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This paper uses three alternating changes in hedge fund regulation to study whether regulation reduces hedge funds' misreporting, and, if so, why regulation is effective. Relative to public companies, hedge fund regulation is relatively light. Much of the regime is a "comply‐or‐explain" framework that allows funds to forego compliance with governance rules, providing that they disclose their lack of compliance. The results show that regulation reduces misreporting at hedge funds. Further analysis suggests that the disclosure requirements led funds to make changes in their internal governance, such as hiring or switching the fund's auditor, and that these changes induced funds to report their financial performance more accurately. [ABSTRACT FROM AUTHOR]

How do U.S. companies respond to incentives intended to encourage domestic manufacturing? I study the Domestic Production Activities Deduction (DPAD), which was enacted in the American Jobs Creation Act (AJCA) of 2004 and was the third largest U.S. corporate tax expenditure as of 2017. Using confidential data from the U.S. Bureau of Economic Analysis, I find greater average domestic investment spending of $95.5–$143.6 million, but only within the sample of domestic‐only firms and not until 2010, when the greatest statutory DPAD benefits were available. Additional evidence suggests that U.S. multinational claimants invest abroad rather than in the United States and that the increased investment by DPAD firms is accompanied by a reduction in the domestic workforce, consistent with a substitution of capital for labor. I also show that the delayed investment response is due to firms engaging in other responses first, such as changing corporate reporting to shift income across time and borders. Quantifying the extent of these effects contributes to the literature that studies this tax deduction and informs policy makers as to the effectiveness of both manufacturing incentives and U.S. corporate income tax rate reductions in stimulating real domestic activity. [ABSTRACT FROM AUTHOR]

This paper examines the effect of market participants' information processing costs on firms' disclosure choice. Using the recent eXtensible Business Reporting Language (XBRL) regulation, I find that firms increase their quantitative footnote disclosures upon implementation of XBRL detailed tagging requirements designed to reduce information users' processing costs. These results hold in a difference‐in‐difference design using matched nonadopting firms as controls, as well as two additional identification strategies. Examination of the disclosure increase by footnote type suggests that both regulatory and nonregulatory market participants play a role in monitoring firm disclosures. Overall, these findings suggest that the processing costs of market participants can be significant enough to impact firms' disclosure decisions. [ABSTRACT FROM AUTHOR]

Using aggregate data from national accounts, we study whether strengthening and harmonizing securities regulation across the European Union increases household equity ownership. We find a significant increase in the proportion of liquid assets invested in equity, both when a household's own country adopts the regulation and when other countries adopt the regulation. To directly explore the mechanism through which households' willingness to directly invest in the equity market increases, we show that the effect of securities regulation is stronger in countries where trust is low and between countries where cultural biases are most pronounced. [ABSTRACT FROM AUTHOR]

Motivated by concerns that financial positions impair analyst objectivity, we examine investor perceptions of the financial positions of nonprofessional analysts (hereafter NPAs) writing on the social media outlet Seeking Alpha. We find that NPA positions contribute directly to short-window returns surrounding the article's publication, holding constant the information in the article as well as contemporaneously issued news from professional analysts, managers, and the business press. Contrary to concerns that stock positions are associated with biased analysis, we find no evidence that NPA positions reduce investor responses to the tone of the article. In fact, our evidence suggests that holding a position magnifies investor responses to both positive and negative tone, although this effect is limited to tone that is contrary to the NPA's stock position. Overall, our findings suggest that, contrary to regulators' concerns, NPA stock positions do not decrease the credibility and informativeness of their analyses. [ABSTRACT FROM AUTHOR]

We examine the long-term effects of interventions by activist hedge funds. Research documents positive equal-weighted long-term returns and operating performance improvements following activist interventions, and typically conclude that activism is beneficial. We extend the literature in two ways. First, we find that equal-weighted long-term returns are driven by the smallest 20% of firms, with an average market value of $22 million. The larger 80% of firms experience insignificant negative long-term returns. On a value-weighted basis, which likely best gauges the effects on shareholder wealth and the economy, we find that pre- to post-activism long-term returns insignificantly differ from zero. For operating performance, we find that prior results are a manifestation of abnormal trends in pre-activism performance. Using an appropriately matched sample, we find no evidence of abnormal post-activism performance improvements. Overall, our results do not strongly support the hypothesis that activist interventions drive long-term benefits for the typical shareholder, nor do we find evidence of shareholder harm. [ABSTRACT FROM AUTHOR]

In this article, we highlight key trends and several European corporate reporting initiatives shaping the European corporate reporting landscape. We argue for a holistic approach towards enhancing and future proofing disclosure regulation and ensuring that corporate reporting information is fit for purpose. We outline seven principles that should be considered during the development of either mandatory disclosure requirements or voluntary reporting frameworks related to both financial and non-financial information. We also acknowledge that there are inherent limitations to the benefits and information value that can be gleaned from disclosures. These limitations should be factored in the design of disclosure regulation. [ABSTRACT FROM AUTHOR]

In the light of growing legislation on company disclosure of ecological and social information such as the US Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd Frank Act) from 2010, the UK Modern Slavery Act 2015 and the recent EU Directive 2014/95/EU on disclosure of non-financial and diversity information by certain large undertakings and groups (CSR Directive) and its German implementation act (CSR-RUG), this article seeks to assess the contribution of company disclosure laws to improving human rights performance of companies and reducing poverty. Put more generally, can disclosure law actually trigger a change in behaviour? It begins by recalling why we need sustainability or corporate social responsibility (CSR) laws, then discusses key issues of the CSR Directive and the German implementation act, looks into some practice and will draw some conclusions. Its main thesis is that the first step of companies on their way to acting socially responsibly is to know and show their environmental and human rights impacts. Thus, company disclosure laws of non-financial information can be a valuable first step towards more sustainability if designed in the right way. [ABSTRACT FROM AUTHOR]

We conducted a type of "field experiment" in September 2017 to evaluate how difficult it will be for companies to implement the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). We examined the disclosures of 15 of the largest oil & gas companies by market cap that had filed a 10‑K or 20‑F in 2016, so before the TCFD's recommendations were published. In general, we found reporting for that year uneven, with some TCFD categories fairly well covered and others not. We also found variation across companies, with most making fairly modest disclosures but some being fairly progressive in this regard. Significantly, we also found that most of the disclosures were in voluntary sustainability reports, not the financial filings required by statute and as recommended by the TCFD. Taken in the aggregate, at least one company was reporting on each of the 11 recommendations with one exception. This suggests that it is feasible for companies in this sector to follow the TCFD's recommendations if they are interested in doing so. [ABSTRACT FROM AUTHOR]

We exploit the introduction of Regulation G (RegG) by the U.S. Securities and Exchange Commission (SEC) in 2003 to study the association between non-GAAP earnings disclosure and debt market outcomes. Specifically, we focus on a subset of 199 S&P 500 firms to analyse the association between non-GAAP earnings disclosure and long-term issuer credit ratings as well as bond spreads before and after the regulatory intervention. We find that post-RegG, correlation between non-GAAP earnings disclosure and bond spreads changes from positive to negative but do not document any change in its correlation with respect to credit ratings. Our study provides first evidence that post-RegG, bond investors, but not rating agencies, seem to view non-GAAP earnings disclosure favourably as part of their credit risk assessment. In practical terms, our results document a specific benefit of RegG and may inform the SEC that its goal of more accurate security pricing extends to the bond markets, which is an under-researched area in the context of non-GAAP regulation. [ABSTRACT FROM AUTHOR]

This paper discusses targeted transparency regulation by securities regulators: corporate disclosure regulation aimed at nudging firms towards changing their business activities in socially desirable ways. Using Corporate Social Responsibility disclosures and other prominent examples, we first document disclosure regulators' public policy objectives. Based on a framework that develops the causal chain linking a disclosure mandate to the desired corporate action, we review empirical evidence on the effectiveness of targeted transparency implemented via securities regulation. The paper concludes with a discussion of opportunities and challenges for future research in this area. [ABSTRACT FROM AUTHOR]

Core & More aims to present corporate reporting 'smarter' by organising financial and non-financial information in a more connected, logical and structured way. Key information that is likely to be relevant for a wide range of stakeholders would be captured in the Core report, and supplementary details for a more specific audience would form the More reports. Core & More reports would be connected digitally. In the future, more companies are also expected to seek to obtain 'integrated' assurance on both their financial and non-financial information in the Core & More reports. [ABSTRACT FROM AUTHOR]

Financial reports have grown significantly over recent years due to new disclosure and reporting requirements mandated by policymakers, regulators, and standard setters. Entities that have to comply with these requirements seek to maximise efficient reporting processes and do not usually review their disclosure packages on a yearly basis. To overcome this challenge, a thorough debate is needed about (a) what kind of information should (still) be reported and (b) how and where that kind of information should be reported - preferably without comingling the two issues. [ABSTRACT FROM AUTHOR]

Transparent corporate reports are required for reducing the asymmetric distribution of information between providers of capital and company management. In recent years, several major trends have led to an increase in the volume and complexity of corporate reports, jeopardizing the usefulness of such information. The article compares and contrasts, from a preparers' perspective, certain current initiatives which have the potential to increase this complexity even further, with encouraging developments observed in Anglo-Saxon jurisdictions that counter disclosure overload. In closing, the author provides his thoughts how the current disclosure regime could be improved. [ABSTRACT FROM AUTHOR]

We examine the effect of annual report textual complexity on firms' stock liquidity. Using techniques from computational linguistics, we predict and find that less readable filings are associated with lower stock liquidity. Our study provides evidence that difficult‐to‐read annual reports hinder investors' ability to process and analyze information contained in corporate annual reports, reducing thereby their willingness to trade which decreases stock liquidity. Our findings are robust to a battery of sensitivity tests, including endogeneity, use of alternative estimation techniques, and use of alternative liquidity and readability proxies. [ABSTRACT FROM AUTHOR]

Gatekeepers in financial markets have the power to provide the institutional stability, fortitude, and direction necessary for the development and the smooth functioning of capital markets. At the same time, they are often motivated by their own private incentives. This along with the tradeoffs they face, and the at‐times unintended consequences of the regulations they propose and enforce, can undermine their effectiveness. A thorough understanding of gatekeepers and their roles can thus illuminate academics, the financial community, and regulators on how such gatekeepers can be the most effective and generate the greatest benefits for capital markets. Since gatekeeping roles and the literature they have inspired encompass a wide array of institutions and agencies, our overview concentrates on those that the conference papers appearing in this volume focus on. We conclude that collectively, the papers contribute to significant progress, and point out some crucial areas that call for further investigation and offer opportunities for future research. [ABSTRACT FROM AUTHOR]

This study examines whether requiring the disclosure of audited financial statements disciplines managers' mergers and acquisitions (M&As) decisions. When an M&A transaction meets certain disclosure thresholds, the Securities and Exchange Commission (SEC) requires the public acquirer to disclose the target's audited financial statements after the merger is completed. Using hand‐collected data, I find that the disclosure of private targets' financial statements is associated with better acquisition decisions. Furthermore, I find that this disciplining effect of disclosure is more pronounced when monitoring by outside capital providers is more difficult and costly, and when other disciplining mechanisms are weaker. Finally, these findings are robust to several alternative explanations, such as monitoring from blockholders and voluntary disclosures. In sum, the evidence suggests that the ex post mandatory disclosure of private targets' accounting information disciplines managers' acquisition decisions and improves acquisition efficiency. [ABSTRACT FROM AUTHOR]

Prospect theory describes people as bounded rational decision maker. What sparked widespread discussion after its initial introduction in 1979 is today criticized for lack of applicability. I use the debate about whistleblowing laws to show that prospect theory may be applied prescriptively in economics as a tool to design effective legislation. Whistleblowing is often seen as an important way to uncover fraud, which causes billions of USD in damages annually. I first examine the fragmented legal landscape across Europe, showing that it can be framed as one favoring rewards or the prevention of losses. I conduct an experiment with 39 university students, wherein legislative incentives are evaluated under a prospect theoretical frame in a setting of ambiguity and high stakes. Results suggest that people exhibit the typical s-shaped value function and loss aversion in line with prospect theory. In addition, their intention to whistleblow is more heavily reduced by losses than increased by gains. The study adds to the scarce literature of prospect theory on decisions in ambiguous contexts—as well as to the applicability of the theory as a prescriptive instrument in designing institutional frames. For whistleblowing in particular, a protection-based approach seems most promising. [ABSTRACT FROM AUTHOR]

A widely held assumption in policy making and empirical research is that increasing the strength of public enforcement improves financial reporting quality and audit quality. This paper provides a more nuanced view. In a model with a manager who can manage earnings, a strategic auditor, and an enforcement institution, we show that enforcement and auditing are complements in a weak enforcement regime but can be substitutes in a strong regime. Although stronger enforcement always mitigates earnings management, the effects of different instruments of strengthening enforcement are ambiguous. We show that they can improve or impair financial reporting quality and audit quality, depending on production risk, accounting system characteristics, and the scope of auditing relative to enforcement. [ABSTRACT FROM AUTHOR]

We examine the impact of disclosure by defendant firms on the outcome of securities fraud class actions. We hypothesize that firms issuing a higher quantity of disclosure will experience more adverse litigation outcomes, given the strict pleading standards of the Private Securities Litigation Reform Act (PSLRA). Using broad measures of disclosure derived from press releases issued during the class period, we find that more disclosure increases the likelihood that the judge will allow a lawsuit to proceed rather than dismissing it. Our results provide new insights to the literature on disclosure and litigation by studying the outcome rather than incidence of litigation, or the plaintiffs' decision to sue. We strengthen the inference that the features of the PSLRA create a positive relationship between overall disclosure and the likelihood of settlement by showing that the relationship holds when controlling for forward-looking disclosure and ex ante litigation risk, and by providing evidence that more public disclosures allow plaintiffs to present more extensive cases. [ABSTRACT FROM AUTHOR]

Prior research finds that mandatory risk factor disclosures are informative in that they increase investors' assessments of the volatility of a firm's cash flows. However, the literature is silent as to whether these disclosures provide information about the level of future cash flows and, ultimately, their implications for firm value. We address this question by examining the association between Form 10-K risk factor disclosures and future cash flows levels and stock returns. We use the setting of taxes because it is relatively easier to identify the specific income and cash flow statement line items to which these risks relate, and offer two main results. First, we find that tax risk factor disclosures are positively associated with future cash flows. This suggests that, on average, tax risk factor disclosures relate to tax positions that are rewarded with future tax savings. Second, we find that investors incorporate this relation into stock prices. In additional analysis, we find no evidence of a drift in stock prices, suggesting that investors incorporate the implications of tax risk factor disclosures in a timely manner. Overall, our results suggest that risk factor disclosures provide information about the level of a firm's future cash flows, that the risks discussed in these disclosures are – on average – value-increasing, and that investors incorporate this information into current stock prices. [ABSTRACT FROM AUTHOR]

I compare voting positions taken by Financial Accounting Standards Board (FASB) members on standards to positions taken by constituent sponsors in comment letters both before and after the emergence of the FASB's conceptual framework. I find that, relative to the Pre-CF regime (1973–1986), FASB members in the CF regime (1987–2007) take positions that are (i) less like their constituent sponsors and (ii) more like one another. Both shifts are associated with standards increasing accounting relevance; in the CF regime, such standards are likely a product of the framework's broad focus on decision usefulness. From 1996 to 2007, all but one dissenting vote on fair value standards explicitly argues for an even greater use of fair values, while none argue for less use. To the extent standard-setters' idiosyncratic ideologies influence their voting positions, the evidence is consistent with a decline in the level of ideological diversity among FASB members. [ABSTRACT FROM AUTHOR]

The mandatory adoption of International Financial Reporting Standards (IFRS) has been the most noteworthy accounting regulatory change in a multitude of countries. After adopting IFRS, the gap between accounting earnings and taxable income increases in most of these countries. Previous literature suggests that low book-tax conformity is associated with higher corporate tax avoidance, thereby collecting lower income tax revenues. This study applies the propensity score matching method and the difference-in-differences design to empirically examine the impact of the government-mandated adoption of IFRS on a country's income tax revenue. Using panel data of 137 countries covering the period from 2000 to 2010, the empirical results show that the mandatory IFRS adoption results in a decrease in income tax revenue. [ABSTRACT FROM AUTHOR]

This study constructs a model of the determinants of earnings announcement tone in order to examine the impact of CEO power on earnings announcement tone. An interaction term between CEO power and board monitoring is used to test whether effective board oversight moderates the strength of the association between CEO power and earnings announcement tone. Following prior research, we measure earnings announcement tone as the spread in the proportion of positive and negative words in the announcements. CEO power is assessed across two dimensions: (1) expert power (CEO tenure) and (2) structural power (CEO-chairman duality). We use board independence, meeting frequency, and board meeting attendance to measure the effectiveness of board oversight. We find that earnings announcement tone is significantly positively associated with CEO tenure and CEO duality. The effect of CEO tenure is weaker when board oversight is stronger, especially when board members have higher reputation costs, whereas the effect of CEO duality is unchanged by board oversight mechanisms. The empirical evidence is broadly consistent with the notion that powerful CEOs use a more optimistic and aggressive tone in their earnings' announcements and that stronger board oversight is effective in constraining overt aggressiveness in the earnings announcements issued by CEOs with longer tenure but not those issued by dual-role CEOs. The results are robust to several sensitivity tests. Finally, this study identifies CEO power and board oversight as previously unrecognized determinants of tone in earnings announcements. [ABSTRACT FROM AUTHOR]

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