13 Financial Accounting 8: Investor relations/Regulations /IPO/M&As/ Pension accounting (FAR8)
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ItemOnce Bitten, Twice Shy: Learning from Corporate Fraud( 2022)This paper finds that investors learn from their experience with corporate fraud and financial misconduct and modify their investment behavior to avoid suspicious firms and increase corporate governance efforts. More specifically, mutual funds that experienced corporate fraud at one of their portfolio firms subsequently chose firms with lower probabilities of fraud and financial misconduct, compared to otherwise similar funds that did not experience any corporate malfeasance incidents. Furthermore, mutual funds that experienced corporate fraud intensify their corporate governance activities and vote significantly more against management at other firms in their portfolios, compared to the voting behavior at the same firms by otherwise similar funds but that did not experience any fraud, especially on issues related to director election, audit, and financial statement. I find that fraud-experienced investors are significantly less likely to vote for problematic directors. Finally, I find that firms held by more fraud-experienced investors observe a significant drop in the propensity to get an accounting fraud sanction in subsequent years. Taken together, my results show that learning and experience play a critical role in corporate governance spillovers, fraud detection, and deterrence.
ItemMunicipal Bond Market Effects of Credit Rating Dissemination( 2022)We examine the effect of dissemination on transaction costs in the municipal bond market by exploiting a regulatory change that made municipal credit rating information prepared by two of the three major credit rating agencies freely and publicly available on the Electronic Municipal Market Access (EMMA) database. We use a difference-in-differences framework that compares subsequent trading in bonds issued before the regulatory change, where the difference is whether rating information is provided on EMMA or not. We find that the dissemination of credit ratings reduced transaction costs primarily for retail investors. We also find that the dissemination effects are concentrated in bond purchases and are amplified when the information environment of the issuer is poor. Collectively, we interpret these results as indicating that the broad dissemination of credit rating information lowers transaction costs when information acquisition costs are high.
ItemMaterial information in Managers’ Private Disclosures: Evidence from Professional Investors’ Perceptions( 2022)Using both survey and experimental methods, we provide evidence on the materiality and the nature of information communicated in private meetings from the perspective of 308 professional investors. While benefits of private meetings for investors are well documented, the source of such benefits remains unclear due to unobservability of such events, challenging the enforcement of Regulation Fair Disclosure. We find that a significant portion of information in managers’ private disclosures can only be obtained through private interactions with senior management, and that the information is likely material, influencing investor judgments. In contrast to assumptions made by prior academics and regulators, we document that nonverbal and qualitative information are important sources of private meeting usefulness. Further, nonverbal information in private meetings is salient enough to affect the informativeness of meeting in different formats (i.e. in-person vs. virtual). Overall, our study documents whether and how material information is communicated through managers’ private disclosures.
ItemWindow Dressing in a Regulated Transaction-Level Disclosure Regime( 2022)This study examines whether managers window dress their year-end reports in a disclosure regime requiring the disclosure of transaction level investment data. Proponents of mandatory transaction-level disclosure argue that the opportunity to window dress is negated when all transactions can be observed, thus revealing a more accurate depiction of a firm’s during-period financial condition. We examine this conjecture by exploiting the U.S. based insurance industry, where all investment transactions are reported at the 9-digit CUSIP level. Although insurance companies may have incentives to increase investment risk to increase investment returns, they also have incentives to manage their year-end portfolio to circumvent regulatory scrutiny. Consistent with these incentives, our results suggest insurance companies increase risk during the year only to decrease risk significantly at year-end. This relation is magnified for firms with greater regulatory risk. This evidence suggests that the disclosure of transaction level data does not fully eliminate window dressing, even in highly regulated industries, likely due to processing costs and budgetary constraints of the regulator.
ItemDoes Access to Patent Information Help Technological Acquisitions?( 2022)Technology acquirers face significant information asymmetry when identifying appropriate acquisition targets. Employing plausibly exogenous variation in technological information gathering costs caused by staggered openings of patent libraries, we find that firms become more active in technological acquisitions following local patent library openings. In addition, acquirers prefer targets that are geographically close or are similar in technological space to a lesser extent, technology M&A completion rates increase, acquirers’ abnormal announcement returns are higher, and long-term stock returns of combined firms are better. Acquirers’ access to patent libraries also leads to greater post-merger innovation output through fostering more collaboration between acquirers’ and targets’ inventors. Overall, our study sheds new light on the importance of information gathering costs in corporate takeovers and the search for human capital synergies.