or audit team switches and early partner rotations. We show that these situations are more disruptive and more likely to ...

REVISION: Evidence-Based Policymaking: Promise, Challenges and Opportunities for Accounting and Financial Markets Research
Date Posted:Mon, 17 Dec 2018 05:23:58 -0600
The use of evidence and economic analysis in policymaking is on the rise, and accounting standard setting and financial regulation are no exception. This article discusses the promise of evidence-based policymaking in accounting and financial markets as well as the challenges and opportunities for research supporting this endeavor. In principle, using sound theory and robust empirical evidence should lead to better policies and regulations. But despite its obvious appeal and substantial promise, evidence-based policymaking is easier demanded than done. It faces many challenges related to the difficulty of providing relevant causal evidence, lack of data, the reliability of published research, and the transmission of research findings. Overcoming these challenges requires substantial infrastructure investments for generating and disseminating relevant research. To illustrate this point, I draw parallels to the rise of evidence-based medicine. The article provides several concrete ...

REVISION: Evidence-Based Policymaking: Promise, Challenges and Opportunities for Accounting and Financial Markets Research
Date Posted:Sat, 15 Dec 2018 15:59:10 -0600
The use of evidence and economic analysis in policymaking is on the rise, and accounting standard setting and financial regulation are no exception. This article discusses the promise of evidence-based policymaking in accounting and financial markets as well as the challenges and opportunities for research supporting this endeavor. In principle, using sound theory and robust empirical evidence should lead to better policies and regulations. But despite its obvious appeal and substantial promise, evidence-based policymaking is easier demanded than done. It faces many challenges related to the difficulty of providing relevant causal evidence, lack of data, the reliability of published research, and the transmission of research findings. Overcoming these challenges requires substantial infrastructure investments for generating and disseminating relevant research. To illustrate this point, I draw parallels to the rise of evidence-based medicine. The article provides several concrete ...

REVISION: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Sat, 15 Dec 2018 15:57:35 -0600
An important question in banking is how strict supervision affects bank lending and in turn local business activity. Forcing banks to recognize losses could choke off lending and amplify local economic woes, especially after financial crises. But stricter supervision could also lead to changes in how banks assess loans and manage their loan portfolios. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) – a large change in prudential supervision, affecting ten percent of all U.S. depository institutions. Using this event, we analyze economic links between strict supervision, bank lending and business activity. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. We then analyze the lending effects of this regulatory change and show that former OTS banks increase small business lending by approximately 10 percent. This increase stems primarily from well capitalized banks and those more affected ...

REVISION: Who Falls Prey to the Wolf of Wall Street? Investor Participation in Market Manipulation
Date Posted:Sat, 15 Dec 2018 15:54:51 -0600
Manipulative communications touting stocks are common in capital markets around the world. Although the price distortions created by so-called “pump-and-dump” schemes are well known, little is known about the investors in these frauds. By examining 421 “pump-and-dump” schemes between 2002 and 2015 and a proprietary set of trading records for over 110,000 individual investors from a major German bank, we provide evidence on the participation rate, magnitude of the investments, losses, and the characteristics of the individuals who invest in such schemes. Our evidence suggests that participation is quite common and involves sizable losses, with nearly 6% of active investors participating in at least one “pump-and-dump” and an average loss of nearly 30%. Moreover, we identify several distinct types of investors, some of which should not be viewed as falling prey to these frauds. We also show that portfolio composition and past trading behavior can better explain participation in touted ...

REVISION: On the Economics of Audit Partner Tenure and Rotation: Evidence from PCAOB Data
Date Posted:Sat, 15 Dec 2018 15:50:05 -0600
We provide the first partner tenure and rotation analysis for a large cross-section of U.S. publicly listed firms over an extended period. We analyze the effects on audit quality as well as economic tradeoffs with respect to audit hours and fees. On average, we find no evidence for audit quality declines over the tenure cycle and, consistent with the former, little support for fresh-look benefits after five-year mandatory rotations. Nevertheless, partner rotations have significant economic consequences. We find increases in audit fees and decreases in audit hours over the tenure cycle, which differ by partner experience, client size, and competitiveness of the local audit market. Our findings are consistent with efforts by the audit firms to minimize disruptions and audit failures around mandatory rotations. We also analyze special circumstances, such as audit firm or audit team switches and early partner rotations. We show that these situations are more disruptive and more likely to ...

REVISION: Going the Extra Mile: Distant Lending and Credit Cycles
Date Posted:Tue, 13 Nov 2018 08:44:23 -0600
We examine the degree to which competition amongst lenders interacts with the cyclicality in lending standards using a simple measure, the average physical distance of borrowers from banks’ branches. We propose that this novel measure captures the extent to which lenders are willing to stretch their lending portfolio. Consistent with this idea, we find a significant cyclical component in the evolution of lending distances. Distances widen considerably when credit conditions are lax and shorten considerably when credit conditions become tighter. Next, we show that a sharp departure from the trend in distance between banks and borrowers is indicative of increased risk taking. Finally, we provide evidence that as competition in banks’ local markets increases, their willingness to make loans at greater distance increases. Since average lending distance is easily measurable, it is potentially a useful measure for bank supervisors.

REVISION: On the Economics of Audit Partner Tenure and Rotation: Evidence from PCAOB Data
Date Posted:Wed, 20 Jun 2018 01:27:39 -0500
We provide the first partner tenure and rotation analysis for a large cross-section of U.S. publicly listed firms over an extended period. We analyze the effects on audit quality as well as economic tradeoffs with respect to audit hours and fees. On average, we find no evidence for audit quality declines over the tenure cycle and, consistent with the former, little support for fresh-look benefits after five-year mandatory rotations. Nevertheless, partner rotations have significant economic consequences. We find increases in audit fees and decreases in audit hours over the tenure cycle, which differ by partner experience, client size, and competitiveness of the local audit market. Our findings are consistent with efforts by the audit firms to minimize disruptions and audit failures around mandatory rotations. We also analyze special circumstances, such as audit firm or audit team switches and early partner rotations. We show that these situations are more disruptive and more likely to ...

REVISION: The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research
Date Posted:Wed, 09 May 2018 12:29:39 -0500
This paper discusses the empirical literature on the economic consequences of disclosure and financial reporting regulation, drawing on U.S. and international evidence. Given the policy relevance of research on regulation, we highlight the challenges with (1) quantifying regulatory costs and benefits, (2) measuring disclosure and reporting outcomes, and (3) drawing causal inferences from regulatory studies. Next, we discuss empirical studies that link disclosure and reporting activities to firm-specific and market-wide economic outcomes. Understanding these links is important when evaluating regulation. We then synthesize the empirical evidence on the economic effects of disclosure regulation and reporting standards, including the evidence on International Financial Reporting Standards (IFRS) adoption. Several important conclusions emerge. We generally lack evidence on market-wide effects and externalities from regulation, yet such evidence is central to the economic justification of ...

REVISION: Evidence-Based Policymaking: Promise, Challenges and Opportunities for Accounting and Financial Markets Research
Date Posted:Tue, 24 Apr 2018 04:22:03 -0500
The use of evidence and economic analysis in policymaking is on the rise, and accounting standard setting and financial regulation are no exception. This article discusses the promise of evidence-based policymaking in accounting and financial markets as well as the challenges and opportunities for research supporting this endeavor. In principle, using sound theory and robust empirical evidence should lead to better policies and regulations. But despite its obvious appeal and substantial promise, evidence-based policymaking is easier demanded than done. It faces many challenges related to the difficulty of providing relevant causal evidence, lack of data, the reliability of published research, and the transmission of research findings. Overcoming these challenges requires substantial infrastructure investments for generating and disseminating relevant research. To illustrate this point, I draw parallels to the rise of evidence-based medicine. The article provides several concrete ...

New: Evidence-Based Policymaking: Promise, Challenges and Opportunities for Accounting and Financial Markets Research
Date Posted:Mon, 23 Apr 2018 01:05:29 -0500
The use of evidence and economic analysis in policymaking is on the rise, and accounting standard setting and financial regulation are no exception. This article discusses the promise of evidence-based policymaking in accounting and financial markets as well as the challenges and opportunities for research supporting this endeavor. In principle, using sound theory and robust empirical evidence should lead to better policies and regulations. But despite its obvious appeal and substantial promise, evidence-based policymaking is easier demanded than done. It faces many challenges related to the difficulty of providing relevant causal evidence, lack of data, the reliability of published research, and the transmission of research findings. Overcoming these challenges requires substantial infrastructure investments for generating and disseminating relevant research. To illustrate this point, I draw parallels to the rise of evidence-based medicine. The article provides several concrete ...

REVISION: Evidence-Based Policymaking: Promise, Challenges and Opportunities for Accounting and Financial Markets Research
Date Posted:Mon, 16 Apr 2018 01:02:00 -0500
The use of evidence and economic analysis in policymaking is on the rise, and accounting standard setting and financial regulation are no exception. This article discusses the promise of evidence-based policymaking in accounting and financial markets as well as the challenges and opportunities for research supporting this endeavor. In principle, using sound theory and robust empirical evidence should lead to better policies and regulations. But despite its obvious appeal and substantial promise, evidence-based policymaking is easier demanded than done. It faces many challenges related to the difficulty of providing relevant causal evidence, lack of data, the reliability of published research, and the transmission of research findings. Overcoming these challenges requires substantial infrastructure investments for generating and disseminating relevant research. To illustrate this point, I draw parallels to the rise of evidence-based medicine. The article provides several concrete ...

REVISION: The Twilight Zone: OTC Regulatory Regimes and Market Quality
Date Posted:Sat, 03 Mar 2018 22:37:18 -0600
Studying a comprehensive sample of stocks from the U.S. OTC market, we show that this market is a large and diverse trading environment with a rich set of regulatory and disclosure regimes, comprising venue rules and state laws beyond SEC regulation. We exploit this institutional richness to show that OTC firms subject to stricter regulatory regimes and disclosure requirements have higher market quality (higher liquidity and lower crash risk). Our analysis points to an important trade-off in regulating the OTC market and protecting investors: lowering regulatory requirements reduces the compliance burden for smaller firms, but it also reduces market quality.

REVISION: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Thu, 28 Dec 2017 04:14:42 -0600
An important question in banking is how strict supervision affects bank lending and in turn local business activity. Forcing banks to recognize losses could choke off lending and amplify local economic woes, especially after financial crises. But stricter supervision could also lead to changes in how banks assess loans and manage their loan portfolios. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) – a large change in prudential supervision, affecting ten percent of all U.S. depository institutions. Using this event, we analyze economic links between strict supervision, bank lending and business activity. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. We then analyze the lending effects of this regulatory change and show that former OTS banks increase small business lending by approximately 10 percent. This increase stems primarily from well-capitalized banks and those more affected ...

REVISION: Who Falls Prey to the Wolf of Wall Street? Investor Participation in Market Manipulation
Date Posted:Wed, 29 Nov 2017 04:15:27 -0600
Manipulative communications touting stocks are common in capital markets around the world. Although the price distortions created by so-called “pump-and-dump” schemes are well known, little is known about the investors in these frauds. By examining 421 “pump-and-dump” schemes between 2002 and 2015 and a proprietary set of trading records for over 110,000 individual investors from a major German bank, we provide evidence on the participation rate, magnitude of the investments, losses, and the characteristics of the individuals who invest in such schemes. Our evidence suggests that participation is quite common and involves sizable losses, with nearly 6% of active investors participating in at least one “pump-and-dump” and an average loss of nearly 30%. Moreover, we identify several distinct types of investors, some of which should not be viewed as falling prey to these frauds. We also show that portfolio composition and past trading behavior can better explain participation in touted ...

REVISION: On the Economics of Audit Partner Tenure and Rotation: Evidence from PCAOB Data
Date Posted:Tue, 31 Oct 2017 05:16:57 -0500
This paper provides the first partner tenure and rotation analysis for a large cross-section of U.S. publicly listed firms over an extended period. We analyze the effects on audit quality as well as economic tradeoffs related to partner tenure and rotation with respect to audit hours and fees. On average, we find no evidence for audit quality declines over the tenure cycle and little support for fresh-look benefits after rotations. Nevertheless, partner rotations have significant economic consequences. We find increases in audit fees and decreases in audit hours over the tenure cycle, which differ by partner experience, client size, and competitiveness of the local audit market. More generally, our findings are consistent with efforts by the audit firms to minimize disruptions and audit failures around mandatory rotations. We also analyze special circumstances, such as audit firm switches and early partner rotations, and show that they are more disruptive than mandatory rotations, ...

REVISION: On the Economics of Audit Partner Tenure and Rotation: Evidence from PCAOB Data
Date Posted:Wed, 23 Aug 2017 04:35:54 -0500
This paper provides the first partner tenure and rotation analysis for a large cross-section of U.S. publicly listed firms over an extended period. We analyze the effects on audit quality as well as economic tradeoffs related to partner tenure and rotation with respect to audit hours and fees. On average, we find no evidence for audit quality declines over the tenure cycle and little support for fresh-look benefits after rotations. Nevertheless, partner rotations have significant economic consequences. We find increases in audit fees and decreases in audit hours over the tenure cycle, which differ by partner experience, client size, and competitiveness of the local audit market. More generally, our findings are consistent with efforts by the audit firms to minimize disruptions and audit failures around mandatory rotations. We also analyze special circumstances, such as audit firm switches and early partner rotations, and show that they are more disruptive than mandatory rotations, ...

REVISION: Public Audit Oversight and Reporting Credibility: Evidence from the PCAOB Inspection Regime
Date Posted:Thu, 03 Aug 2017 08:45:14 -0500
This paper examines how regulatory oversight of the audit profession affects investors’ assessments of reporting credibility and trust in financial reporting. We analyze whether market responses to earnings news increase after the introduction of the Public Company Accounting Oversight Board (PCAOB), as predicted by theory if such oversight enhances reporting credibility. We use a generalized difference-in-differences design and exploit the fact that the new regime affects firms at different points in time, depending on their fiscal year-ends, auditors, and the rollout of auditor inspections, to disentangle regime effects from other macro and regulatory changes. We find that investors respond more strongly to earnings news following PCAOB oversight. Corroborating these findings, we also find an increase in volume responses to firms’ 10-K filings after the new regime is in place. Overall, our results are consistent with regulatory oversight of the audit profession increasing investor ...

REVISION: Public Audit Oversight and Reporting Credibility: Evidence from the PCAOB Inspection Regime
Date Posted:Mon, 31 Jul 2017 12:54:23 -0500
This paper examines how regulatory oversight of the audit profession affects investors’ assessments of reporting credibility and trust in financial reporting. We analyze whether market responses to earnings news increase after the introduction of the Public Company Accounting Oversight Board (PCAOB), as predicted by theory if such oversight enhances reporting credibility. We use a generalized difference-in-differences design and exploit the fact that the new regime affects firms at different points in time, depending on their fiscal year-ends, auditors, and the rollout of auditor inspections, to disentangle regime effects from other macro and regulatory changes. We find that investors respond more strongly to earnings news following PCAOB oversight. Corroborating these findings, we also find an increase in volume responses to firms’ 10-K filings after the new regime is in place. Overall, our results are consistent with regulatory oversight of the audit profession increasing investor ...

New: The Effect of Regulatory Harmonization on Cross-Border Labor Migration: Evidence from the Accounting Profession
Date Posted:Tue, 25 Jul 2017 05:34:15 -0500
The paper examines whether international regulatory harmonization increases cross-border labor migration. To study this question, we analyze European Union initiatives that harmonized accounting and auditing standards. Regulatory harmonization should reduce economic mobility barriers, essentially making it easier for accounting professionals to move across countries. Our research design compares the cross-border migration of accounting professionals relative to tightly matched other professionals before and after regulatory harmonization. We find that international labor migration in the accounting profession increases significantly relative to other professions. We provide evidence that this effect is due to harmonization, rather than increases in the demand for accounting services during the implementation of the rule changes. The findings illustrate that diversity in rules constitutes an economic barrier to cross-border labor mobility and, more specifically, that accounting ...

REVISION: The Twilight Zone: OTC Regulatory Regimes and Market Quality
Date Posted:Tue, 27 Jun 2017 06:04:05 -0500
We analyze a comprehensive sample of more than 10,000 U.S. OTC stocks. We first show that the OTC market is a large, diverse, and dynamic trading environment with a rich set of regulatory and disclosure regimes, comprising venue rules and state laws beyond SEC regulation. We then exploit this institutional richness to analyze two key dimensions of market quality, liquidity and crash risk, across firms and regulatory regimes. We find that OTC firms that are subject to stricter regulatory regimes and disclosure requirements have higher market quality (higher liquidity and lower crash risk). Our analysis points to an important trade-off in regulating the OTC market and protecting investors: Lowering regulatory requirements (e.g., for disclosure) reduces the compliance burden for smaller firms, but it also reduces market quality.

REVISION: The Twilight Zone: OTC Regulatory Regimes and Market Quality
Date Posted:Thu, 15 Jun 2017 09:17:44 -0500
We analyze a comprehensive sample of more than 10,000 U.S. OTC stocks. We first show that the OTC market is a large, diverse, and dynamic trading environment with a rich set of regulatory and disclosure regimes, comprising venue rules and state laws beyond SEC regulation. We then exploit this institutional richness to analyze two key dimensions of market quality, liquidity and crash risk, across firms and regulatory regimes. We find that OTC firms that are subject to stricter regulatory regimes and disclosure requirements have higher market quality (higher liquidity and lower crash risk). Our analysis points to an important trade-off in regulating the OTC market and protecting investors: Lowering regulatory requirements (e.g., for disclosure) reduces the compliance burden for smaller firms, but it also reduces market quality.

REVISION: The Effect of Regulatory Harmonization on Cross-Border Labor Migration: Evidence from the Accounting Profession
Date Posted:Thu, 22 Dec 2016 09:45:13 -0600
The paper examines whether international regulatory harmonization increases cross-border labor migration. To study this question, we analyze European Union (EU) initiatives that harmonized accounting and auditing standards. Regulatory harmonization should reduce economic mobility barriers, essentially making it easier for accounting professionals to move across countries. Our research design compares the cross-border migration of accounting professionals relative to tightly-matched other professionals before and after regulatory harmonization. We find that international labor migration in the accounting profession increases significantly relative to other professions. We provide evidence that this effect is due to harmonization, rather than increases in the demand for accounting services during the implementation of the rule changes. The findings illustrate that diversity in rules constitutes an economic barrier to cross-border labor mobility and, more specifically, that accounting ...

REVISION: Public Audit Oversight and Reporting Credibility: Evidence from the PCAOB Inspection Regime
Date Posted:Tue, 20 Dec 2016 10:45:33 -0600
This paper examines how audit oversight by a public-sector regulator affects investors’ assessments of reporting credibility. We analyze whether market responses to unexpected earnings releases increase following the introduction of the Public Company Accounting Oversight Board (PCAOB), as predicted by theory if the new regime enhances reporting credibility. To identify the effects, we use a difference-in-differences design that exploits the staggered introduction of the inspection regime, which affects firms at different points in time depending on their fiscal year-ends, auditors, and the timing of PCAOB inspections. We find that market responses to unexpected earnings increase significantly following the introduction of the PCAOB inspection regime. Corroborating these findings, we also find an increase in abnormal volume responses to firms’ 10-K filings after the new regime is in place. Overall, our results are consistent with public audit oversight increasing the credibility of ...

REVISION: The Twilight Zone: OTC Regulatory Regimes and Market Quality
Date Posted:Mon, 21 Nov 2016 09:17:05 -0600
We analyze a comprehensive sample of more than 10,000 U.S. OTC stocks. We provide much needed descriptive evidence on this market and show that the OTC market is a large, diverse, and dynamic trading environment with a rich set of regulatory and disclosure regimes, comprising venue rules and state laws beyond SEC regulation. We also exploit the institutional richness of the OTC market and analyze two key dimensions of market quality, liquidity and crash risk, across firms and regulatory regimes. We find that OTC firms that are subject to stricter regulatory regimes and disclosure requirements have higher market quality (higher liquidity and lower crash risk). Our analysis points to an important trade-off in regulating the OTC market and protecting investors: Lowering regulatory requirements (e.g., for disclosure) reduces the compliance burden for smaller firms, but also reduces market quality.

REVISION: The Twilight Zone: OTC Regulatory Regimes and Market Quality
Date Posted:Tue, 08 Nov 2016 12:06:29 -0600
We analyze a comprehensive sample of more than 10,000 U.S. OTC stocks. We provide much needed descriptive evidence on this market and show that the OTC market is a large, diverse, and dynamic trading environment with a rich set of regulatory and disclosure regimes, comprising venue rules and state laws beyond SEC regulation. We also exploit the institutional richness of the OTC market and analyze two key dimensions of market quality, liquidity and crash risk, across firms and regulatory regimes. We find that OTC firms that are subject to stricter regulatory regimes and disclosure requirements have higher market quality (higher liquidity and lower crash risk). Our analysis points to an important trade-off in regulating the OTC market and protecting investors: Lowering regulatory requirements (e.g., for disclosure) reduces the compliance burden for smaller firms, but also reduces market quality.

New: Capital-Market Effects of Securities Regulation: Prior Conditions, Implementation, and Enforcement
Date Posted:Sat, 15 Oct 2016 03:49:29 -0500
We examine the capital-market effects of changes in securities regulation in the European Union (EU) aimed at reducing market abuse and increasing transparency. To estimate causal effects for the population of EU firms, we exploit that for plausibly exogenous reasons, like national legislative procedures, EU countries adopted these directives at different times. We find significant increases in market liquidity, but the effects are stronger in countries with stricter implementation and traditionally more stringent securities regulation. The findings suggest that countries with initially weaker regulation do not catch up with stronger countries, and that countries diverge more upon harmonizing regulation.

Update: The Effect of Regulatory Harmonization on Cross-Border Labor Migration: Evidence from the Accounting Profession
Date Posted:Tue, 04 Oct 2016 04:08:26 -0500
The paper examines whether international regulatory harmonization increases cross-border labor migration. To study this question, we analyze European Union (EU) initiatives that harmonized accounting and auditing standards. Regulatory harmonization should reduce economic mobility barriers, essentially making it easier for accounting professionals to move across countries. Our research design compares the cross-border migration of accounting professionals relative to tightly-matched other professionals before and after regulatory harmonization. We find that international labor migration in the accounting profession increases significantly relative to other professions. We provide evidence that this effect is due to harmonization, rather than increases in the demand for accounting services during the implementation of the rule changes. The findings illustrate that diversity in rules constitutes an economic barrier to cross-border labor mobility and, more specifically, that accounting ...
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REVISION: The Effect of Regulatory Harmonization on Cross-Border Labor Migration: Evidence from the Accounting Profession
Date Posted:Wed, 21 Sep 2016 10:24:15 -0500
The paper examines whether international regulatory harmonization increases cross-border labor migration. To study this question, we analyze European Union (EU) initiatives that harmonized accounting and auditing standards. Regulatory harmonization should reduce economic mobility barriers, essentially making it easier for accounting professionals to move across countries. Our research design compares the cross-border migration of accounting professionals relative to tightly-matched other professionals before and after regulatory harmonization. We find that international labor migration in the accounting profession increases significantly relative to other professions. We provide evidence that this effect is due to harmonization, rather than increases in the demand for accounting services during the implementation of the rule changes. The findings illustrate that diversity in rules constitutes an economic barrier to cross-border labor mobility and, more specifically, that accounting ...

REVISION: The Twilight Zone: OTC Regulatory Regimes and Market Quality
Date Posted:Fri, 16 Sep 2016 02:41:18 -0500
We analyze a comprehensive sample of more than 10,000 U.S. OTC stocks. We provide much needed descriptive evidence on this market and show that the OTC market is a large, diverse, and dynamic trading environment with a rich set of regulatory and disclosure regimes, comprising venue rules and state laws beyond SEC regulation. We also exploit the institutional richness of the OTC market and analyze two key dimensions of market quality, liquidity and crash risk, across firms and regulatory regimes. We find that OTC firms that are subject to stricter regulatory regimes and disclosure requirements have higher market quality (higher liquidity and lower crash risk). Our analysis points to an important trade-off in regulating the OTC market and protecting investors: Lowering regulatory requirements (e.g., for disclosure) reduces the compliance burden for smaller firms, but also reduces market quality.

REVISION: The Twilight Zone: OTC Regulatory Regimes and Market Quality
Date Posted:Thu, 15 Sep 2016 01:31:38 -0500
We analyze a comprehensive sample of more than 10,000 U.S. OTC stocks. We provide much needed descriptive evidence on this market and show that the OTC market is a large, diverse, and dynamic trading environment with a rich set of regulatory and disclosure regimes, comprising venue rules and state laws beyond SEC regulation. We also exploit the institutional richness of the OTC market and analyze two key dimensions of market quality, liquidity and crash risk, across firms and regulatory regimes. We find that OTC firms that are subject to stricter regulatory regimes and disclosure requirements have higher market quality (higher liquidity and lower crash risk). Our analysis points to an important trade-off in regulating the OTC market and protecting investors: Lowering regulatory requirements (e.g., for disclosure) reduces the compliance burden for smaller firms, but also reduces market quality.

REVISION: The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research
Date Posted:Fri, 09 Sep 2016 05:46:55 -0500
This paper discusses the empirical literature on the economic consequences of disclosure and financial reporting regulation, drawing on U.S. and international evidence. Given the policy relevance of research on regulation, we highlight the challenges with (1) quantifying regulatory costs and benefits, (2) measuring disclosure and reporting outcomes, and (3) drawing causal inferences from regulatory studies. Next, we discuss empirical studies that link disclosure and reporting activities to firm-specific and market-wide economic outcomes. Understanding these links is important when evaluating regulation. We then synthesize the empirical evidence on the economic effects of disclosure regulation and reporting standards, including the evidence on International Financial Reporting Standards (IFRS) adoption. Several important conclusions emerge. We generally lack evidence on market-wide effects and externalities from regulation, yet such evidence is central to the economic justification of ...

REVISION: The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research
Date Posted:Thu, 01 Sep 2016 13:13:11 -0500
This paper discusses the empirical literature on the economic consequences of disclosure and financial reporting regulation, drawing on U.S. and international evidence. Given the policy relevance of research on regulation, we highlight the challenges with (1) quantifying regulatory costs and benefits, (2) measuring disclosure and reporting outcomes, and (3) drawing causal inferences from regulatory studies. Next, we discuss empirical studies that link disclosure and reporting activities to firm-specific and market-wide economic outcomes. Understanding these links is important when evaluating regulation. We then synthesize the empirical evidence on the economic effects of disclosure regulation and reporting standards, including the evidence on International Financial Reporting Standards (IFRS) adoption. Several important conclusions emerge. We generally lack evidence on market-wide effects and externalities from regulation, yet such evidence is central to the economic justification of ...

REVISION: The Effect of Regulatory Harmonization on Cross-Border Labor Migration: Evidence from the Accounting Profession
Date Posted:Wed, 13 Jul 2016 01:04:38 -0500
The paper examines whether international regulatory harmonization increases cross-border labor migration. To study this question, we analyze European Union (EU) initiatives that harmonized accounting and auditing standards. Regulatory harmonization should reduce economic mobility barriers, essentially making it easier for accounting professionals to move across countries. Our research design compares the cross-border migration of accounting professionals relative to tightly-matched other professionals before and after regulatory harmonization. We find that international labor migration in the accounting profession increases significantly relative to other professions. We provide evidence that this effect is due to harmonization, rather than increases in the demand for accounting services during the implementation of the rule changes. The findings illustrate that diversity in rules constitutes an economic barrier to cross-border labor mobility and, more specifically, that accounting ...

REVISION: Capital-Market Effects of Securities Regulation: Prior Conditions, Implementation, and Enforcement
Date Posted:Wed, 06 Apr 2016 06:26:15 -0500
We examine the capital-market effects of changes in securities regulation in the European Union (EU) aimed at reducing market abuse and increasing transparency. To estimate causal effects for the population of EU firms, we exploit that for plausibly exogenous reasons, like national legislative procedures, EU countries adopted these directives at different times. We find significant increases in market liquidity, but the effects are stronger in countries with stricter implementation and traditionally more stringent securities regulation. The findings suggest that countries with initially weaker regulation do not catch up with stronger countries, and that countries diverge more upon harmonizing regulation.

REVISION: The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research
Date Posted:Wed, 09 Mar 2016 06:44:41 -0600
This paper discusses the empirical literature on the economic consequences of disclosure and financial reporting regulation (including IFRS adoption), drawing on U.S. and international evidence. Given the policy relevance of research on regulation, we highlight the challenges with: (i) quantifying regulatory costs and benefits, (ii) measuring disclosure and reporting outcomes, and (iii) drawing causal inferences from regulatory studies. Next, we discuss empirical studies that link disclosure and reporting activities to firm-specific and market-wide economic outcomes. Understanding these links is important when evaluating regulation. We then synthesize the empirical evidence on the economic effects of disclosure regulation and reporting standards, including the evidence on IFRS adoption. Several important conclusions emerge. We generally lack evidence on market-wide effects and externalities from regulation, yet such evidence is central to the economic justification of regulation. ...

REVISION: The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research
Date Posted:Tue, 23 Feb 2016 05:23:44 -0600
This paper discusses the empirical literature on the economic consequences of disclosure and financial reporting regulation (including IFRS adoption), drawing on U.S. and international evidence. Given the policy relevance of research on regulation, we highlight the challenges with: (i) quantifying regulatory costs and benefits, (ii) measuring disclosure and reporting outcomes, and (iii) drawing causal inferences from regulatory studies. Next, we discuss empirical studies that link disclosure and reporting activities to firm-specific and market-wide economic outcomes. Understanding these links is important when evaluating regulation. We then synthesize the empirical evidence on the economic effects of disclosure regulation and reporting standards, including the evidence on IFRS adoption. Several important conclusions emerge. We generally lack evidence on market-wide effects and externalities from regulation, yet such evidence is central to the economic justification of regulation. ...

REVISION: The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research
Date Posted:Sat, 20 Feb 2016 08:49:14 -0600
This paper discusses the empirical literature on the economic consequences of disclosure and financial reporting regulation (including IFRS adoption), drawing on U.S. and international evidence. Given the policy relevance of research on regulation, we highlight the challenges with: (i) quantifying regulatory costs and benefits, (ii) measuring disclosure and reporting outcomes, and (iii) drawing causal inferences from regulatory studies. Next, we discuss empirical studies that link disclosure and reporting activities to firm-specific and market-wide economic outcomes. Understanding these links is important when evaluating regulation. We then synthesize the empirical evidence on the economic effects of disclosure regulation and reporting standards, including the evidence on IFRS adoption. Several important conclusions emerge. We generally lack evidence on market-wide effects and externalities from regulation, yet such evidence is central to the economic justification of regulation. ...

REVISION: The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research
Date Posted:Sat, 20 Feb 2016 00:23:51 -0600
This paper discusses the empirical literature on the economic consequences of disclosure and financial reporting regulation (including IFRS adoption), drawing on U.S. and international evidence. Given the policy relevance of research on regulation, we highlight the challenges with: (i) quantifying regulatory costs and benefits, (ii) measuring disclosure and reporting outcomes, and (iii) drawing causal inferences from regulatory studies. Next, we discuss empirical studies that link disclosure and reporting activities to firm-specific and market-wide economic outcomes. Understanding these links is important when evaluating regulation. We then synthesize the empirical evidence on the economic effects of disclosure regulation and reporting standards, including the evidence on IFRS adoption. Several important conclusions emerge. We generally lack evidence on market-wide effects and externalities from regulation, yet such evidence is central to the economic justification of regulation. ...

REVISION: The Effect of Regulatory Harmonization on Cross-Border Labor Migration: Evidence from the Accounting Profession
Date Posted:Fri, 22 Jan 2016 05:33:11 -0600
The paper examines whether international regulatory harmonization increases cross-border labor migration. To study this question, we analyze European Union (EU) initiatives that harmonized accounting and auditing standards. Regulatory harmonization should reduce economic mobility barriers, essentially making it easier for accounting professionals to move across countries. Our research design compares the cross-border migration of accounting professionals relative to tightly-matched other professionals before and after regulatory harmonization. We find that international labor migration in the accounting profession increases significantly relative to other professions. We provide evidence that this effect is due to harmonization, rather than increases in the demand for accounting services during the implementation of the rule changes. The findings illustrate that diversity in rules constitutes an economic barrier to cross-border labor mobility and, more specifically, that accounting ...

New: The Effect of Regulatory Harmonization on Cross-Border Labor Migration: Evidence from the Accounting Profession
Date Posted:Thu, 21 Jan 2016 21:04:12 -0600
The paper examines whether international regulatory harmonization increases cross-border labor migration. To study this question, we analyze European Union (EU) initiatives that harmonized accounting and auditing standards. Regulatory harmonization should reduce economic mobility barriers, essentially making it easier for accounting professionals to move across countries. Our research design compares the cross-border migration of accounting professionals relative to tightly-matched other professionals before and after regulatory harmonization. We find that international labor migration in the accounting profession increases significantly relative to other professions. We provide evidence that this effect is due to harmonization, rather than increases in the demand for accounting services during the implementation of the rule changes. The findings illustrate that diversity in rules constitutes an economic barrier to cross-border labor mobility and, more specifically, that accounting ...

Update: The Effect of Regulatory Harmonization on Cross-Border Labor Migration: Evidence from the Accounting Profession
Date Posted:Thu, 21 Jan 2016 02:48:02 -0600
The paper examines whether international regulatory harmonization increases cross-border labor migration. To study this question, we analyze European Union (EU) initiatives that harmonized accounting and auditing standards. Regulatory harmonization should reduce economic mobility barriers, essentially making it easier for accounting professionals to move across countries. Our research design compares the cross-border migration of accounting professionals relative to tightly-matched other professionals before and after regulatory harmonization. We find that international labor migration in the accounting profession increases significantly relative to other professions. We provide evidence that this effect is due to harmonization, rather than increases in the demand for accounting services during the implementation of the rule changes. The findings illustrate that diversity in rules constitutes an economic barrier to cross-border labor mobility and, more specifically, that accounting ...
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REVISION: The Effect of Regulatory Harmonization on Cross-Border Labor Migration: Evidence from the Accounting Profession
Date Posted:Mon, 07 Dec 2015 06:23:24 -0600
The paper examines whether international regulatory harmonization increases cross-border labor migration. To study this question, we analyze European Union (EU) initiatives that harmonized accounting and auditing standards. Regulatory harmonization should reduce economic mobility barriers, essentially making it easier for accounting professionals to move across countries. Our research design compares the cross-border migration of accounting professionals relative to tightly-matched other professionals before and after regulatory harmonization. We find that international labor migration in the accounting profession increases significantly relative to other professions. We provide evidence that this effect is due to harmonization, rather than increases in the demand for accounting services during the implementation of the rule changes. The findings illustrate that diversity in rules constitutes an economic barrier to cross-border labor mobility and, more specifically, that accounting ...

REVISION: Public Audit Oversight and Reporting Credibility: Evidence from the PCAOB Inspection Regime
Date Posted:Wed, 23 Sep 2015 23:40:07 -0500
This paper examines how audit oversight by a public-sector regulator affects investors’ assessments of reporting credibility. We analyze whether the introduction of the Public Company Accounting Oversight Board (PCAOB) and its inspection regime have strengthened capital-market responses to unexpected earnings releases, as theory predicts when reporting credibility increases. To identify the effects, we use a difference-in-differences design that exploits the staggered introduction of the inspection regime, which affects firms at different points in time depending on their fiscal year-ends, auditors, and the timing of PCAOB inspections. We find that capital-market responses to unexpected earnings increase significantly following the introduction of the PCAOB inspection regime. Corroborating these findings, we also find an increase in abnormal volume responses to firms’ 10-K filings after the new regime. Overall, our results are consistent with public audit oversight increasing the ...

REVISION: Public Audit Oversight and Reporting Credibility: Evidence from the PCAOB Inspection Regime
Date Posted:Tue, 08 Sep 2015 02:12:39 -0500
This paper examines how audit oversight by a public-sector regulator affects investors’ assessments of reporting credibility. We analyze whether the introduction of the Public Company Accounting Oversight Board (PCAOB) and its inspection regime have strengthened capital-market responses to unexpected earnings releases, as theory predicts when reporting credibility increases. To identify the effects, we use a difference-in-differences design that exploits the staggered introduction of the inspection regime, which affects firms at different points in time depending on their fiscal year-ends, auditors, and the timing of PCAOB inspections. We find that capital-market responses to unexpected earnings increase significantly following the introduction of the PCAOB inspection regime. Corroborating these findings, we also find an increase in abnormal volume responses to firms’ 10-K filings after the new regime. Overall, our results are consistent with public audit oversight increasing the ...

REVISION: Public Audit Oversight and Reporting Credibility: Evidence from the PCAOB Inspection Regime
Date Posted:Sun, 09 Aug 2015 09:57:38 -0500
This paper examines how audit oversight by a public-sector regulator affects investors’ assessments of reporting credibility. We analyze whether the introduction of the Public Company Accounting Oversight Board (PCAOB) and its inspection regime have strengthened capital-market responses to unexpected earnings releases, as theory predicts when reporting credibility increases. To identify the effects, we use a difference-in-differences design that exploits the staggered introduction of the inspection regime, which affects firms at different points in time depending on their fiscal year-ends, auditors, and the timing of PCAOB inspections. We find that capital-market responses to unexpected earnings increase significantly following the introduction of the PCAOB inspection regime. Corroborating these findings, we also find an increase in abnormal volume responses to firms’ 10-K filings after the new regime. Overall, our results are consistent with public audit oversight increasing the ...

Update: Capital-Market Effects of Securities Regulation: Prior Conditions, Implementation, and Enforcement
Date Posted:Fri, 07 Aug 2015 02:36:40 -0500
This paper examines the capital-market effects of changes in securities regulation. We analyze two key directives in the European Union (EU) that tightened market abuse and transparency regulation. All EU member states were required to adopt these directives, but for plausibly exogenous reasons did so at different times. We exploit this staggered introduction to estimate causal effects of tighter securities regulation for the population of European firms, and find significant increases in market liquidity. Examining cross-sectional variation, we find larger treatment effects in countries that implement and enforce the directives more strictly. They are also stronger in countries with traditionally stricter securities regulation and a better track record of implementing regulation. The cross-sectional results indicate that the same forces that limited the effectiveness of regulation in the past are at play when new rules are introduced, leading to hysteresis in regulatory outcomes. ...
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REVISION: The Effect of Regulatory Harmonization on Cross-Border Labor Migration: Evidence from the Accounting Profession
Date Posted:Fri, 23 Jan 2015 06:59:54 -0600
The paper examines the effect of international regulatory harmonization on cross-border labor migration. We analyze directives in the European Union (EU) that harmonized accounting and auditing standards. This regulatory harmonization should make it less costly for those who work in the accounting profession to move across countries. Our research design compares the cross-border migration of accounting professionals relative to tightly-matched other professionals before and after regulatory harmonization. We find that, on average, labor migration in the accounting profession increases relative to comparable professions by roughly 15% after harmonization. The findings illustrate that diversity in rules constitutes an important economic barrier to cross-border labor mobility and, more specifically, that accounting harmonization can have a meaningful effect on cross-border migration.

REVISION: The Effect of Regulatory Harmonization on Cross-Border Labor Migration: Evidence from the Accounting Profession
Date Posted:Mon, 19 Jan 2015 10:32:14 -0600
The paper examines the effect of international regulatory harmonization on cross-border labor migration. We analyze directives in the European Union (EU) that harmonized accounting and auditing standards. This regulatory harmonization should make it less costly for those who work in the accounting profession to move across countries. Our research design compares the cross- border migration of accounting professionals relative to tightly-matched other professionals before and after regulatory harmonization. We find that, on average, labor migration in the accounting profession increases relative to comparable professions by roughly 15% after harmonization. The findings illustrate that diversity in rules constitutes an important economic barrier to cross-border labor mobility and, more specifically, that accounting harmonization can have meaningful effect on cross-border migration.

REVISION: Capital-Market Effects of Securities Regulation: Prior Conditions, Implementation, and Enforcement
Date Posted:Wed, 12 Feb 2014 01:55:36 -0600
This paper examines the economic effects of changes in securities regulation. We analyze two key directives in the European Union (EU) that tightened market abuse and transparency regulation. All EU member states were required to adopt these two directives, but did so at different points in time. Our research design exploits this staggered introduction of the same regulation to identify capital-market effects. We also examine cross-sectional variation in the strictness of implementation and enforcement as well as in prior regulatory conditions. We find that, on average, market liquidity increases as EU countries tighten market abuse and transparency regulation. The effects are larger in countries that implement and enforce the directives more strictly. They are also stronger in countries with traditionally stricter securities regulation and with a better prior track record of implementing regulation and government policies. The results indicate that the same forces that limited the ...

REVISION: Capital-Market Effects of Securities Regulation: Prior Conditions, Implementation, and Enforcement
Date Posted:Wed, 05 Feb 2014 05:03:35 -0600
This paper examines the economic effects of changes in securities regulation. We analyze two key directives in the European Union (EU) that tightened market abuse and transparency regulation. All EU member states were required to adopt these two directives, but did so at different points in time. Our research design exploits this staggered introduction of the same regulation to identify capital-market effects. We also examine cross-sectional variation in the strictness of implementation and enforcement as well as in prior regulatory conditions. We find that, on average, market liquidity increases as EU countries tighten market abuse and transparency regulation. The effects are larger in countries that implement and enforce the directives more strictly. They are also stronger in countries with traditionally stricter securities regulation and with a better prior track record of implementing regulation and government policies. The results indicate that the same forces that limited the ...

New: Mandatory IFRS Reporting and Changes in Enforcement
Date Posted:Sat, 07 Dec 2013 02:06:15 -0600
In recent years, reporting under International Financial Reporting Standards (IFRS) became mandatory in many countries. The capital-market effects around this change have been extensively studied, but their sources are not yet well understood. This study aims to distinguish between several potential explanations for the observed capital-market effects. We find that, across all countries, mandatory IFRS reporting had little impact on liquidity. The liquidity effects around IFRS introduction are concentrated in the European Union (EU) and limited to five EU countries that concurrently made substantive changes in reporting enforcement. There is little evidence of liquidity benefits in IFRS countries without substantive enforcement changes even when they have strong legal and regulatory systems. Moreover, we find similar liquidity effects for firms that experience enforcement changes but do not concurrently switch to IFRS. Thus, changes in reporting enforcement or (unobserved) factors ...

REVISION: Mandatory IFRS Reporting and Changes in Enforcement
Date Posted:Mon, 04 Nov 2013 02:28:16 -0600
In recent years, reporting under International Financial Reporting Standards (IFRS) became mandatory in many countries. The capital-market effects around this change have been extensively studied, but their sources are not yet well understood. This study aims to distinguish between several potential explanations for the observed capital-market effects. We find that, across all countries, mandatory IFRS reporting had little impact on liquidity. The liquidity effects around IFRS introduction are concentrated in the European Union (EU) and limited to five EU countries that concurrently made substantive changes in reporting enforcement. There is little evidence of liquidity benefits in IFRS countries without substantive enforcement changes even when they have strong legal and regulatory systems. Moreover, we find similar liquidity effects for firms that experience enforcement changes but do not concurrently switch to IFRS. Thus, changes in reporting enforcement or (unobserved) factors ...

REVISION: Proper Inferences or a Market for Excuses? The Capital-Market Effects of Mandatory IFRS Adoption
Date Posted:Sat, 12 Oct 2013 08:42:21 -0500
Barth and Israeli (2013) raise five serious concerns regarding the research design and interpretation of Christensen, Hail, and Leuz (2013). They claim: (i) the evidence stands in stark contrast to Daske, Hail, Leuz, and Verdi (2008) and fails to replicate its prior findings; (ii) the research design using fixed effects leaves out main effects and two-way interactions which likely biases the estimated liquidity effects around IFRS adoption and changes in enforcement; (iii) the vast majority of sample observations do not contribute to the identification which is misleading in terms of the scope and the conclusions that can be drawn from the study; (iv) the timing of IFRS adoption and enforcement changes is measured imprecisely leading to low power tests; and (v) the evidence from Japan is irrelevant to the study. In this note, we show that all five claims are incorrect or misleading. Our discussion also more broadly describes how to properly interpret the fixed-effect specifications ...

REVISION: Mandatory IFRS Reporting and Changes in Enforcement
Date Posted:Mon, 09 Sep 2013 11:25:56 -0500
In recent years, reporting under International Financial Reporting Standards (IFRS) became mandatory in many countries. The capital-market effects around this change have been extensively studied, but their sources are not yet well understood. This study aims to distinguish between several potential explanations for the observed capital-market effects. We find that, across all countries, mandatory IFRS reporting had little impact on liquidity. The liquidity effects around IFRS introduction are ...

REVISION: Proper Inferences or a Market for Excuses? The Capital-Market Effects of Mandatory IFRS Adoption
Date Posted:Mon, 02 Sep 2013 12:28:21 -0500
Barth and Israeli (2013) raise five serious concerns regarding the research design and interpretation of Christensen, Hail, and Leuz (2013). They claim: (i) the evidence stands in stark contrast to Daske, Hail, Leuz, and Verdi (2008) and fails to replicate its prior findings; (ii) the research design using fixed effects leaves out main effects and two-way interactions which likely biases the estimated liquidity effects around IFRS adoption and changes in enforcement; (iii) the vast majority of ...

REVISION: The Twilight Zone: OTC Regulatory Regimes and Market Quality
Date Posted:Wed, 28 Aug 2013 09:06:34 -0500
We analyze a comprehensive sample of more than 10,000 U.S. stocks in the OTC market. As little is known about this market, we first characterize OTC firms by trading venue and provide evidence on survival, success, frequency of venue changes, reporting status, and trading activity. A large number of new firms appear on the OTC market each year. With few exceptions, these new firms exhibit poor performance and rarely rise to trade on traditional exchanges. We analyze how market liquidity, price ...

REVISION: The Twilight Zone: OTC Regulatory Regimes and Market Quality
Date Posted:Tue, 09 Jul 2013 13:27:04 -0500
We analyze a comprehensive sample of more than 10,000 U.S. stocks in the OTC market. As little is known about this market, we first characterize OTC firms by trading venue and provide evidence on survival, success, frequency of venue changes, reporting status, and trading activity. A large number of new firms appear on the OTC market each year. With few exceptions, these new firms exhibit poor performance and rarely rise to trade on traditional exchanges. We analyze how market liquidity, price ...

REVISION: The Twilight Zone: OTC Regulatory Regimes and Market Quality
Date Posted:Sat, 06 Jul 2013 14:47:40 -0500
We analyze a comprehensive sample of more than 10,000 U.S. stocks in the OTC market. As little is known about this market, we first characterize OTC firms by trading venue and provide evidence on survival, success, frequency of venue changes, reporting status, and trading activity. A large number of new firms appear on the OTC market each year. With few exceptions, these new firms exhibit poor performance and rarely rise to trade on traditional exchanges. We analyze how market liquidity, price ...

REVISION: Mandatory IFRS Reporting and Changes in Enforcement
Date Posted:Thu, 20 Jun 2013 14:44:58 -0500
In recent years, reporting under International Financial Reporting Standards (IFRS) became mandatory in many countries. The capital-market effects around this change have been extensively studied, but their sources are not yet well understood. This study aims to distinguish between several potential explanations for the observed capital-market effects. We find that, across all countries, mandatory IFRS reporting had little impact on liquidity. The liquidity effects around IFRS introduction are ...

REVISION: Adopting a Label: Heterogeneity in the Economic Consequences Around IAS/IFRS Adoptions
Date Posted:Sun, 21 Apr 2013 10:25:18 -0500
This study examines liquidity and cost of capital effects around voluntary and mandatory IAS/IFRS adoptions. In contrast to prior work, we focus on the firm-level heterogeneity in the economic consequences, recognizing that firms have considerable discretion in how they implement the new standards. Some firms may make very few changes and adopt IAS/IFRS more in name, while for others the change in standards could be part of a strategy to increase their commitment to transparency. To test these ...

REVISION: Adopting a Label: Heterogeneity in the Economic Consequences Around IAS/IFRS Adoptions
Date Posted:Tue, 19 Mar 2013 06:02:28 -0500
This study examines liquidity and cost of capital effects around voluntary and mandatory IAS/IFRS adoptions. In contrast to prior work, we focus on the firm-level heterogeneity in the economic consequences, recognizing that firms have considerable discretion in how they implement the new standards. Some firms may make very few changes and adopt IAS/IFRS more in name, while for others the change in standards could be part of a strategy to increase their commitment to transparency. To test these ...

REVISION: Adopting a Label: Heterogeneity in the Economic Consequences Around IAS/IFRS Adoptions
Date Posted:Fri, 08 Mar 2013 13:58:43 -0600
This study examines liquidity and cost of capital effects around voluntary and mandatory IAS/IFRS adoptions. In contrast to prior work, we focus on the firm-level heterogeneity in the economic consequences, recognizing that firms have considerable discretion in how they implement the new standards. Some firms may make very few changes and adopt IAS/IFRS more in name, while for others the change in standards could be part of a strategy to increase their commitment to transparency. To test these ...

REVISION: Mandatory IFRS Reporting and Changes in Enforcement
Date Posted:Tue, 05 Mar 2013 06:32:21 -0600
In recent years, reporting under International Financial Reporting Standards (IFRS) became mandatory in many countries. The capital-market effects around this change have been extensively studied, but their sources are not yet well understood. This study aims to distinguish between several potential explanations for the observed capital-market effects. We find that, across all countries, mandatory IFRS reporting had little impact on liquidity. The liquidity effects around IFRS introduction are ...

REVISION: The Economic Consequences of Increased Disclosure
Date Posted:Sat, 23 Feb 2013 03:01:09 -0600
Economic theory suggests that a commitment by a firm to increased levels of disclosure should lower the information asymmetry component of the firm's cost of capital. But while the theory is compelling, so far empirical results relating increased levels of disclosure to measurable economic benefits have been mixed. One explanation for the mixed results among studies using data from firms publicly registered in the US is that, under current US reporting standards, the disclosure environment is ...

REVISION: Mandatory IFRS Reporting and Changes in Enforcement
Date Posted:Mon, 08 Oct 2012 19:06:53 -0500
In recent years, a number of countries have made reporting under International Financial Reporting Standards (IFRS) mandatory. The capital-market effects around this change have been extensively studied, but their sources are not yet well understood. This study presents new evidence that aims to distinguish between several potential explanations for the observed capital-market effects. We find that, across all countries, mandatory IFRS reporting had little impact on liquidity. The liquidity ...

REVISION: Capital-Market Effects of Securities Regulation: Hysteresis, Implementation, and Enforcement
Date Posted:Wed, 05 Sep 2012 18:28:24 -0500
This paper examines capital market effects of changes in securities regulation. We analyze two key directives in the European Union (EU) that tightened market abuse and transparency regulation and its enforcement. All EU member states were required to adopt these two directives, but did so at different points in time. Our research design exploits this differential timing of the same regulatory change to identify the capital-market effects. We also use cross-sectional variation in the ...

Update: Mandatory IFRS Reporting and Changes in Enforcement
Date Posted:Tue, 14 Aug 2012 10:45:39 -0500
In recent years, a large number of countries have made reporting under International Financial Reporting Standards (IFRS) mandatory. The capital-market effects of this change have been extensively studied, but their sources are not yet well understood and still heavily debated. This paper presents new evidence that aims to distinguish between several potential explanations for these capital-market effects. We show that, across all countries, mandatory IFRS reporting had little impact on liquidit
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REVISION: Adopting a Label: Heterogeneity in the Economic Consequences Around IAS/IFRS Adoptions
Date Posted:Sun, 27 May 2012 16:04:00 -0500
This study examines market liquidity and cost of capital effects around voluntary and mandatory IAS/IFRS adoptions. In contrast to prior work, we focus on the firm-level heterogeneity in the economic consequences, recognizing that firms have considerable discretion in how they implement the new standards. Some firms may make very few changes and adopt IAS/IFRS more in name, while for others the change in standards could be part of a strategy to increase their commitment to transparency. To ...

REVISION: Adopting a Label: Heterogeneity in the Economic Consequences Around Ias/Ifrs Adoptions
Date Posted:Sat, 26 May 2012 01:52:36 -0500
This study examines market liquidity and cost of capital effects around voluntary and mandatory IAS/IFRS adoptions. In contrast to prior work, we focus on the firm-level heterogeneity in the economic consequences, recognizing that firms have considerable discretion in how they implement the new standards. Some firms may make very few changes and adopt IAS/IFRS more in name, while for others the change in standards could be part of a strategy to increase their commitment to transparency. To ...

REVISION: Mandatory IFRS Reporting and Changes in Enforcement
Date Posted:Thu, 15 Mar 2012 04:42:28 -0500
In recent years, a large number of countries have made reporting under International Financial Reporting Standards (IFRS) mandatory. The capital-market effects of this change have been extensively studied, but their sources are not yet well understood and still heavily debated. This paper presents new evidence that aims to distinguish between several potential explanations for these capital-market effects. We show that, across all countries, mandatory IFRS reporting had little impact on ...

REVISION: Mandatory IFRS Reporting and Changes in Enforcement
Date Posted:Wed, 07 Mar 2012 13:38:50 -0600
In recent years, a large number of countries have made reporting under International Financial Reporting Standards (IFRS) mandatory. The capital-market effects of this change have been extensively studied, but their sources are not yet well understood and still heavily debated. This paper presents new evidence that aims to distinguish between several potential explanations for these capital-market effects. We show that, across all countries, mandatory IFRS reporting had little impact on ...

REVISION: Capital-Market Effects of Securities Regulation: Hysteresis, Implementation, and Enforcement
Date Posted:Tue, 07 Feb 2012 18:31:52 -0600
This paper examines capital market effects of changes in securities regulation. We analyze two key directives in the European Union (EU) that tightened market abuse and transparency regulation and its enforcement. All EU member states were required to adopt these two directives, but did so at different points in time. Our research design exploits this differential timing of the same regulatory change to identify the capital-market effects. We also use cross-sectional variation in the ...

REVISION: Capital-Market Effects of Securities Regulation: Hysteresis, Implementation, and Enforcement
Date Posted:Tue, 03 Jan 2012 01:31:21 -0600
This paper examines capital market effects of changes in securities regulation. We analyze two key directives in the European Union (EU) that tightened market abuse and transparency regulation and its enforcement. All EU member states were required to adopt these two directives, but did so at different points in time. Our research design exploits this differential timing of the same regulatory change to identify the capital-market effects. We also use cross-sectional variation in the ...

REVISION: Capital-Market Effects of Securities Regulation: Hysteresis, Implementation, and Enforcement
Date Posted:Mon, 02 Jan 2012 01:11:38 -0600
This paper examines capital market effects of changes in securities regulation. We analyze two key directives in the European Union (EU) that tightened market abuse and transparency regulation and its enforcement. All EU member states were required to adopt these two directives, but did so at different points in time. Our research design exploits this differential timing of the same regulatory change to identify the capital-market effects. We also use cross-sectional variation in the ...

REVISION: Capital-Market Effects of Securities Regulation: The Role of Prior Regulation, Implementation and En
Date Posted:Mon, 31 Oct 2011 18:22:33 -0500
This paper examines capital market effects of changes in securities regulation. We analyze two key directives in the European Union (EU) that tightened market abuse and transparency regulation and its enforcement. All EU member states were required to adopt these two directives but did so at different points in time. Our research design exploits this differential timing of the same regulatory change to identify the capital-market effects. We also use cross-sectional variation in the strictness ...

REVISION: Capital-Market Effects of Securities Regulation: The Role of Prior Regulation, Implementation and En
Date Posted:Tue, 25 Oct 2011 13:32:21 -0500
This paper examines capital market effects of changes in securities regulation. We analyze two key directives in the European Union (EU) that tightened market abuse and transparency regulation and its enforcement. All EU member states were required to adopt these two directives but did so at different points in time. Our research design exploits this differential timing of the same regulatory change to identify the capital-market effects. We then use cross-sectional variation in the strictness ...

REVISION: Adopting a Label: Heterogeneity in the Economic Consequences around Voluntary IAS and IFRS Adoptions
Date Posted:Thu, 06 Oct 2011 18:13:08 -0500
This paper examines market liquidity and cost of capital effects associated with voluntary adoptions of IAS (or IFRS) around the world. In contrast to prior work, we focus on the heterogeneity in the economic consequences, recognizing that firms have considerable discretion in how they implement IAS. Some firms may make very few changes and adopt IAS more in name, while for others IAS adoption could be part of a strategy to increase their commitment to transparency. To test these predictions, ...

REVISION: Capital-Market Effects of Securities Regulation: The Role of Implementation and Enforcement
Date Posted:Wed, 13 Jul 2011 01:11:38 -0500
This paper examines capital market effects of changes in securities regulation. We analyze two key capital market directives in the European Union (EU) that tightened market abuse and transparency regulation and, in particular, their enforcement. All EU member states were required to adopt these two directives but did so at different points in time. Our research design exploits this differential timing of the same regulatory change for identification and uses cross-sectional variation in the ...

REVISION: Adopting a Label: Heterogeneity in the Economic Consequences around Voluntary IAS Adoptions
Date Posted:Wed, 15 Jun 2011 06:11:04 -0500
This paper examines market liquidity and cost of capital effects associated with voluntary adoptions of International Accounting Standards (IAS) around the world. In contrast to prior work, we focus on the heterogeneity in the economic consequences, recognizing that firms have considerable discretion in how they implement IAS. Some firms may make very few changes and adopt IAS more in name, while for others IAS adoption could be part of a strategy to increase their commitment to transparency ...

REVISION: Information Asymmetry, Information Precision, and the Cost of Capital
Date Posted:Mon, 02 May 2011 18:39:59 -0500
The consequences of information differences across investors in capital markets are still much debated. This paper examines the relation between information differences across investors and the cost of capital, and makes three points. First, in models of perfect competition, information differences across investors affect a firm's cost of capital through investors' average information precision, and not information asymmetry per se. Second, the average information precision effect is unlikely ...

New: Information Asymmetry, Information Precision, and the Cost of Capital
Date Posted:Tue, 26 Apr 2011 08:06:32 -0500
This paper examines the relation between information differences across investors (i.e., information asymmetry) and the cost of capital, and establishes that with perfect competition information asymmetry makes no difference. Instead, a firm’s cost of capital is governed solely by the average precision of investors’ information. With imperfect competition, however, information asymmetry affects the cost of capital even after controlling for investors’ average precision. In other words, the ...

REVISION: Capital-Market Effects of Securities Regulation: The Role of Implementation and Enforcement
Date Posted:Tue, 08 Mar 2011 07:33:54 -0600
This paper examines capital market effects of changes in securities regulation. We analyze two key capital market directives in the European Union (EU) that tightened market abuse and transparency regulation and, in particular, their enforcement. All EU member states were required to adopt these two directives but did so at different points in time. Our research design exploits this differential timing of the same regulatory change for identification and uses cross-sectional variation in the ...

REVISION: Why Do Firms Go Dark? Causes and Economic Consequences of Voluntary SEC Deregistrations
Date Posted:Sun, 13 Feb 2011 03:47:42 -0600
We examine a comprehensive sample of going-dark deregistrations where companies cease SEC reporting, but continue to trade publicly. We document a spike in going dark that is largely attributable to the Sarbanes-Oxley Act. Firms experience large negative abnormal returns when going dark. We find that many firms go dark due to poor future prospects, distress and increased compliance costs after SOX. But we also find evidence suggesting that controlling insiders take their firms dark to protect ...

REVISION: Capital-Market Effects of Securities Regulation: The Role of Implementation and Enforcement
Date Posted:Sun, 23 Jan 2011 11:55:46 -0600
This paper examines capital market effects of changes in securities regulation. We analyze two key capital market directives in the European Union (EU) that tightened market abuse and transparency regulation and, in particular, their enforcement. All EU member states were required to adopt these two directives but did so at different points in time. Our research design exploits this differential timing of the same regulatory change for identification and uses cross-sectional variation in the ...

New: Global Accounting Convergence and the Potential Adoption of IFRS by the U.S. (Part II): Political Fa
Date Posted:Sat, 18 Dec 2010 09:24:22 -0600
This is the second article of a two-part series analyzing the economic and policy factors related to the potential adoption of IFRS by the United States. In Part I (see Hail et al. 2010), we develop the conceptual framework for our analysis and discuss economic factors driving the costs and benefits associated with IFRS adoption. In this part, we provide an analysis of the political factors related to the possible U.S. adoption of IFRS, present several scenarios for the evolution of U.S ...

New: Global Accounting Convergence and the Potential Adoption of IFRS by the U.S. (Part I): Conceptual Un
Date Posted:Thu, 09 Sep 2010 19:29:11 -0500
This article is Part I of a two-part series analyzing the economic and policy factors related to the potential adoption of IFRS by the United States. In this part, we develop the conceptual framework for our analysis of potential costs and benefits from IFRS adoption in the United States. Drawing on the academic literature in accounting, finance and economics, we assess the potential impact of IFRS adoption on the quality and comparability of U.S. reporting practices, the ensuing capital ...

REVISION: Different Approaches to Corporate Reporting Regulation: How Jurisdictions Differ and Why
Date Posted:Sun, 30 May 2010 21:29:08 -0500
This paper discusses differences in countries’ approaches to reporting regulation and explores the reasons why they exist in the first place as well as why they are likely to persist. I first delineate various regulatory choices and discuss the tradeoffs associated with these choices. I also provide a framework that can explain differences in corporate reporting regulation. Next, I present descriptive and stylized evidence on regulatory and institutional differences across countries. There are ...

REVISION: Different Approaches to Corporate Reporting Regulation: How Jurisdictions Differ and Why
Date Posted:Tue, 30 Mar 2010 13:56:50 -0500
This paper discusses differences in countries’ approaches to reporting regulation and explores the reasons why they exist in the first place as well as why they are likely to persist. I first delineate various regulatory choices and discuss the tradeoffs associated with these choices. I also provide a framework that can explain differences in corporate reporting regulation. Next, I present descriptive and stylized evidence on regulatory and institutional differences across countries. There are ...

New: Did Fair-Value Accounting Contribute to the Financial Crisis?
Date Posted:Mon, 22 Mar 2010 05:08:17 -0500
The recent financial crisis has led to a major debate about fair-value accounting. Many critics have argued that fair-value accounting, often also called mark-to-market accounting, has significantly contributed to the financial crisis or, at least, exacerbated its severity. In this paper, we assess these arguments and examine the role of fair-value accounting in the financial crisis using descriptive data and empirical evidence. Based on our analysis, it is unlikely that fair-value ...

REVISION: Capital Market Effects of Mandatory IFRS Reporting in the EU: Empirical Evidence
Date Posted:Thu, 17 Dec 2009 18:26:20 -0600
This report provides a review of the academic literature relevant to the mandatory adoption of IFRS reporting for member countries of the European Union in 2005 and an empirical analysis of the associated capital-market effects. In the empirical analysis, we focus on the effects on firms' costs of capital and market liquidity. More specifically, we analyze the effect of mandated IFRS reporting on the implied cost of equity capital, percentage bid-ask spreads, the price impact of trades and the ...

REVISION: Did Fair-Value Accounting Contribute to the Financial Crisis?
Date Posted:Tue, 15 Dec 2009 12:42:59 -0600
The recent financial crisis has led to a major debate about fair-value accounting. Many critics have argued that fair-value accounting, often also called mark-to-market accounting, has significantly contributed to the financial crisis or, at least, exacerbated its severity. In this paper, we assess these arguments and examine the role of fair-value accounting in the financial crisis using descriptive data and empirical evidence. Based on our analysis, it is unlikely that fair-value accounting ...

REVISION: Capital Market Effects of Mandatory IFRS Reporting in the EU: Empirical Evidence
Date Posted:Sun, 13 Dec 2009 04:56:54 -0600
This report provides a review of the academic literature relevant to the mandatory adoption of IFRS reporting for member countries of the European Union in 2005 and an empirical analysis of the associated capital-market effects. In the empirical analysis, we focus on the effects on firms’ cost of capital and market liquidity. More specifically, we analyze the effect of mandated IFRS reporting on the implied cost of equity capital, percentage bid-ask spreads, the price impact of trades and the ...

REVISION: Did Fair-Value Accounting Contribute to the Financial Crisis?
Date Posted:Mon, 26 Oct 2009 11:18:56 -0500
The recent financial crisis has led to a major debate about fair-value accounting. Many critics have argued that fair-value accounting, often also called mark-to-market accounting, has significantly contributed to the financial crisis or, at least, exacerbated its severity. In this paper, we assess these arguments and examine the role of fair-value accounting in the financial crisis using descriptive data and empirical evidence. Based on our analysis, it is unlikely that fair-value accounting ...

REVISION: Did Fair-Value Accounting Contribute to the Financial Crisis?
Date Posted:Fri, 23 Oct 2009 08:46:14 -0500
The recent financial crisis has led to a major debate about fair-value accounting. Many critics have argued that fair-value accounting, often also called mark-to-market accounting, has significantly contributed to the financial crisis or, at least, exacerbated its severity. In this paper, we assess these arguments and examine the role of fair-value accounting in the financial crisis using descriptive data and empirical evidence. Based on our analysis, it is unlikely that fair-value accounting ...

REVISION: Did Fair-Value Accounting Contribute to the Financial Crisis?
Date Posted:Wed, 14 Oct 2009 19:50:59 -0500
The recent financial crisis has led to a major debate about fair-value accounting. Many critics have argued that fair-value accounting, often also called mark-to-market accounting, has significantly contributed to the financial crisis or, at least, exacerbated its severity. In this paper, we assess these arguments and examine the role of fair-value accounting in the financial crisis using descriptive data and empirical evidence. Based on our analysis, it is unlikely that fair-value accounting ...

REVISION: Cost of Capital Effects and Changes in Growth Expectations Around U.S. Cross-Listings
Date Posted:Wed, 26 Aug 2009 08:20:27 -0500
This paper examines whether cross-listing in the U.S. reduces foreign firms' costs of capital. While prior studies show that U.S. cross-listings are associated with substantial increases in firm value, the sources of these valuation effects are not well understood. We estimate cost of capital effects implied by market prices and analyst forecasts, which accounts for changes in growth expectations around cross-listings. We find strong evidence that firms with cross-listings on U.S. exchanges ...

New: Do Foreigners Invest Less in Poorly Governed Firms?
Date Posted:Wed, 12 Aug 2009 06:58:48 -0500
As domestic sources of outside finance are limited in many countries around the world, it is important to understand factors that influence whether foreign investors provide capital to a country's firms. We study 4,409 firms from twenty-nine countries to assess whether and why concerns about corporate governance result in fewer foreign holdings. We find that foreigners invest less in firms that reside in countries with poor outsider protection and disclosure and have ownership structures that ...

New: Disclosure and the Cost of Capital: Evidence from Firms’ Responses to the Enron Shock
Date Posted:Thu, 28 May 2009 17:00:45 -0500
This paper examines the link between disclosure and the cost of capital. We exploit an exogenous cost of capital shock created by the Enron scandal in Fall 2001 and analyze firms’ disclosure responses to this shock. These tests are opposite to the typical research design that analyzes cost of capital responses to disclosure changes. In reversing the tests and using an exogenous shock, we mitigate concerns about omitted variables in traditional cross-sectional disclosure studies. We estimate ...

New: Information Asymmetry, Information Precision, and the Cost of Capital
Date Posted:Wed, 29 Apr 2009 17:00:07 -0500
The consequences of information differences across investors in capital markets are still much debated. This paper examines the relation between information differences across investors and the cost of capital, and makes three points. First, in models of perfect competition, information differences across investors affect a firm's cost of capital through investors' average information precision, and not information asymmetry per se. Second, the average precision effect of information that is ...

New: The Crisis of Fair Value Accounting: Making Sense of the Recent Debate
Date Posted:Tue, 21 Apr 2009 10:45:14 -0500
The recent financial crisis has led to a vigorous debate about the pros and cons of fair-value accounting (FVA). This debate presents a major challenge for FVA going forward and standard setters’ push to extend FVA into other areas. In this article, we highlight four important issues as an attempt to make sense of the debate. First, much of the controversy results from confusion about what is new and different about FVA. Second, while there are legitimate concerns about marking to market ...

REVISION: Disclosure and the Cost of Capital: Evidence from Firms' Response to the Enron Shock
Date Posted:Fri, 20 Mar 2009 10:01:03 -0500
This paper examines the link between disclosure and the cost of capital. We exploit an exogenous cost of capital shock that the Enron scandal in Fall 2001 created for other U.S. firms and analyze whether and how firms respond to this shock. These tests are opposite to the typical research design that analyzes cost of capital responses to disclosure changes. In reversing the tests and using an exogenous shock, we mitigate endogeneity concerns in traditional cross-sectional disclosure studies ...

New: Global Accounting Convergence and the Potential Adoption of IFRS by the United States: An Analysis o
Date Posted:Wed, 11 Mar 2009 11:20:09 -0500
Drawing on the academic literature in accounting, finance and economics, we analyze economic and policy factors related to the potential adoption of International Financial Reporting Standards (IFRS) in the U.S. We highlight the unique institutional features of U.S. markets to assess the potential impact of IFRS adoption on the quality and comparability of U.S. reporting practices, the ensuing capital market effects, and the potential costs of switching from U.S. GAAP to IFRS. We discuss the ...

REVISION: Disclosure and the Cost of Capital: Evidence from Firms' Response to the Enron Shock
Date Posted:Fri, 26 Dec 2008 08:36:15 -0600
This paper examines the link between disclosure and the cost of capital. We exploit an exogenous cost of capital shock that the Enron scandal in Fall 2001 created for other U.S. firms and analyze whether and how firms respond to this shock. These tests are opposite to the typical research design that analyzes cost of capital responses to disclosure changes. In reversing the tests and using an exogenous shock, we mitigate endogeneity concerns in traditional cross-sectional disclosure studies ...

REVISION: Disclosure and the Cost of Capital: Evidence from Firms' Response to the Enron Shock
Date Posted:Tue, 23 Dec 2008 12:06:30 -0600
This paper examines the link between disclosure and the cost of capital. We exploit an exogenous cost of capital shock that the Enron scandal in Fall 2001 created for other U.S. firms and analyze whether and how firms respond to this shock. These tests are opposite to the typical research design that analyzes cost of capital responses to disclosure changes. In reversing the tests and using an exogenous shock, we mitigate endogeneity concerns in traditional cross-sectional disclosure studies ...

REVISION: Cost of Capital Effects and Changes in Growth Expectations around U.S. Cross-Listings
Date Posted:Tue, 02 Dec 2008 19:36:13 -0600
This paper examines whether cross-listing in the U.S. reduces foreign firms' costs of capital. While prior studies show that U.S. cross-listings are associated with substantial increases in firm value, the sources of these valuation effects are not well understood. We estimate cost of capital effects implied by market prices and analyst forecasts, which accounts for changes in growth expectations around cross-listings. We find strong evidence that firms with cross-listings on U.S. exchanges ...

REVISION: Cost of Capital Effects and Changes in Growth Expectations around U.S. Cross-Listings
Date Posted:Tue, 02 Dec 2008 19:31:55 -0600
This paper examines whether cross-listing in the U.S. reduces foreign firms' costs of capital. While prior studies show that U.S. cross-listings are associated with substantial increases in firm value, the sources of these valuation effects are not well understood. We estimate cost of capital effects implied by market prices and analyst forecasts, which accounts for changes in growth expectations around cross-listings. We find strong evidence that firms with cross-listings on U.S. exchanges ...

REVISION: Cost of Capital Effects and Changes in Growth Expectations around U.S. Cross-Listings
Date Posted:Tue, 25 Nov 2008 04:20:59 -0600
This paper examines whether cross-listing in the U.S. reduces foreign firms' costs of capital. While prior studies show that U.S. cross-listings are associated with substantial increases in firm value, the sources of these valuation effects are not well understood. We estimate cost of capital effects implied by market prices and analyst forecasts, which accounts for changes in growth expectations around cross-listings. We find strong evidence that firms with cross-listings on U.S. exchanges ...

IAS versus US GAAP: Information Asymmetry-Based Evidence from Germany's New Market
Date Posted:Thu, 06 Nov 2008 05:53:32 -0600
The competition between IAS and US GAAP to become the global accounting standard has created a debate about the relative quality of the two standards. This paper compares IAS and US GAAP in terms of information asymmetry and market liquidity - two key constructs in securities regulation. It uses firms trading in Germany's New Market, which must choose between IAS and US GAAP in preparing their financial statements, but face the same regulatory environment. That is, institutional factors, such ...

REVISION: Mandatory IFRS Reporting Around the World: Early Evidence on the Economic Consequences
Date Posted:Fri, 24 Oct 2008 09:31:26 -0500
This paper examines the economic consequences of mandatory IFRS reporting around the world. We analyze the effects on market liquidity, cost of capital and Tobin's q in 26 countries using a large sample of firms that are mandated to adopt IFRS. We find that, on average, market liquidity increases around the time of the introduction of IFRS. We also document a decrease in firms' cost of capital and an increase in equity valuations, but only if we account for the possibility that the effects ...

REVISION: Mandatory IFRS Reporting Around the World: Early Evidence on the Economic Consequences
Date Posted:Mon, 08 Sep 2008 18:23:45 -0500
This paper examines the economic consequences of mandatory IFRS reporting around the world. We analyze the effects on market liquidity, cost of capital and Tobin's q in 26 countries using a large sample of firms that are mandated to adopt IFRS. We find that, on average, market liquidity increases around the time of the introduction of IFRS. We also document a decrease in firms' cost of capital and an increase in equity valuations, but only if we account for the possibility that the effects ...

REVISION: Mandatory IFRS Reporting Around the World: Early Evidence on the Economic Consequences
Date Posted:Mon, 08 Sep 2008 09:48:52 -0500
This paper examines the economic consequences of the introduction of mandatory IFRS reporting across the world. We analyze the effects on market liquidity, cost of equity capital and Tobin's q in 26 countries using a large sample that includes over 3,800 first-time adopters. We find that market liquidity and equity valuations increase around the time of the mandatory introduction of IFRS. The results for firms' cost of capital are mixed. Partitioning our sample, we find that the capital-market ...

REVISION: Cost of Capital Effects and Changes in Growth Expectations around U.S. Cross-Listings
Date Posted:Sat, 19 Jul 2008 18:49:47 -0500
This paper examines whether cross-listing in the U.S. reduces foreign firms' cost of capital. While prior studies document that U.S. cross-listings are associated with substantial increases in firm value, the sources of these valuation effects are not well understood. We estimate cost of capital effects implied by market prices and analyst forecasts, which allows us to explicitly account for changes in growth expectations around cross-listings. We find strong evidence that firms with ...

REVISION: Why Do Firms Go Dark? Causes and Economic Consequences of Voluntary SEC Deregistrations
Date Posted:Tue, 01 Apr 2008 09:44:56 -0500
We examine a comprehensive sample of going-dark deregistrations where companies cease SEC reporting, but continue to trade publicly. We document a spike in going dark that is largely attributable to the Sarbanes-Oxley Act. Firms experience large negative abnormal returns when going dark. We find that many firms go dark due to poor future prospects, distress and increased compliance costs after SOX. But we also find evidence suggesting that controlling insiders take their firms dark to protect ...

REVISION: Mandatory IFRS Reporting Around the World: Early Evidence on the Economic Consequences
Date Posted:Mon, 31 Mar 2008 08:49:19 -0500
This paper examines the economic consequences of the introduction of mandatory IFRS reporting across the world. We analyze the effects on market liquidity, cost of equity capital and Tobin's q in 26 countries using a large sample that includes over 3,800 first-time adopters. We find that market liquidity and equity valuations increase around the time of the mandatory introduction of IFRS. The results for firms' cost of capital are mixed. Partitioning our sample, we find that the capital-market ...

REVISION: Why Do Firms Go Dark? Causes and Economic Consequences of Voluntary SEC Deregistrations
Date Posted:Mon, 31 Mar 2008 08:20:36 -0500
We examine a comprehensive sample of going-dark deregistrations where companies cease SEC reporting, but continue to trade publicly. We document a spike in going dark that is largely attributable to the Sarbanes-Oxley Act. Firms experience large negative abnormal returns when going dark. We find that many firms go dark due to poor future prospects, distress and increased compliance costs after SOX. But we also find evidence suggesting that controlling insiders take their firms dark to protect ...

REVISION: Do Foreigners Invest Less in Poorly Governed Firms?
Date Posted:Mon, 31 Mar 2008 08:17:22 -0500
As domestic sources of outside finance are limited in many countries around the world, it is important to understand factors that influence whether foreign investors provide capital to a country's firms. We study 4,409 firms from 29 countries to assess whether and why concerns about corporate governance result in fewer foreign holdings. We find that foreigners invest less in firms that reside in countries with poor outsider protection and disclosure and have ownership structures that are ...

REVISION: Information Asymmetry, Information Precision, and the Cost of Capital
Date Posted:Thu, 27 Mar 2008 21:00:32 -0500
The consequences of information differences across investors in capital markets are still much debated. This paper examines the relation between information differences across investors and the cost of capital, and makes three points. First, in models of perfect competition, information differences across investors affect a firm's cost of capital through investors' average information precision, and not information asymmetry per se. Second, the average information precision effect is unlikely ...

REVISION: Economic Consequences of Financial Reporting and Disclosure Regulation: A Review and Suggestions for
Date Posted:Wed, 26 Mar 2008 07:09:53 -0500
This paper surveys the theoretical and empirical literature on the economic consequences of financial reporting and disclosure regulation. We integrate theoretical and empirical studies from accounting, economics, finance and law in order to contribute to the cross-fertilization of these fields. We provide an organizing framework that identifies firm-specific (micro-level) and market-wide (macro-level) costs and benefits of firms' reporting and disclosure activities and then use this framework ...

New: Do Foreigners Invest Less in Poorly Governed Firms?
Date Posted:Wed, 19 Mar 2008 00:17:53 -0500
As domestic sources of outside finance are limited in many countries around the world, it is important to understand factors that influence whether foreign investors provide capital to a country's firms. We study 4,409 firms from 29 countries to assess whether and why concerns about corporate governance result in fewer foreign holdings. We find that foreigners invest less in firms that reside in countries with poor outsider protection and disclosure and have ownership structures that are ...

New: Why Do Firms Go Dark? Causes and Economic Consequences of Voluntary SEC Deregistrations
Date Posted:Tue, 18 Mar 2008 10:14:49 -0500
We examine a comprehensive sample of going-dark deregistrations where companies cease SEC reporting, but continue to trade publicly. We document a spike in going dark that is largely attributable to the Sarbanes-Oxley Act. Firms experience large negative abnormal returns when going dark. We find that many firms go dark due to poor future prospects, distress and increased compliance costs after SOX. But we also find evidence suggesting that controlling insiders take their firms dark to protect ...

REVISION: Earnings Management and Investor Protection: An International Comparison
Date Posted:Sun, 16 Mar 2008 22:55:24 -0500
This paper examines the pervasiveness of earnings management across 31 countries between 1990 and 1999. It documents systematic differences in earnings management across different clusters of countries. We propose an explanation for these differences based on the notion that insiders, in an attempt to protect their private control benefits, use earnings management to conceal firm performance from outsiders. Thus, earnings management is expected to decrease in investor protection because strong ...

REVISION: Political Relationships, Global Financing and Corporate Transparency: Evidence from Indonesia
Date Posted:Sun, 16 Mar 2008 20:27:05 -0500
This study examines the role of political connections for firms' financing strategies and their long-run financial performance. We view political connections as an example for domestic arrangements which can reduce the benefits of global financing. Consistent with this argument, we find that firms with close political ties are less likely than firms with weak connections to have publicly traded foreign securities. We also show that estimates of the performance consequences of foreign ...

REVISION: Economic Consequences of Financial Reporting and Disclosure Regulation: A Review and Suggestions for
Date Posted:Thu, 13 Mar 2008 18:50:21 -0500
This paper surveys the theoretical and empirical literature on the economic consequences of financial reporting and disclosure regulation. We integrate theoretical and empirical studies from accounting, economics, finance and law in order to contribute to the cross-fertilization of these fields. We provide an organizing framework that identifies firm-specific (micro-level) and market-wide (macro-level) costs and benefits of firms' reporting and disclosure activities and then use this framework ...

New: Accounting Information, Disclosure, and the Cost of Capital
Date Posted:Mon, 18 Feb 2008 08:06:30 -0600
In this paper we examine whether and how accounting information about a firm manifests in its cost of capital, despite the forces of diversification. We build a model that is consistent with the Capital Asset Pricing Model and explicitly allows for multiple securities whose cash flows are correlated. We demonstrate that the quality of accounting information can influence the cost of capital, both directly and indirectly. The direct effect occurs because higher quality disclosures affect the ...

REVISION: Mandatory IFRS Reporting Around the World: Early Evidence on the Economic Consequences
Date Posted:Wed, 02 Jan 2008 19:40:03 -0600
This paper examines the economic consequences of the introduction of mandatory IFRS reporting across the world. We analyze the effects on market liquidity, cost of equity capital and Tobin's q in 26 countries using a large sample that includes over 3,800 first-time adopters. We find that market liquidity and equity valuations increase around the time of the mandatory introduction of IFRS. The results for firms' cost of capital are mixed. Partitioning our sample, we find that the capital-market ...

REVISION: The Importance of Reporting Incentives: Earnings Management in European Private and Public Firms
Date Posted:Wed, 02 Jan 2008 18:46:37 -0600
This paper examines how capital market pressures and institutional factors shape firms' incentives to report earnings that reflect economic performance. To isolate the effects of reporting incentives, we exploit the fact that, within the European Union, privately held corporations face the same accounting standards as publicly traded companies because accounting regulation is based on legal form. We focus on the level of earnings management as one dimension of accounting quality that is ...

REVISION: International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regula
Date Posted:Wed, 02 Jan 2008 18:43:52 -0600
This paper examines international differences in firms' cost of equity capital across 40 countries. We analyze whether the effectiveness of a country's legal institutions and securities regulation is systematically related to cross-country differences in the cost of equity capital. We employ several models to estimate firms' implied or ex ante cost of capital. Our results support the conclusion that firms from countries with more extensive disclosure requirements, stronger securities ...

REVISION: Mandatory IFRS Reporting Around the World: Early Evidence on the Economic Consequences
Date Posted:Thu, 25 Oct 2007 15:44:57 -0500
This paper examines the economic consequences of the introduction of mandatory IFRS reporting across the world. We analyze the effects on market liquidity, cost of equity capital and Tobin's q in 26 countries using a large sample that includes over 3,800 first-time adopters. We find that market liquidity increases around the time of the mandatory introduction of IFRS. The results for firms' cost of capital are mixed but there is evidence indicating an increase in equity valuations ...

REVISION: Was the Sarbanes-Oxley Act of 2002 Really this Costly? A Discussion of Evidence from Event Returns a
Date Posted:Mon, 18 Jun 2007 02:24:21 -0500
This paper discusses evidence on the costs (and benefits) of the Sarbanes-Oxley Act (SOX) from stock returns and firms' going-private decisions. Zhang (2006) analyzes stock returns around key legislative events and concludes that SOX and its provisions have imposed significant net costs on firms. Engel et al. (2006) examine going-private decisions before and after SOX and point to unintended consequences of SOX. Both studies are carefully conducted and deserve praise for tackling a timely and ...

REVISION: The Importance of Reporting Incentives: Earnings Management in European Private and Public Firms
Date Posted:Tue, 12 Jun 2007 12:19:26 -0500
This paper examines how capital market pressures and institutional factors shape firms' incentives to report earnings that reflect economic performance. To isolate the effects of reporting incentives, we exploit the fact that, within the European Union, privately held corporations face the same accounting standards as publicly traded companies because accounting regulation is based on legal form. We focus on the level of earnings management as one dimension of accounting quality that is ...

REVISION: Was the Sarbanes-Oxley Act of 2002 Really this Costly? A Discussion of Evidence from Event Returns a
Date Posted:Sun, 03 Jun 2007 08:53:00 -0500
This paper discusses evidence on the costs (and benefits) of the Sarbanes-Oxley Act (SOX) from stock returns and firms' going-private decisions. Zhang (2006) analyzes stock returns around key legislative events and concludes that SOX and its provisions have imposed significant net costs on firms. Engel et al. (2006) examine going-private decisions before and after SOX and point to unintended consequences of SOX. Both studies are carefully conducted and deserve praise for tackling a timely and ...

REVISION: Why Do Firms Go Dark? Causes and Economic Consequences of Voluntary Sec Deregistrations
Date Posted:Wed, 09 May 2007 14:25:09 -0500
We examine a comprehensive sample of SEC deregistrations from 1998 to 2004 where public companies go dark, i.e., cease filing with the SEC, but continue to trade in the OTC market. We document a recent spike of going dark deregistrations and show that a large part of it is attributable to the Sarbanes-Oxley Act, consistent with claims about increased reporting costs. We also document a large negative abnormal return to going dark, even when firms already trade in the OTC market and there is no ...

New: Accounting Information, Disclosure, and the Cost of Capital
Date Posted:Mon, 08 Jan 2007 09:51:47 -0600
In this paper we examine whether and how accounting information about a firm manifests in its cost of capital, despite the forces of diversification. We build a model that is consistent with the CAPM and explicitly allows for multiple securities whose cash flows are correlated. We demonstrate that the quality of accounting information can influence the cost of capital, both directly and indirectly. The direct effect occurs because higher quality disclosures reduce the firm's assessed ...

REVISION: Why do Firms go Dark? Causes and Economic Consequences of Voluntary SEC Deregistrations
Date Posted:Sun, 19 Nov 2006 20:05:36 -0600
We examine a comprehensive sample of SEC deregistrations from 1998 to 2004 where public companies go dark, i.e., cease filing with the SEC, but continue to trade in the OTC market. We document a recent spike of going dark deregistrations and show that a large part of it is attributable to the Sarbanes-Oxley Act, consistent with claims about increased reporting costs. We also document a large negative abnormal return to going dark, even when firms already trade in the OTC market and there is no ...

New: Political Relationships, Global Financing, and Corporate Transparency: Evidence from Indonesia
Date Posted:Wed, 02 Aug 2006 20:21:53 -0500
This study examines the role of political connections in firms' financing strategies and their long-run performance. We view political connections as an example for domestic arrangements which can reduce the benefits of global financing. Using data from Indonesia, we find that firms with strong political connections are less likely to have publicly traded foreign securities. As a result, estimates of the performance consequences of foreign financing are severely biased if value-creating ...

New: Do Foreigners Invest Less in Poorly Governed Firms?
Date Posted:Sun, 23 Jul 2006 15:14:18 -0500
As domestic sources of outside finance are limited in many countries around the world, it is important to understand the factors that influence whether foreign outside investors provide capital to a country's firms. This study examines whether and why investor concern about corporate governance results in fewer foreign holdings. We use a comprehensive set of foreign holdings by U.S. investors as a proxy for foreign investment and analyze a sample of 4,411 firms from 29 emerging market and ...

New: Cross Listing, Bonding and Firms' Reporting Incentives: A Discussion
Date Posted:Fri, 30 Jun 2006 04:26:05 -0500
Lang, Raedy and Wilson (JAE 2006) compare the properties of U.S. GAAP accounting numbers across cross-listed and U.S. firms. Using a wide range of properties, LRW show that accounting data are not comparable, even though sample firms use the same accounting standards. I discuss how these findings advance the literature and what they imply for the effectiveness of cross listing as a bonding mechanism. My discussion highlights that documented differences cannot be solely attributed to weak U.S ...

REVISION: Do Foreigners Invest Less in Poorly Governed Firms?
Date Posted:Fri, 02 Jun 2006 12:06:18 -0500
As domestic sources of outside finance are limited in many countries around the world, it is important to understand the factors that influence whether foreign outside investors provide capital to a country's firms. This study examines whether and why investor concern about corporate governance results in fewer foreign holdings. We use a comprehensive set of foreign holdings by U.S. investors as a proxy for foreign investment and analyze a sample of 4,411 firms from 29 emerging market and ...

REVISION: Do Foreigners Invest Less in Poorly Governed Firms?
Date Posted:Thu, 11 May 2006 09:21:36 -0500
As domestic sources of outside finance are limited in many countries around the world, it is important to understand the factors that influence whether foreign outside investors provide capital to a country's firms. This study examines whether and why investor concern about corporate governance results in fewer foreign holdings. We use a comprehensive set of foreign holdings by U.S. investors as a proxy for foreign investment and analyze a sample of 4,411 firms from 29 emerging market and ...

REVISION: International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regula
Date Posted:Thu, 27 Apr 2006 08:16:59 -0500
This paper examines international differences in firms' cost of equity capital across 40 countries. We analyze whether the effectiveness of a country's legal institutions and securities regulation is systematically related to cross-country differences in the cost of equity capital. We employ several models to estimate firms' implied or ex ante cost of capital. Our results support the conclusion that firms from countries with more extensive disclosure requirements, stronger securities ...

REVISION: Why do Firms go Dark? Causes and Economic Consequences of Voluntary SEC Deregistrations
Date Posted:Wed, 05 Apr 2006 09:47:25 -0500
We examine a comprehensive sample of SEC deregistrations from 1998 to 2004 where public companies "go dark", i.e., cease filing with the SEC, but continue to trade in the OTC market. We document a recent spike of going dark deregistrations and show that a large part of it is attributable to the Sarbanes-Oxley Act, consistent with claims about increased reporting costs. We also document a large negative abnormal return to going dark, even when firms already trade in the OTC market and there is ...

REVISION: Accounting Information, Disclosure, and the Cost of Capital
Date Posted:Fri, 31 Mar 2006 09:14:02 -0600
In this paper we examine whether and how accounting information about a firm manifests in its cost of capital, despite the forces of diversification. We build a model that is consistent with the CAPM and explicitly allows for multiple securities whose cash flows are correlated. We demonstrate that the quality of accounting information can influence the cost of capital, both directly and indirectly. The direct effect occurs because higher quality disclosures reduce the firm's assessed ...

REVISION: The Importance of Reporting Incentives: Earnings Management in European Private and Public Firms
Date Posted:Wed, 22 Mar 2006 19:06:01 -0600
This paper examines how capital market pressures and institutional factors shape firms' incentives to report earnings that reflect economic performance. To isolate the effects of reporting incentives, we exploit the fact that, within the European Union, privately held corporations face the same accounting standards as publicly traded companies because accounting regulation is based on legal form. We focus on the level of earnings management as one dimension of accounting quality that is ...

REVISION: The Importance of Reporting Incentives: Earnings Management in European Private and Public Firms
Date Posted:Wed, 15 Mar 2006 07:36:13 -0600
This paper examines how capital market pressures and institutional factors shape firms' incentives to report earnings that reflect economic performance. To isolate the effects of reporting incentives, we exploit the fact that, within the European Union, privately held corporations face the same accounting standards as publicly traded companies because accounting regulation is based on legal form. We focus on the level of earnings management as one dimension of accounting quality that is ...

REVISION: International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regula
Date Posted:Tue, 17 Jan 2006 06:10:47 -0600
This paper examines international differences in firms' cost of equity capital across 40 countries. We analyze whether the effectiveness of a country's legal institutions and securities regulation is systematically related to cross-country differences in the cost of equity capital. We employ several models to estimate firms' implied or ex ante cost of capital. Our results support the conclusion that firms from countries with more extensive disclosure requirements, stronger securities ...

Firms' Capital Allocation Choices, Information Quality, and the Cost of Capital
Date Posted:Wed, 11 Jan 2006 03:56:09 -0600
In this paper, we establish a link between information quality, firms' capital investment decisions and their cost of capital. We characterize asset prices in a market equilibrium framework with perfect competition for firm shares and derive a pricing equation that is equivalent to the CAPM. Using this characterization, we show that higher information quality leads to a lower cost of capital via its effect on expected cash flows. Better information improves the coordination between firms and ...

REVISION: Accounting Information, Disclosure, and the Cost of Capital
Date Posted:Wed, 12 Oct 2005 09:38:38 -0500
In this paper, we examine whether and how accounting information about a firm manifests in its cost of capital, despite the forces of diversification. We build a model that is consistent with the CAPM and explicitly allows for multiple securities whose cash flows are correlated. We demonstrate that the quality of accounting information can influence the cost of capital, both directly and indirectly. The direct effect occurs because higher quality disclosures reduce the firm's assessed ...

Cross Listing, Bonding and Firms' Reporting Incentives: A Discussion of Lang, Raedy and Wilson (JAE
Date Posted:Thu, 15 Sep 2005 08:00:42 -0500
Lang, Raedy and Wilson (2006) examine the properties of U.S. GAAP accounting numbers provided by cross-listed firms and compare them to those of U.S. firms. Using a wide range of properties related to earnings management, timely loss recognition, and value relevance, LRW show that accounting data are not comparable across cross listed and U.S. firms, despite the fact that all firms use the same accounting standards. In this paper, I discuss how these findings advance the literature and what ...

REVISION: Political Relationships, Global Financing and Corporate Transparency
Date Posted:Thu, 04 Aug 2005 10:18:11 -0500
This study examines the role of political connections for firms' financing strategies and their long-run financial performance. We view political connections as an example for domestic arrangements which can reduce the benefits of global financing. Consistent with this argument, we find that firms with close political ties are less likely than firms with weak connections to have publicly traded foreign securities. We also show that estimates of the performance consequences of foreign ...

Earnings Management and Investor Protection: An International Comparison
Date Posted:Mon, 18 Oct 2004 06:48:51 -0500
This paper examines the pervasiveness of earnings management across 31 countries between 1990 and 1999. It documents systematic differences in earnings management across different clusters of countries. We propose an explanation for these differences based on the notion that insiders, in an attempt to protect their private control benefits, use earnings management to conceal firm performance from outsiders. Thus, earnings management is expected to decrease in investor protection because strong ...

Economic Consequences of SEC Disclosure Regulation: Evidence from the OTC Bulletin Board
Date Posted:Mon, 18 Oct 2004 06:45:00 -0500
This paper examines the economic consequences of a recent regulatory change mandating OTC Bulletin Board firms to comply with the reporting requirements under the 1934 Securities Exchange Act. This change substantially increases the required disclosures for firms that previously did not file with the SEC. We document that the imposition of SEC disclosure requirements results in significant costs for smaller firms, essentially forcing them off the OTCBB. However, SEC disclosure regulation also ...

Economic Consequences of SEC Disclosure Regulation: Evidence from the OTC Bulletin Board
Date Posted:Mon, 19 Apr 2004 05:15:26 -0500
This paper examines the economic consequences of a regulatory change mandating OTCBB firms to comply with reporting requirements under the 1934 Securities Exchange Act. This change substantially increases mandated disclosures for firms previously not filing with the SEC. We document that the imposition of disclosure requirements results in significant costs for smaller firms, forcing them off the OTCBB. SEC regulation also has significant benefits. Firms previously filing with the SEC ...

Proprietary versus Non-Proprietary Disclosures: Evidence from Germany
Date Posted:Fri, 16 Apr 2004 02:57:10 -0500
Discretionary disclosure theory suggests that proprietary costs are an important reason why firms often withhold material information. However, empirically testing this hypothesis has proven to be difficult, due especially to the elusive nature of proprietary costs and lack of settings in which proprietary disclosures are voluntary. This paper exploits the fact that that until recently, German firms were not required to disclose business segment reports, which are generally viewed as ...

The Role of Accounting in the German Financial System
Date Posted:Tue, 25 Nov 2003 14:00:00 -0600
This paper describes and analyzes the role of financial accounting in the German financial system. It starts from the common (international) perception that German accounting is rather uninformative. This characterization has its merits from the perspective of an arm's length or outside investor and when confined to the financial statements per se. But it is no longer accurate when a broader perspective is adopted. The German accounting system exhibits several arrangements that privately ...

IAS versus US GAAP: Information Asymmetry-Based Evidence from Germany's New Market
Date Posted:Fri, 07 Mar 2003 05:32:18 -0600
Motivated by the debate about globally uniform accounting standards, this paper investigates whether firms using US GAAP vis-a-vis IAS exhibit differences in several proxies for information asymmetry. The study exploits a unique setting where the two sets of standards are put on a level playing field. Firms trading in Germany's New Market must choose between IAS and US GAAP for financial reporting, but face the same regulatory environment otherwise. Thus, institutional factors such as listing ...

Discussion of ADRs, Analysts, and Accuracy: Does Cross Listing in the U.S. Improve a Firm's Informat...
Date Posted:Tue, 28 Jan 2003 04:47:10 -0600
Lang, Lins and Miller (2002) investigate the relation between cross listing in the U.S. and information intermediation by analysts. The results suggest that cross listing in the U.S. increases analyst following and forecast accuracy and that both variables are associated with Tobin's Q. These findings are interesting and advance the cross-listing literature in several ways. This discussion raises two issues. First, I highlight that the sources of cross-listing effects are not obvious and are ...

The Development of Voluntary Cash Flow Statements in Germany and the Influence of International Repo...
Date Posted:Mon, 20 May 2002 11:02:53 -0500
This paper studies the incentives of German firms to voluntarily disclose cash flow statements. Although cash flow statements have not been mandatory in Germany until recently, an increasing number of firms have voluntarily provided cash flow statements. These firms are likely to be influenced by recommendations of the German accounting profession, IAS 7, and the respective standards of other countries. This paper studies this influence by looking at the adoption pattern of the cash flow ...

The Development of Voluntary Cash Flow Statements in Germany and the Influence of International Repo...
Date Posted:Mon, 20 May 2002 04:52:13 -0500
This paper studies the incentives of German firms to voluntarily disclose cash flow statements over time. While cash flow statement are mandated under many GAAP regimes, its disclosure has not been mandatory in Germany until recently. Nevertheless, an increasing number of firms provides cash flow statements voluntarily. These firms are likely to be influenced by recommendations of the German accounting profession, IAS 7 as well as the respective standards of other countries. The idea of the ...

REVISION: The Economic Consequences of Increased Disclosure
Date Posted:Tue, 13 Feb 2001 13:09:11 -0600
Economic theory suggests that a commitment by a firm to increased levels of disclosure should lower the information asymmetry component of the firm's cost of capital. But while the theory is compelling, so far empirical results relating increased levels of disclosure to measurable economic benefits have been mixed. One explanation for the mixed results among studies using data from firms publicly registered in the US is that, under current US reporting standards, the disclosure environment is ...

The Economic Consequences of Increased Disclosure
Date Posted:Tue, 12 Dec 2000 07:34:05 -0600
Economic theory suggests that a commitment by a firm to increased levels of disclosure should lower the information asymmetry component of the firm's cost of capital. But while the theory is compelling, so far empirical results relating increased levels of disclosure to measurable economic benefits have been mixed. One explanation for the mixed results among studies using data from firms publicly registered in the US is that, under current US reporting standards, the disclosure environment is ...

The Role of Accrual Accounting in Restricting Dividends to Shareholders
Date Posted:Tue, 21 Nov 2000 03:41:10 -0600
This paper addresses the question why net earnings and other accrual accounting numbers are frequently used to restrict dividends to shareholders. Even though this role of accrual accounting is widely accepted in the literature, a theory explaining the role of accruals in dividend restrictions is still in its early stages. Building on the principal-agent framework, I argue that basic features of the accrual process can be viewed as arising from the demand for dividend restrictions mitigating ...

An International Comparison of Accounting-Based Payout Restrictions in the United States, United Kin...
Date Posted:Thu, 09 Nov 2000 02:42:35 -0600
Agency theory shows that payout constraints can play an important role in debt contracting and mitigating debt- related incentive problems. In this paper, we compare how, empirically, corporations in the UK, the USA and Germany are restricted in their ability to pay dividends (and other forms of payouts) to shareholders. Our study is novel in two respects: First, although there is ample evidence on the use of accounting-based payout restrictions in US debt contracts, and some evidence in the ...

An International Comparison of Accounting-Based Payout Restrictions in the United States, United Kin...
Date Posted:Tue, 25 Apr 2000 03:27:47 -0500
Agency theory shows that payout constraints can play an important role in debt contracting and mitigating debt-related incentive problems. In this paper, we compare how, empirically, corporations in the UK, the USA and Germany are restricted in their ability to pay dividends (and other forms of payouts) to shareholders. Our study is novel in two respects: First, although there is ample evidence on the use of accounting-based payout restrictions in US debt contracts, and some evidence in the ...

The Role of Accrual Accounting in Restricting Dividends to Shareholders
Date Posted:Tue, 15 Feb 2000 04:46:58 -0600
This paper addresses the question why net earnings and other accrual accounting numbers are frequently used to restrict dividends to shareholders. Even though this role of accrual accounting is widely accepted in the literature, a theory explaining the role of accruals in dividend restrictions is still in its early stages. Building on the principal-agent framework, I argue that basic features of the accrual process can be viewed as arising from the demand for dividend restrictions mitigating ...