07 Financial Accounting 2: Disclosure (FAR2)

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    Do Managers Strategically Time Investor Mood? Evidence of Releasing Bad News on Sunny Days
    ( 2022) Chen, Chen ; Dong, Yashu ; Lai, Shufang
    This paper explores whether managers strategically time the dissemination of bad news on sunny days to leverage positive investor mood. Our empirical evidence suggests that managers are more likely to announce bad news on sunny days and tend to reschedule bad news earnings announcements from cloudy days to sunny days when accurate weather forecasts are available. Further analysis shows a weaker short-term market reaction and a stronger post-earnings announcement drift for firms announcing bad news on sunny days rather than non-sunny days. In addition, we find that this strategic disclosure of bad news is not motivated by insider selling, but is more likely to be driven by firms’ fear of high litigation risks. Considering the benefit and cost of applying the mood-timing strategy, our cross-sectional tests show that managers are more likely to announce bad news on sunny days when the market sentiment is low, when the firm does not follow a routine pattern to release its earnings announcement, and when there are fewer sunny days around the EAD. In summary, our findings suggest that managers consider investor mood in their information dissemination strategies and that litigation concerns are the main driver behind the strategic release of bad news on sunny days.
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    Real Effects of Mandatory Disclosure of Proprietary Information
    ( 2022) Lee, Mary
    Mandated disclosure of proprietary information can lead to both costs and benefits to affected firms. Firms frequently object to disclosing proprietary information that they believe will harm their competitive positions. At the same time, firms value transparency from competitors and peers, as the information disclosed by others allows them to make superior decisions as uncertainty decreases and opportunities for coordination increase. I study the effects of mandatory disclosure of proprietary information using the setting of mandated disclosure of capacity utilization in Korea. I find that mandated disclosure is associated with increased firm productivity on average, though the net benefits vary with firm-level factors. As predicted, firms benefit more from mandatory disclosure of capacity utilization when they opt out of disclosing and when they face greater demand uncertainty. At the industry level, mandated disclosure is associated with increased industry productivity on average, and the increase is larger when industries face lower international competition and when industries face greater demand uncertainty. Further, these effects lead to a decrease in dispersion of productivity within industries.
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    Where Do My Tax Dollars Go? Tax Morale Effects of Perceived Government Spending
    ( 2022) Giaccobasso, Matias ; Nathan, Brad ; Perez-Truglia, Ricardo ; Zentner, Alejandro
    Do perceptions about how the government spends tax dollars affect the willingness to pay taxes? We designed a field experiment to test this hypothesis in a natural, high-stakes context and via revealed preferences. We measure perceptions about the share of property tax revenues that fund public schools and the share of property taxes that are redistributed to disadvantaged districts. We find that even though information on where tax dollars go is publicly available and easily accessible, taxpayers still have significant misperceptions. We use an information-provision experiment to induce exogenous shocks to these perceptions. Using administrative data on tax appeals, we measure the causal effect of perceived government spending on the willingness to pay taxes. We find that some perceptions about government spending have a significant effect on the probability of filing a tax appeal and in a manner that is consistent with the classical theory of benefit-based taxation. We discuss implications for researchers and policy makers.
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    Accounting Disclosure Requirements in Procurement Contracting
    ( 2022) Nathan, Brad
    This paper studies how requirements for suppliers to privately disclose accounting information affect the award and execution of government procurement contracts. Using thresholds related to a federal procurement regulation known as the Truth in Negotiations Act (TINA), I find that above-threshold contracts, which are subject to requirements for suppliers to disclose data supporting their proposed prices unless there is a minimum number of competing bidders, experience greater competition than below-threshold contracts. Further, I find improvements in contract performance (i.e., less frequent re-negotiations and cost overruns) and completeness (i.e., decreased reliance on cost-plus contracts). Taken together, these findings are consistent with procurement's attention becoming more directed towards above-threshold contracts to promote competition to avoid the costs of requiring the data.
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    The Information Content of Municipal Financial Statements: Large-sample Evidence
    ( 2022) Nakhmurina, Anya ; Cuny, Christine ; Li, Ken ; Watts, Edward
    The usefulness of financial disclosures is a source of considerable debate in the municipal setting, given their lack of timeliness. This paper empirically examines the extent to which municipal financial disclosures have information content. Using the entire universe of annual financial disclosures from 2009 to 2020, we show that trading activity in the secondary market for municipal bonds increases after the disclosures are filed. Both institutional and retail trades increase around disclosure filings, but the effect is pronounced for retail traders, for whom the reports are more likely to provide new information. Moreover, the heightened trading is pronounced for timelier disclosures, consistent with regulators' views that untimely disclosures are less likely to provide new information. We also find a pronounced response when investors' risk is high and when the disclosures contain risk-related discussions. Our results contrast with earlier research and provide the first large-scale evidence that participants in the U.S. market for municipal bonds perceive financial disclosures to have informational value.
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    Venture Capital's Influence on Startup Media Coverage
    ( 2022) Baik, Brian ; Shin, Albert
    We find that venture capital (VC) investment is related to a significant increase in media coverage of the portfolio companies. Exploiting a staggered differences-in-differences design, we document a link between VC investment and increase in media coverage post VC investment, both in quantity and reach. The increase is mainly driven by positive articles; we find a significant decrease in negative articles. Portfolio companies classified as expansion stage, companies with business customers, and companies invested by VC firms with higher past returns especially see an increase in media coverage. Our tests reveal that both VC monitoring and VC reputation/network could be the mechanisms behind the increase in media articles. Taken together, our analyses highlight the impact VC investors bring to their investments leveraging the media.
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    Disclosure Regulation and Competition
    ( 2022) Xia, Shijun
    I investigate the impact of disclosure regulation on competition. Using a threshold of the anti-fraud disclosure regulation in the U.S. government procurement market, I find that requiring contractors to disclose contract-related misconduct discourages competition in contract bidding. Consistent with heterogeneity in compliance costs, the effect is more pronounced (1) when contract bidders are small firms, (2) when a contract is low value, (3) when a contract is likely to involve more disclosures, and (4) when there are alternative markets for the contracted product. Next, I provide direct evidence of channels as to why the regulation leads to less competition. I find that whistleblower lawsuits and IRS attention to contractors with treated contracts increase because contract-related misconduct is more visible after the regulation is in place. Overall, my evidence suggests that disclosure regulation has significant real effects by imposing costly compliance costs and additional risks on bidders to the extent that they are unwilling to bid, which reduces competition in the government procurement market.
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    Do Information Processing Costs Matter to Regulators? Evidence from the U.S. Shadow Bank Supervision
    ( 2022) Even-Tov, Omri
    This study examines the effect of reducing information processing costs on U.S. state regulators who supervise mortgage companies (i.e., “shadow banks”). State regulators traditionally disclosed enforcement actions against mortgage companies only on their own websites. A centralized repository introduced in 2012 assembled enforcement records across states in one place, substantially reducing a regulator’s cost to learn about enforcements in other states. To isolate the incremental effect of the centralized repository, we manually collect enforcement records from all state regulators’ websites both before and after the introduction of the centralized repository. We find that enforcement records posted on the centralized repository significantly increase the probability of subsequent enforcement actions against the same firm in other states, which suggests that reducing information processing costs helps state regulators identify companies that engage in misconduct. Additional analyses show that the effect is stronger for records from state websites that are more costly to process and for state regulators with more limited resources. Last, we find that lenders approve significantly fewer loan applications in the non-enforcing states, particularly those from risky borrowers, after their enforcement records are posted on the centralized repository, indicating that these lenders reduce credit supply in response to heightened regulatory scrutiny.
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    Manager Letters: Voluntary Disclosure In Response To The Covid-19 Pandemic
    ( 2022) Liu, Lu
    I study a novel and popular type of voluntary disclosure: manager letters. Since early 2020, about 50% of S&P 500 managers have issued letters in response to the COVID-19 pandemic. I hand-collect a sample of manager letters issued by S&P 500 firms, and study the contents, linguistic features, determinants, and consequences of the letters. I find that the issuance of the letter is positively related to investors' information demand. Issuing firms experience downward forecast revisions and their managers tend to discuss COVID-19 risks in subsequent earning calls, compared to non-issuing firms. However, issuing firms enjoy lower subsequent crash risk. Overall, my results suggest that firms use manager letters to inform investors their exposure to the pandemic. While the disclosure reduces the market's earnings expectations, it helps to minimize the firm's long-term crash risk.
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    The Informational Role of Exhibits as 'Source Files' in Form 10-K
    ( 2022) Cheng, Stephanie ; Li, Yimeng ; Lin, Pengkai
    We study the role of exhibits enclosed in the Form 10-K information bundle, which contains a main file and an average of eight new exhibits. We show that 10-K exhibits provide material documents regarding a wide range of SEC-mandated topics, and relative to the main file, exhibits are less readable, contain more legal words, and adopt more neutral language. We hypothesize and find that information users acquire and incorporate exhibits into trading decisions in the 10-K's short-term event window. Importantly, the short-term acquisition of 10-K exhibits strengthens the market reaction to the main file, and is higher when the main file lacks textual quantity, clarity, or certainty, and when the main file reveals negative financial contexts. Our findings suggest that exhibits are used as 'source files' to validate and supplement the main file. The evidence supports the unique role that exhibits play in users' processing of Form 10-K main file and provides insights into how users assemble the information mosaic within the 10-K information bundle.