17 Other accounting issues (OTHER)
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ItemA Principle of Classification( 2021)We study a firm's decision to classify transactions as recurring or nonrecurring in a setting with no fixed classification scheme, but with the following principle: transactions classified as recurring must be more persistent than those classified as nonrecurring. This principle corresponds to existing classification standards. We find that the firm’s optimal classification strategy has a simple form: maximize the product of the (absolute) total of income-reducing nonrecurring and the total income-increasing recurring items. We characterize the possible firm values consistent with a report, and provide a measure of how opaque a firm’s valuation is given its classification choice.
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ItemIt’s Not Who You Know—It’s Who Knows You: Employee Social Capital and Firm Performance( 2021)We show that the social capital embedded in employees’ networks contributes to firm value and provide evidence on the mechanisms. Using novel, individual-level network data, we measure a firm’s social capital derived from employees’ connections with external stakeholders. The directed nature of connections allows for identifying whether one party in a connection is a more valued contact. Results show that firms with more employee social capital perform better; the positive effect stems primarily from employees being valued by others. We provide causal evidence exploiting the enactment of a government regulation that imparted a negative shock to networking with specific sectors.
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ItemLong-run Performance of Debt Renegotiations: Large-Sample Evidence( 2021)We examine the long-run performance of over 17,000 debt renegotiations. We find that, compared with non-renegotiating firms matched on size, book-to-market, profitability, and investment, renegotiating firms, on average, deliver 11 (19) percent higher stock returns over the three (five) years after the renegotiation. This renegotiation effect occurs regardless of the market’s initial reaction, is strongest for lender consents/waivers, decreases with the borrower’s bargaining power, and is causal. Renegotiations lead to immediate increases in capital expenditures and working capital, but lagged improvements in earnings and cash flow from operations. Renegotiations followed by larger improvements in accounting fundamentals have better long-run stock returns.
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ItemAccounting comparability and managers’ discretionary disclosures over conference calls( 2021)This study examines how accounting comparability affects managers’ disclosure linguistic choices during the conference call. We find that managers use less complex language during the conference when their prepared financial information exhibit greater comparability with industry peer firms. More importantly, the further analyses document a negative relation between financial information comparability and the informativeness of managerial linguistic complexity of the conference call by decomposing linguistic complexity into its latent information and obfuscation components, suggesting that managers strategically use the optimal level of mandatory and voluntary disclosure channels to convey information. We also find the strategic disclosure behavior when management disclosure inceptives or market competition are high. Our additional tests indicate that while managers reduce information language, analysts tend to be more active during the conference for firms with higher financial information comparability. Overall, the findings advance our understanding of management disclosure incentives regarding voluntary information, concurrently with mandatory primary reporting.
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ItemEquity Market Fragmentation and Capital Investment Efficiency( 2021)This study examines how equity market fragmentation affects firms’ capital investment decisions. Recent empirical research finds that market fragmentation lowers trading costs and thus improves market quality. We examine whether this increase in market quality translates into greater revelatory price efficiency, where stock prices reveal with greater precision information to managers and/or creditors about firms’ investment opportunities. Consistent with this notion, our findings reveal that the association between capital investment and investment opportunities is increasing in market fragmentation. Additional findings suggest that (a) market fragmentation increases revelatory price efficiency at least in part by encouraging information acquisition by equity investors and (b) the more efficient stock prices inform both managers and creditors about firms’ investment opportunities. Inferences based on difference-in-differences and instrumental variable tests are consistent with those based on our primary findings.
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ItemRegulation, Tax, and Cryptocurrency Pricing( 2021)This paper examines whether and how jurisdictional gaps in crypto regulations partially explain the persistent price differentials of the same cryptocurrency across different jurisdictions. Using Bitcoin prices from twelves exchanges located in eight jurisdictions, we discover that variations in both the regulatory framework and specific crypto policies have a significant incremental explanatory power for the cross-jurisdiction disparity in Bitcoin prices. First, greater uncertainty in the regulatory framework for cryptocurrencies is associated with lower Bitcoin prices (denominated in U.S. dollars). Second, Bitcoin prices are lower in jurisdictions that impose income taxes on crypto transactions and mandates banks’ real name verification of crypto accounts that removes anonymity. Bitcoin prices are, however, higher in jurisdictions that apply anti–money laundering laws directly to crypto exchanges and take strong exchange-related enforcement actions. Interestingly, Bitcoin prices are lower in jurisdictions with a larger supply of fiat currencies, suggesting the influence of monetary policies on Bitcoin pricing. Utilizing staggered adoptions of specific cryptocurrency polices, we identify the influence of regulation on crypto pricing using both the difference-in-differences design and the regulatory event study methodology.
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ItemPower of deep learning: Quantifying language to explain cross-sectional returns( 2021)When quantifying information from unstructured textual data, the traditional bag-of-words approach only captures semantic features of single words or phrases. The context, the sequence of words, and the relationship between words are ignored. This paper introduces a novel approach to incorporate complex syntactical featuresin the textual analysis using machine learning (i.e., neural-network-based natural language parser and word embedding). We construct a new measure of sentiment that is specific to performance discussions and is adjusted for complex contextual negations. We find that this performance-specific sentiment explains cross-sectional returns and future operating performance better than the umbrella sentiment proxies used in the literature
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ItemThe Impact of Conservatism and Supply Chain Finance on Bad Debt Expense( 2021)Standard accrual models assume a linear relation between accruals and changes in sales. However, due to conservatism, working capital items such as receivables can be written off but are rarely written up, creating an asymmetry that linear models do not capture. We compare the modified Jones model with models based on accounting methods for bad debt expense (BDE). We find that models that incorporate conservatism have much better explanatory power, especially during recessions when write-offs are bigger. Moreover, modeling conservatism highlights the effect of contracting innovations that influence the risk of receivables and hence BDE. We find that supply chain finance, which has gained popularity after the 2007-08 financial crisis, contributed to recent decreases in the levels and volatilities of write-offs and BDE. Our study highlights the importance of modeling individual accruals using accounting methods, adjusting for conservatism, and incorporating business innovations that affect accounting practice.
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ItemThe Explanatory Power of Explanatory Variables( 2021)This paper concerns potential disparities between narratives and statistical evidence in empirical accounting research. We focus on the extent to which a regression model’s main variable of interest contributes incrementally to the explanation of the dependent variable. We replicate ten recently published accounting studies, all of which base their conclusions on t-statistics and statistical significance. In eight of the replicated studies, we find that the incremental explanatory power contributed by the main variable of interest is effectively zero. For the remaining two, the incremental contribution is at best marginal. These findings highlight the apparent overreliance on t-statistics as the primary evaluation metric. T-statistics tend to reject the null hypothesis primarily due to a large numbers of observations (N), a point we examine in detail. As a potential remedy, we evaluate the use of Standardized Regressions (SR). The magnitudes of estimated SR coefficients indicate variables’ relevance directly. Empirical analyses establish a strong correlation between a variable’s estimated SR coefficient magnitude and its incremental explanatory power, without reference to N or t-statistics.
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ItemHow Do Venture Capital Firms Manage Narcissistic Entrepreneurs?( 2021)Narcissism could turbocharge or doom a promising entrepreneurial company. We study how venture capital firms (VCs), one major capital provider for early-stage entrepreneurial companies, manage narcissistic entrepreneurs. We find that VCs prefer to invest in companies with narcissistic entrepreneurs. Conditional on investing in entrepreneurial companies, VCs are also more likely to impose contingent contracts on narcissistic entrepreneurs that would require the latter to compensate the VCs if certain pre-specified targets fail to be met. Furthermore, conditional on accepting the contingent contracts, narcissistic entrepreneurs are subject to more restrictive contingent contracts.