18 Financial: Credit ratings/Intangible assets/other financial accounting issues

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    Navigating Weak Institutions through Foreign Broker Reputation
    ( 2018-08-31) Yoon, Aaron
    I study how firms signal their quality and attract foreign investors when they operate in a market characterized by weak enforcement and legal protection. Using a proprietary disclosure dataset, I examine how Chinese firms respond to a market liberalization pilot program. I find that affected firms responded through increasing the number of selective private meetings hosted by major foreign investment banks instead of using public disclosure channels. These firms experienced an increase in foreign institutional holdings after the liberalization’s implementation, and exhibited more stable stock performance and retained foreign investors during a subsequent market crash. Overall, the results are consistent with firms using communication channels certified by reputable foreign investment banks to attract and maintain foreign investment.
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    Nonlinear Loan Loss Provisioning
    ( 2018-08-31) Basu, Sudipta ; Vitanza, Justin ; Wang, Wei
    The extant banking literature often models loan loss provisions as a linear function of changes in loan portfolio quality. Large sample data indicate that this linearity assumption is invalid and that a V-shaped piecewise linear specification fits much better. Decreases in nonperforming loans are associated with increases in loan loss provisions. This anomalous asymmetric relation is partly driven by the mechanical accounting effects of loan charge-offs on nonperforming loans and allowance for loan losses. We find that, controlling for concurrent loan charge-offs, loan loss provisions move in the same direction as nonperforming loan change, but asymmetry remains. The effect of nonperforming loan increases on loan loss provisions is still twice as large as that of nonperforming loan decreases. We argue that the residual asymmetry is caused by conditional conservatism. We show that loan loss provision asymmetry is greater for banks with more high-risk construction loans and shorter-maturity loans and for public banks, and is more pronounced during economic downturns and in the fourth quarter, consistent with the predictable effects of conditional conservatism.
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    Disseminating Misinformation through Business Press
    ( 2018-08-31) Kyung, Hangsoo ; Marquardt, Carol
    In this paper, we examine the effect of disseminating misinformation through business press. While prior literature on the role of business presses focuses on disseminating information in the capital markets, business press also disseminates misinformation. Using aggressive non-GAAP earnings as a proxy for misinformation, we find that stronger initial market reaction to aggressive non-GAAP earnings when business press covers non-GAAP earnings. However, stronger initial market reaction for aggressive non-GAAP earnings covered by business press experiences subsequent reversal after the earnings announcements, suggesting that business press coverage may exacerbate mispricing when managers have incentives to mislead investors. Our findings provide important insights on the current debate on the role of business press in the capital markets.
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    Are Lengthy and Boilerplate Risk Factor Disclosures Inadequate? An Examination of Judicial and Regulatory Assessments of Risk Factor Language
    ( 2018-08-30) Cazier, Richard A. ; McMullin, Jeff ; Treu, John Spencer
    Prior research finds that lengthy and boilerplate risk factor disclosures are associated with negative capital market consequences. Yet regulators and users of financial statements continue to criticize corporate risk factor disclosures as excessively long and boilerplate. We investigate two potential sources of firms’ incentives to issue lengthy, boilerplate risk factor disclosures by examining how judicial and regulatory assessments of firms’ risk factor disclosures correlate with measures of disclosure length and disclosure boilerplate. Our results suggest that lengthy and more boilerplate risk factor disclosures are less likely to be considered inadequate under judicial and regulatory review. Specifically, risk factor disclosures that are lengthier and less specific are less likely to be flagged as inadequate for safe harbor purposes under the Private Securities Litigation Reform Act. In addition, more standardized risk factor disclosures are less likely to be targeted by an SEC comment letter during the SEC’s filing review process.
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    Customer Concentration of Targets in Mergers and Acquisitions
    ( 2018-08-30) Cheng, Mei ; Jaggi, Jacob ; Young, Spencer
    We study how customer base concentration at a target firm impacts the occurrence and structure of M&A deals. We hypothesize that customer concentration increases information asymmetry and adverse selection between bidders and targets, such that (1) firms with greater customer concentration are less likely to receive a bid and (2) bidders for targets with greater customer concentration share the risk by using more stock payment in their offer. Using data on customer concentration and M&A deals from 1985 to 2016, we find consistent evidence supporting our predictions. Our findings extend the literature by systematically documenting an important factor in M&A decisions and by quantifying the economic consequences of customer concentration.