11 Financial: Investor Relations/Regulations/Regulators
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ItemThe Effect of Deferred Prosecution Agreements on Firm Performance( 2019-08-31)The recent increase in the use of deferred and non-prosecution agreements (DPAs) by government agencies as a mechanism to hold a firm accountable for having engaged in wrongdoing and to reform the firm’s practices has given rise to a vigorous debate regarding the merits and drawbacks of such arrangements, compared with the alternative of prosecuting these firms. We find that firms subject to DPAs experience significantly lower buy and hold returns in the one- to three-year period following the DPA compared with prosecuted firms. These results are consistent with shareholders experiencing a wealth loss when a firm enters into a DPA. We also show that DPA firms experience negative real consequences following the initiation of a DPA, relative to prosecuted firms, as measured by decreases in both sales and the number of employees. These results are inconsistent with the idea that DPAs reduce the collateral damage to stakeholders who are not responsible for the crimes committed by the organization (i.e., innocent parties).
ItemCorporate Responses under External Scrutiny: The Battle against Short-Seller Research( 2019-08-31)Using the recent emergence of short-seller research as instances of external scrutiny, the study investigates how firms under intense external scrutiny manage to restore market confidence by analyzing their corporate responses. The results indicate that firms under attack by short-sellers generally find it difficult to convince the market only through voluntary disclosures, which may resemble a babbling equilibrium in some cases. To remedy this potential “cheap-talk” situation, actively engaging in two-way conversations with analysts and investors (e.g. by hosting conference calls and corporate visits) appears to help enhance corporate communication to outsiders. Strong endorsement by sell-side analysts may also help restore market confidence. Further, targeted firms may use payout policies such as dividends and continuous share repurchases to signal their values over time.
ItemProtecting Wall Street or Main Street: The Effect of Ownership Characteristics on SEC Oversight and Enforcement( 2019-08-29)In this study we examine whether ownership characteristics of a firm influence the likelihood of SEC oversight and enforcement. We specifically ask whether the percentage of retail ownership of a firm affects the likelihood of the firm either receiving an SEC comment letter or an Accounting and Auditing Enforcement Release (AAER). We find that retail ownership percentage is negatively associated with the receipt of an SEC comment letter. In contrast, we find a positive association between retail ownership percentage and an AAER following a restatement. These results are consistent with the SEC trading off its regulatory efforts to protect retail versus institutional investors based on the nature of the potential misreporting, and only stepping in to protect retail investors in the most egregious cases.
ItemThe economic consequences of GASB financial statement disclosure( 2019-08-29)We examine whether changes in how items are reported on GASB financial statements have real economic consequences for local governments. We generate identification using financial reporting differences that existed prior to adoption of GASB 68, a standard focused on the reporting of defined benefit pension obligations. These differences were eliminated by GASB 68, and were not discretionary. They arose based on whether the local government participated in either a shared or agency pension plan. Using a broad sample of municipalities and a difference-in-differences (DD) research design, we find that the new disclosure of a pension obligation leads to reduced expenses through changes to wages, benefits and employee headcount. We find the opposite result for pension assets, and stronger results for larger pension obligations. In addition, we find that the effects of disclosing pension obligations are stronger for those municipalities accessing debt markets, suggesting that credit markets may be contributing to the effects we document.
ItemWhat shapes CSR performance? Evidence from the changing enforceability of non-compete agreements in the United States( 2019-08-24)This paper investigates whether companies strategically engage in corporate social responsibility (CSR) practices to retain employees. Under a unique setting of exogenous variations in non-compete law enforceability in the U.S., we examine the relation between the changing enforceability of non-compete agreements and firms’ CSR performance. Using a difference-in-differences design, we find that an increase in the enforcement of non-compete agreements (which enhances a firm’s ability to retain employees) deteriorates CSR performance. In cross-sectional tests, we find that peer pressure affects CSR performance interactively with the enforceability of non-compete agreements; specifically, the strategic role of CSR performance in employee retention is more pronounced for firms facing higher peer pressure (i.e., firms that are R&D intensive and in highly competitive industries). We further find a negative relation between the absolute enforceability of non-compete agreements and CSR performance. The above findings are consistent with the notion that firms strategically engage in CSR practices to retain employees, thereby reducing the knowledge spillover associated with employee mobility.
ItemWearing Out the Watchdog: SEC Case Backlog and Investigation Likelihood( 2019-08-05)In the wake of corporate scandals, the SEC often provides a defense of being overworked. We examine this assertion using a novel comprehensive data set of closed investigations by SEC office. We show that high office case backlog materially decreases the likelihood that a new investigation is opened after several common investigation trigger events, and we find this association extends to cases with large shareholder implications. Further, we show that when office backlog is high the SEC is less like to open cases that are costlier to investigate (e.g., complex restatements, larger firms, less familiarity).