18 Financial: Credit ratings/Intangible assets/other financial accounting issues
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ItemNavigating Weak Institutions through Foreign Broker Reputation( 2018-08-31)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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ItemNonlinear Loan Loss Provisioning( 2018-08-31)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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ItemDisseminating Misinformation through Business Press( 2018-08-31)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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ItemAre Lengthy and Boilerplate Risk Factor Disclosures Inadequate? An Examination of Judicial and Regulatory Assessments of Risk Factor Language( 2018-08-30)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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ItemCustomer Concentration of Targets in Mergers and Acquisitions( 2018-08-30)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.
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ItemInformation Content of Credit Rating Affirmations( 2018-08-30)We examine whether the reiteration of past credit ratings (i.e., credit rating affirmation) provides value-relevant information to equity analysts and stock investors. While a large body of accounting and finance research provides evidence on the informational role of credit rating downgrades and upgrades, the informational effects of credit rating affirmations remain unexplored, despite the fact that the frequency of issuing rating affirmations is 1.6 times greater than that of issuing both rating downgrades and upgrades. Using a sample of US corporate credit rating reports that reiterate the previous credit ratings over the period of April 1995-June 2018, we find that equity analysts’ earnings forecast dispersion and stock return volatility—proxies for information uncertainty—decrease within a 30-day window following the credit rating affirmation announcements. The reduction in information uncertainty after rating affirmation is mainly driven by firms with non-investment grade bonds, whereas such reduction is not statistically significant for firms with investment grade bonds. We next find that the stock market reaction to affirmations is significantly positive on average and the positive reaction is most pronounced for firms with non-investment grade bonds. Taken together, our findings suggest that credit rating affirmations reduce information uncertainty and stock market investors find it useful for their investment decisions, particularly for firms with non-investment grade bonds. This study enhances our under-standing of the non-trivial informational value of the credit rating affirmations for equity market participants.
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ItemThe role of credit rating changes on opacity in the municipal bond market( 2018-08-27)This paper examines the role of credit rating changes on municipalities’ disclosure decisions. Using Moody’s recalibration of their municipal ratings scale in 2010 as an exogenous upgrade to municipal credit ratings, we find that upgraded municipalities significantly reduced their disclosure of financial information relative to unaffected municipalities. Consistent with rating upgrades decreasing municipal issuers’ cost of capital and reducing investors’ demand for disclosure, we find that this reduction is greater for issuers with greater ex–ante information asymmetry, greater ex–ante investor reliance on disclosure, and lower monitoring by underwriters and auditors. Collectively, our results suggest that higher ratings can reduce the transparency of debt issuers’ information environments by reducing borrowers’ incentives to disclose financial information.
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ItemIdentifying the Nature and Value of Expected Merger Synergies( 2018-08-23)Using a large sample of post-2001 mergers, we show that three components of targets’ intellectual property account for 25% to 33% of merger value creation. In particular, we show that R&D, Technology, and Trademarks generate greater synergies than acquired net tangible assets and goodwill. We also find that acquiring targets’ customer bases is associated with lower synergies and that acquirers overpay for goodwill. Our findings are robust to using conventional and novel wealth effect estimates. They suggest that information about the economic value of acquired assets drawn from price allocation disclosures enables researchers to simultaneously study multiple sources of synergy.
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ItemExogenous Credit Rating Changes and the Provision of Voluntary Disclosure( 2018-08-11)We provide evidence suggesting that corporate credit rating changes have an effect on firms’ voluntary disclosure behavior that is independent of the information they convey about firm fundamentals. Our analyses exploit two separate quasi-experimental settings that generate either exogenous credit rating downgrades or credit rating upgrades that allow us to isolate the effect of the credit rating label from changes in firms’ credit quality. We find evidence of a negative relation between the direction of the credit rating change and the provision of voluntary disclosure in both settings—firms respond to exogenous downgrades by increasing voluntary disclosure and to exogenous upgrades by decreasing voluntary disclosure. Overall, our analyses indicate that credit rating agencies as information intermediaries influence firms’ provision of voluntary disclosure.