REVISION: Proactive Financial Reporting Enforcement and Firm Value
Date Posted:
Jun 13,
2017
We examine the effect of increasing the intensity of proactive enforcement of financial reporting regulation on equity values. Using a setting in the United Kingdom where a securities regulator periodically selects specific market sectors for increased scrutiny, we find that an approximately fourfold increase in the likelihood of regulator-initiated reviews of financial reports reduces equity values by 1.5%. This reduction in equity values occurs despite a subsequent increase in stock market liquidity of approximately 5%. Our study provides evidence of an instance in which, despite significant capital market benefits, increasing proactive financial reporting enforcement intensity has an overall negative effect on shareholder wealth.
REVISION: The Effects of Charge-Price Transparency Regulation on Prices in the Healthcare Industry
Date Posted:
Apr 11,
2017
Using micro data on actual healthcare purchases, we provide evidence on the causal effects of charge-price transparency regulation (PTR). We find that, although PTR causes providers to reduce charges by approximately 6%, these reductions do not lead to lower actual payments. Variation in the estimated treatment effect across hospitals suggests that reputational costs of perceived overcharging, rather than increased consumer search, explain the observed reduction in charges. Taken together, our results indicate that providers can avoid the potential impact of PTR on profitability by altering charges without affecting payments, which suggests that price transparency regulation based only on charges could be a way for policy makers to give the appearance they are addressing rising healthcare costs without imposing significant costs on providers.
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: The Real Effects of Mandated Information on Social Responsibility in Financial Reports: Evidence from Mine-Safety Records
Date Posted:
Mar 02,
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 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 by 11% and 13%, respectively, and reduces labor productivity by approximately 0.9%. Additional 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. Overall, our results illustrate that including information on social responsibility in financial reports can have economically significant real effects—even if that information is also ...
REVISION: Public Audit Oversight and Reporting Credibility: Evidence from the PCAOB Inspection Regime
Date Posted:
Dec 20,
2016
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: 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 ...