REVISION: Securities Regulation, Household Equity Ownership, and Trust in the Stock Market
Date Posted:
Oct 21,
2018
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: Regulatory Cooperation and Foreign Portfolio Investment
Date Posted:
Sep 12,
2018
We investigate the effect of cross-border regulatory cooperation on global mutual fund portfolio allocations, focusing on the Multilateral Memorandum of Understanding (MMoU), a non-binding information sharing arrangement between global securities regulators. Connections between the US Securities and Exchange Commission (SEC) and other foreign regulators increase the SEC’s ability to pursue US cross-listed firms. We find that foreign investment in US-cross- listed firms domiciled in the signatory country increases significantly relative to non-cross-listed firms from that country. We find the strongest effects of the MMoU for non-US investors trading on non-US exchanges, which suggests that there are significant spillover effects associated with regulatory cooperation. This increase in foreign investment is particularly pronounced for investors from geographically, linguistically, and culturally distant countries where information asymmetry is high, and also for dedicated investors ...
REVISION: The Effects of Charge-Price Transparency Regulation on Prices in the Healthcare Industry
Date Posted:
May 01,
2018
We examine the effects of charge-price-transparency regulation (PTR)—a common policy solution intended to curb rising healthcare costs—on hospitals’ prices. Using micro data on actual healthcare purchases, we find that although PTR causes providers to reduce charges by approximately 6%, these reductions do not lead to lower payments. Further tests suggest that reputational costs of perceived overcharging are one impetus for the reduction in charges, which suggests that some stakeholders able to impose costs on hospitals do not fully understand hospitals’ ability to lower charges without affecting payments. The fact that PTR policies can be implemented without affecting payments could explain why charge transparency polices have been widely adopted (with little industry opposition) while payment transparency policies have not. Overall, our findings provide a cautionary note—transparency polices that are based on an indicator that can be decoupled from the underlying construct of ...
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: Proactive Financial Reporting Enforcement and Shareholder Wealth
Date Posted:
Dec 15,
2017
We examine the effect of increased proactive-financial-reporting-enforcement (PFRE) intensity on shareholder wealth. In a setting where specific industries are periodically targeted for greater regulatory scrutiny, we find that PFRE is associated with increased disclosure, greater resources expended on regulatory compliance, and higher stock-market liquidity. Yet, the market reaction to the announcement of the targeted industries is negative, suggesting that, despite an improvement in transparency, increasing PFRE intensity could have a net-negative effect on shareholder wealth. Supporting this interpretation, firms with stronger preexisting private oversight—where additional public enforcement is presumably least beneficial—experience the largest reductions in equity values.
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: Public Audit Oversight and Reporting Credibility: Evidence from the PCAOB Inspection Regime
Date Posted:
Aug 03,
2017
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: 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 ...