New: Importing Activists: Determinants and Consequences of Increased Cross-border Shareholder Activism
Date Posted:
Dec 29,
2020
We use a comprehensive sample of over 7,000 shareholder activism campaigns across 55 countries to examine how corporate governance regulations interact with activism to drive meaningful change in real corporate sector outcomes. We develop a country-level framework of regulatory characteristics that serve as necessary precursors for minority shareholders to influence firm governance, and find that the incidence of both foreign and domestic activism in a given country, as measured by the number of campaigns, increases by more than 80% following reforms that increase shareholder voting rights and board independence. Using these shareholder-empowering changes to governance regulation as shocks that increase the threat of activism, and the presence of independent institutional investors to identify high-activism-risk firms, we find that firms facing a high threat of activism reduce investment and increase payouts. We also find similar effects for firms not directly targeted by activists, ...
REVISION: Reversing the Resource Curse: Foreign Corruption Regulation and Economic Development
Date Posted:
Dec 22,
2020
We examine whether foreign corruption regulation reduces corruption and increases the local economic benefits of resource extraction. After a mid-2000s increase in enforcement of the US Foreign Corrupt Practices Act (FCPA), economic activity (measured by nighttime luminosity) increases by 14% (3%) in African communities within a 10- (25-) kilometer radius of resource extraction facilities whose owners are subject to the FCPA. Local perceptions of corruption decline by 8%. Consistent with changes in existing extraction firms’ business practices contributing to the increase in development, the association between resource production, instrumented by world commodity prices, and local economic activity increases by 40%.
REVISION: Reversing the Resource Curse: Foreign Corruption Regulation and Economic Development
Date Posted:
Dec 19,
2020
We examine whether foreign corruption regulation reduces corruption and increases the local economic benefits of resource extraction. After a mid-2000s increase in enforcement of the US Foreign Corrupt Practices Act (FCPA), economic activity (measured by nighttime luminosity) increases by 14% (3%) in African communities within a 10- (25-) kilometer radius of resource extraction facilities whose owners are subject to the FCPA. Local perceptions of corruption decline by 8%. Consistent with changes in existing extraction firms’ business practices contributing to the increase in development, the association between resource production, instrumented by world commodity prices, and local economic activity increases by 40%.
REVISION: Policeman for the World: The Impact of Extraterritorial FCPA Enforcement on Foreign Investment and Internal Controls
Date Posted:
Sep 03,
2020
We show that a mid-2000s increase in US extraterritorial enforcement of the Foreign Corrupt Practices Act (FCPA), characterized by greater international regulatory cooperation and more frequent use of the FCPA’s accounting provisions, has a significant deterrent effect on foreign direct investment in high-corruption-risk countries. The decrease in investment is at least as large for non-US as for US firms, suggesting that increased extraterritorial enforcement helps to level the foreign-investment playing field. Firms with fundamental characteristics that make it more difficult to maintain effective internal controls invest less in high-corruption-risk countries, suggesting regulatory compliance costs play an important role in deterring investment. Consistent with investments in accounting systems being one margin firms move on to limit enforcement risk when investing in high-corruption-risk countries, firms pursuing new investments spend more time evaluating potential acquisition ...
REVISION: Public Oversight and Reporting Credibility: Evidence from the PCAOB Audit Inspection Regime
Date Posted:
Jan 02,
2020
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:
Nov 02,
2019
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: Regulatory Cooperation and Foreign Portfolio Investment
Date Posted:
Oct 06,
2019
We investigate the effect of cross-border regulatory cooperation in the enforcement of securities laws on global-mutual-fund portfolio allocations. Our research design exploits a shock to the Securities and Exchange Commission's oversight of foreign firms cross-listed on a US stock exchange around the signing of the Multilateral Memorandum of Understanding (MMoU), a non-binding, information-sharing arrangement between global securities regulators. In signatory countries, foreign investment in US-cross-listed firms increases by $110 billion relative to non-cross-listed firms. The strongest effects are for investors facing greater information asymmetries, those from countries closely linked to the US, and non-US foreign investors, suggesting significant spillover effects from international regulatory cooperation.
REVISION: Proactive Financial Reporting Enforcement and Shareholder Wealth
Date Posted:
Oct 06,
2019
Within the U.K.’s proactive financial-reporting-enforcement regime, we examine the effect of increased regulatory scrutiny on equity values. We find that a fourfold increase in the likelihood of regulator-initiated reviews of financial reports reduces equity values by 1.3% on average. Reductions in equity values are largest for firms with strong private oversight that likely ensures that they are closer to their equity-value-maximizing level of transparency. Additional evidence suggests that competition increases and that managers’ investment horizons decrease in industries selected for increased regulatory scrutiny, consistent with direct compliance costs not fully explaining the reduction in equity values.
REVISION: Securities Regulation, Household Equity Ownership, and Trust in the Stock Market
Date Posted:
Aug 08,
2019
Using aggregate data from national accounts, we study whether strengthening and harmonizing securities regulation across the European Union increases household equity ownership. We find a significant increase in the proportion of liquid assets invested in equity, both when a household’s own country adopts the regulation and when other countries adopt the regulation. To directly explore the mechanism through which households’ willingness to directly invest in the equity market increases, we show that the effect of securities regulation is stronger in countries where trust is low and between countries where cultural biases are most pronounced.
REVISION: The Only Prescription is Transparency: The Effect of Charge-Price-Transparency Regulation on Healthcare Prices
Date Posted:
Aug 05,
2019
We examine the effect of charge-price-transparency regulation (PTR) — a common policy solution intended to curb rising healthcare costs — on hospitals’ prices. We find that although PTR does not affect payments or consumer search, it does cause hospitals to reduce charges by approximately 5%. The reputational costs of perceived overcharging appear to be one impetus for the reduction in charges, suggesting that certain stakeholders who are able to impose costs on hospitals are unaware that hospitals can decouple charges from payments. The ineffectiveness of PTR policies in reducing payments and the apparent inability of some stakeholders to realize this fact could explain why charge-transparency policies have been widely adopted with little opposition. Overall, our findings provide a cautionary note — transparency regulation focusing on an indicator that can be decoupled from the construct of interest might placate some stakeholders without actually solving the underlying problem.
REVISION: Equity-Market Trading Restrictions and Credit Prices
Date Posted:
Feb 27,
2018
We examine how equity-market trading restrictions affect credit prices. Using short-sale constraints (SSCs) as a proxy for trading restrictions, we examine two specific sources of variation — the randomized Regulation SHO experiment and time-series variation in short-selling bans during the 2008 financial crisis. In both analyses, we find that greater SSCs are associated with significantly higher credit-default-swap (CDS) spreads. Changes in the term structure of CDS spreads suggest that this increase is attributable to a decrease in the availability of default-risk-relevant information. Further, using a default-model-prediction framework, we document that it is more difficult to accurately assess default risk when short selling is constrained, which corroborates information risk as a channel through which SSCs lead to higher credit prices.
REVISION: The Real Effects of Mandated Information on Social Responsibility in Financial Reports: Evidence from Mine-Safety Records
Date Posted:
Sep 07,
2017
We examine the real effects of mandatory-social-responsibility disclosures, which require SEC-registered mine owners to include their mine-safety records in their financial reports. These safety records are already publicly available elsewhere, which allows us to isolate and estimate the incremental real effects of including this information in financial reports. Comparing mines owned by SEC-registered issuers with mines that are not, we document that including safety records in financial reports decreases mining-related citations and injuries, and reduces labor productivity. Evidence from stock-market reactions and mutual-fund holdings suggests that increased awareness of safety issues is a likely explanation for the observed real effects.
REVISION: The Effect of Equity-Market Frictions on Default-Risk Assessment: Evidence from Short-Sale Constraints around the World
Date Posted:
Mar 31,
2017
We examine how equity-market frictions that restrict pessimistic trading, such as short-sale constraints, affect assessments of default risk. We find that these frictions decrease the usefulness of equity-market variables for identifying defaulting firms but increase their usefulness for identifying non-defaulting firms. Accounting information significantly improves the accuracy of default-risk assessments in the presence of pessimistic-trading frictions, particularly where a country’s institutional infrastructure promotes transparent financial reporting. Yet, the net effect of pessimistic-trading frictions is a reduction in the accuracy of default-risk assessments based on publicly available sources of information. Using an exogenous shock, we document that short-sale constraints lead to higher credit spreads. Overall, our results demonstrate a negative externality of equity-market-based pessimistic-trading restrictions on debt markets arising from a reduction of ...
REVISION: Transparency, Liquidity, and Valuation: International Evidence on When Transparency Matters Most
Date Posted:
Aug 25,
2016
We examine the relation between firm-level transparency, stock market liquidity, and valuation across a variety of international settings. We document lower transaction costs and greater liquidity (as measured by lower bid-ask spreads and fewer zero-return days) for firms with greater transparency (as measured by less evidence of earnings management, better accounting standards, higher quality auditors, more analyst following and more accurate analyst forecasts). The relation between transparency and liquidity is more pronounced in periods of high volatility, when investor protection, disclosure requirements, and media penetration are poor, and when ownership is more concentrated, suggesting that firm-level transparency matters more when overall investor uncertainty is greater. Increased liquidity is associated with lower implied cost of capital and with higher valuation as measured by Tobin’s Q. Finally, a mediation analysis suggests that liquidity is a significant channel through ...
REVISION: Post-Listing Performance and Private Sector Regulation: The Experience of the AIM
Date Posted:
Aug 18,
2016
We investigate the post-listing experience of companies raising capital on the London Stock Exchange’s Alternative Investment Market (AIM). The AIM is unique in that it is privately regulated and relies on Nominated Advisors (Nomads) who compete to bring new listings and provide ongoing regulatory oversight. We find that AIM firms significantly underperform firms on regulated exchanges in terms of post-listing returns and failure rates. The underperformance is similar to that of firms listing on the OTC Bulletin Board prior to SEC regulation. Underperformance is associated with abnormally high pre-listing accruals and post-listing reversals, and is more pronounced for firms raising capital. The choice of a “high quality” auditor or Nomad partially mitigates underperformance, suggesting that AIM firms have a limited ability to bond through commitments to more stringent oversight. Negative returns are particularly pronounced for firms with high proportions of retail investors.
REVISION: Foreign Institutional Ownership and the Global Convergence of Financial Reporting Practices
Date Posted:
Aug 18,
2016
This paper investigates whether foreign institutional investors affect the global convergence of financial reporting practices. Using several measures of reporting convergence, we show that U.S. institutional ownership is positively associated with subsequent changes in emerging market firms’ accounting comparability to their U.S. industry peers. We identify this association using an instrumental variable approach that exploits exogenous variation in U.S. institutional investment generated by the JGTRRA Act of 2003. Further, we provide evidence of a specific mechanism — the switch to a Big Four audit firm — through which U.S. institutional investors affect reporting convergence. Finally, we show that, for emerging market firms, an increase in comparability to U.S. firms is associated with an improvement in the properties of foreign analysts' forecasts.
REVISION: Financial Reporting Opacity and Informed Trading by International Institutional Investors
Date Posted:
Aug 18,
2016
Using cross-country data on trading by international mutual funds, I find that firms with more opaque information environments, as captured by firm- and country-level measures of the availability of financial reporting information, experience more privately informed trading by institutional investors. The association between firm-level opacity and informed trading is most pronounced where country-level disclosure infrastructures are less developed and for those investors for whom the incentives and opportunities to acquire private information are greatest. A difference-in-differences analysis of the returns earned by institutions in opaque stocks suggests that this information advantage is economically significant.
REVISION: Foreign Institutional Ownership and the Global Convergence of Financial Reporting Practices
Date Posted:
Aug 15,
2016
This paper investigates whether foreign institutional investors affect the global convergence of financial reporting practices. Using several measures of reporting convergence, we show that U.S. institutional ownership is positively associated with subsequent changes in emerging market firms’ accounting comparability to their U.S. industry peers. We identify this association using an instrumental variable approach that exploits exogenous variation in U.S. institutional investment generated by the JGTRRA Act of 2003. Further, we provide evidence of a specific mechanism — the switch to a Big Four audit firm — through which U.S. institutional investors affect reporting convergence. Finally, we show that, for emerging market firms, an increase in comparability to U.S. firms is associated with an improvement in the properties of foreign analysts' forecasts.
REVISION: Earnings Comovement and Accounting Comparability: The Effects of Mandatory IFRS Adoption
Date Posted:
Aug 15,
2016
We examine changes in cross-country financial statement comparability around mandatory IFRS adoption and the effects of these changes on firms’ information environments, as captured by analyst properties and bid-ask spreads. First, we show that cross-country earnings comovement is negatively associated with favorable properties of the firm-level information environment. In contrast, we show that cross-country accounting comparability is positively associated with favorable properties of the information environment. We further document that, whereas IFRS adoption increased cross-country earnings comovement, it did not increase accounting comparability relative to a control sample of non-adopting firms. Finally, we show directly that the increases in earnings comovement experienced by IFRS adopters have negative effects on firms’ information environments. This finding provides novel evidence that increases in earnings comovement associated with IFRS adoption diminished financial ...
REVISION: Transparency and Liquidity Uncertainty in Crisis Periods
Date Posted:
Aug 12,
2016
We document, for a global sample, that firms with greater transparency (based on accounting standards, auditor choice, earnings management, analyst following and forecast accuracy) experience less liquidity volatility, fewer extreme illiquidity events and lower correlations between firm-level liquidity and both market liquidity and market returns. Results are robust to numerous sensitivity analyses, including controls for endogeneity and propensity matching. Results are particularly pronounced during crises, when liquidity variances, covariances and extreme illiquidity events increase substantially, but less so for transparent firms. Finally, liquidity variance, covariance and the frequency of extreme illiquidity events are all negatively correlated with Tobin’s Q.
REVISION: Economic Effects of Transparency in International Equity Markets: A Review and Suggestions for Future Research
Date Posted:
Jul 26,
2016
In this paper we discuss the existing accounting literature on the real effects of financial reporting transparency in international equity markets, present aspects of an international setting that make it a fruitful environment for investigating these effects and suggest directions for future research.
REVISION: Listing Choices and Self-Regulation: The Experience of the AIM
Date Posted:
Mar 15,
2011
We compare companies listing on the London AIM to regulated exchanges in the US and UK. The AIM is unique in that it is privately-regulated and relies on Nominated Advisors to provide oversight rather than traditional regulators. We find that AIM firms perform poorly on a variety of dimensions. Their post-listing returns significantly underperform stocks on other exchanges. Liquidity is low and there is evidence of substantial information asymmetry. Results are similar across subsets of firms ...