Heterogeneity in the information content of 8-K disclosures about private targets: Acquirer size and target significance

In this paper, we empirically analyze the disclosures required by the Securities Exchange Commission (SEC) for acquisitions of privately held target firms by public acquirers. We find that 8-K disclosures filed by public acquirers within a week after the announcement date of the takeover of a privately held target firm materially affect the pricing and the trading of the acquirers' shares around the event date, but only for large acquiring firms. This impact is economically significant even for targets classified as “insignificant” by the SEC, but again, only for large acquirers. Our results suggest that it may be optimal to further reduce the disclosure costs faced by smaller acquirers in acquisitions of private targets.     

Discretionary compliance with mandatory environmental disclosures: Evidence from SEC filings

We examine the determinants of adherence to U.S. Securities and Exchange Commission (SEC) mandated disclosures of environmental sanctions. Our sample includes non-superfund U.S. Environmental Protection Agency (EPA) sanctions between 1996 and 2005. Our results suggest that firms are more likely to provide sanction disclosures if they operate in environmentally sensitive industries, are subject to larger penalties and are voluntarily participating in a supplemental environmental project. Our results also suggest that firms are less likely to disclose sanctions involving judicial proceedings. Overall, we find that voluntary disclosure incentives impact compliance with mandatory reporting requirements. Although incentives exist for firms to comply with mandatory disclosures, our results suggest that increases in mandatory environmental accounting disclosures may not be effective under the current regulatory system despite the use of bright-line materiality thresholds. Our study contributes to the current and ongoing debate about the role and effectiveness of environmental risk disclosure mandates in providing information to the marketplace, as well as “mandated disclosure” rules in general. The value attributed to current and potential environmental disclosure regulations cannot be thoroughly understood without examining disclosure compliance with existing regulations. From an environmental and sustainability disclosure perspective, our findings are particularly germane since these disclosures focus on risks, liabilities, or other reputational shortcomings of the firm.     

Information Asymmetry and Voluntary SFAS 157 Fair Value Disclosures by Bank Holding Companies During the 2007 Financial Crisis

We hand‐collect SFAS 157 voluntary fair value disclosures of 18 bank holding companies. The SEC's Division of Corporate Finance likely targeted these entities in 2008 through their “Dear CFO” letters in which they requested specific, additional disclosure items. We collect disclosures that match the SEC recommendations and create eight common factor disclosure variables to examine the effect of such disclosures on information asymmetry. We find that disclosure variables about the use of broker quotes or prices from pricing services and the use of market indices and illiquidity adjustments are related to lower information asymmetry. However, disclosure variables about valuation techniques and asset‐backed securities are related to greater information asymmetry. We also document that disclosure complexity, and disclosure tone (uncertainty and litigious) is related to greater information asymmetry. These findings are consistent with criticism that corporate disclosures are voluminous; management may obfuscate unfavorable information which in turn increases market participants’ assessment of uncertainty associated with the fair value measures. We caveat that the setting of the financial crisis and a small sample size may limit the ability to generalize these inferences to other time periods or other financial firms.     

Repetitive disclosures in the MD&A

This study is the first to empirically analyze repetitive disclosures in the Management Discussion and Analysis (MD&A) section of the 10‐K filing. Repetitive disclosures refer to the extent that content in the MD&A is repeated from the audited financial statement notes. I empirically analyze repetitive disclosures in the MD&A section of the 10‐K filing, and find that firms tend to use more repetitive disclosures when firms have a new CEO, a high level of new disclosures in the notes, issued equity, and have missed the prior year's earnings benchmark. These findings suggest that not all managers use repetitive disclosures to simply obfuscate disclosures. Rather, some managers use repetitive disclosures to emphasize firm‐specific events, consistent with the succession hypothesis. The Securities and Exchange Commission (SEC) states that repetitive disclosures are uninformative and that such disclosures decrease the informativeness of other disclosures in the MD&A. Casting doubt on the SEC's comments, in my primary analyses, I find that repetitive disclosures are informative to investors; this result is stronger for individual investors. Overall, my results suggest that repetitive disclosures are informative, and such disclosures may be effective tools for providing information to investors.     

Externalities of public firm presence: Evidence from private firms' investment decisions

Public firms provide a large amount of information through their disclosures. In addition, information intermediaries publicly analyze, discuss, and disseminate these disclosures. Thus, greater public firm presence in an industry should reduce uncertainty in that industry. Following the theoretical prediction of investment under uncertainty, we hypothesize and find that private firms are more responsive to their investment opportunities when they operate in industries with greater public firm presence. Further, we find that the effect of public firm presence is greater in industries with better information quality and in industries characterized by a greater degree of investment irreversibility. Our results suggest that public firms generate positive externalities by reducing industry uncertainty and facilitating more efficient private firm investment.     

Financial Opacity and Firm Performance: The Readability of REIT Annual Reports

We examine the capital market pricing implications of firm disclosure opacity as measured by the linguistic readability of REIT annual reports. The SEC has expressed concern that firms selectively manage the transparency of disclosures in order to hide adverse information. After controlling for other non-experimental factors that influence the readability of REIT financial statements, we find (1) financial opacity is negatively related to reported firm performance, and (2) the residual opacity that remains after controlling for other determinants of annual report readability has incremental explanatory power for returns beyond the Fama and French (1992, 1993) risk factors. The opacity risk-return premium persists after controlling for a (heretofore undocumented) stark monotonic decrease in annual report readability following the Sarbanes-Oxley Act of 2002.     

Investor overlap and diffusion of disclosure practices

I develop and test an investor demand-driven explanation for why one firm’s change in voluntary disclosure behavior is emulated by some firms in the industry but not others. I focus on the overlap in institutional investor ownership between two firms as a mechanism by which a first-mover firm’s increase in disclosure prompts investors to seek a similar increase from a follower firm. Using 10-K market risk disclosures as my empirical setting, I find that a firm’s decision to follow a first mover in providing more quantitative information than is required by the SEC is positively associated with an increase in investor overlap from the prior year. I also find that the association is stronger for overlap in large institutional investors, consistent with their greater influence over managers, and for firms where investor uncertainty is high. This association is found after controlling for the herding effect documented in prior studies and after addressing potential endogeneity concerns. Overall, this evidence provides new insight into patterns of intra-industry disclosure behavior and highlights investor overlap as a communication channel and feedback mechanism that helps facilitate the diffusion of disclosure practices.     

Factors Influencing Corporate Environmental Disclosures

We investigate the effectiveness of the Carbon Disclosure Project (CDP), a not‐for‐profit organization that facilitates environmental disclosures of firms with institutional investors, thereby serving as a corporate governance mechanism for shareholders to influence the firm's environmental disclosures. We examine firm characteristics associated with firms' decisions to disclose carbon‐related information via the CDP for a sample of 319 Canadian firms over a four‐year period. In particular, we examine how firms' decisions to disclose via CDP are associated with shareholder activism, litigation risk, and the opportunity for low‐cost positive publicity once requested by the firms' “signatory” investors. Our results also show that management's decision to release climate change data is associated with domestic, but not foreign, signatory investors. We also find that disclosing firms tend to be those from lower polluting industries with less exposure to litigation risk. This suggests that this new form of coordinated shareholder activism may not be successful at altering the behavior of firms that are heavier polluters.     

Are required SEC proxy disclosures about the board’s role in risk oversight substantive?

The U.S. Securities and Exchange Commission (SEC) requires companies it regulates to include disclosures about the board’s role in risk oversight in the annual proxy statement to shareholders. The SEC does not mandate specific content or actions that boards should perform as part of their risk oversight responsibilities, leaving the nature of activities and extent of those disclosures to the discretion of the reporting entity. This study examines whether these disclosures contain substantive information reflective of the effectiveness of the organization’s risk oversight. We find that organizations disclosing more specific information (but not simply more information) about board risk oversight practices are associated with firms independently assessed as having the strongest management and governance processes. These findings suggest that these firms use the discretion provided by the SEC’s disclosure rule to provide substantive and potentially value-relevant information for stakeholders about the entity’s risk management processes and board risk oversight activities.     

The usefulness of firm risk disclosures under different firm riskiness,investor-interest,and market conditions: New evidence from Finland

To date, there is only meager research evidence on the usefulness of mandatory annual report risk disclosures to investors. Although it has been argued that corporate disclosure decreases information asymmetry between management and shareholders, we do not know whether investors benefit from high-quality risk reporting in a highly regulated risk disclosure environment. In this paper, we performed association tests to examine whether the quality of firms' mandatory risk disclosures relate to information asymmetry in the Finnish stock markets. In addition, we analyzed whether the usefulness of risk disclosures depends on contingency factors such as firm riskiness, investor interest, and market condition. We demonstrate that the quality of risk disclosure has a direct negative influence on information asymmetry. We also document that risk disclosures are more useful if they are provided by small firms, high tech firms, and firms with low analyst coverage. We also found that momentum in stock markets affects the relevance of firms' risk reports.     

SEC monitoring of foreign firms’ disclosures in the presence of foreign regulators

SEC comment letters indicate that the SEC has reviewed the firm’s filings and identified a disclosure issue. Using the existence of an SEC comment letter as a proxy for SEC monitoring, we document a negative association between the level of SEC monitoring of foreign firms and the strength of those foreign firms’ home-country institutions, consistent with the idea that the SEC implicitly shares its regulatory duties with international securities regulators. We find that foreign cross-listed firms are subject to lower monitoring intensity than foreign firms listed only on US exchanges, but do not find a statistically significant difference in monitoring between foreign firms listed only on US exchanges and US firms. These findings suggest that it is the presence of another regulator that drives the intensity of SEC monitoring. We also find that US investor holdings are positively associated with the level of SEC oversight, suggesting that the SEC focuses its resources on firms that pose a greater risk to US investors. Collectively, our analyses show that two countervailing forces drive the SEC’s choice to monitor foreign firms. On the one hand, the SEC reduces monitoring intensity when it can rely on the public and private enforcement institutions in the foreign firm’s home country. On the other hand, the SEC provides increased monitoring of certain foreign firms when investors on US exchanges have greater investment exposure in those firms.     

Changes in corporate cybersecurity risk disclosures after SEC comment letters

Gao et al. (2020) examined the content and linguistic characteristics of public companies' cybersecurity risk disclosure practices as well as factors that may drive disclosure trends. In this paper, we extend Gao et al. (2020) by exploring SEC comment letter practices related to cybersecurity risk disclosures and investigating how SEC comment letters lead to changes in companies’ cybersecurity risk disclosures. Coinciding with newly issued cybersecurity guidelines, SEC comment letters related to cybersecurity disclosure deficiencies spiked in 2011. On average, it takes about 26 days for a registrant to respond to a comment letter and only 10 percent of registrants respond within the recommended 10-day period. Most comment letters (75 percent) are resolved within one round of communication. Multiple rounds of communication are often required when deficiencies surround disclosure of a cyber breach. Though 81 percent of registrants respond to comment letters related to cybersecurity breaches by claiming that there was no need for disclosure as the breaches were not material, the SEC will likely reject that claim and require the registrant to provide the required detail. We find evidence that the SEC uses comment letters to signal that the staff wish to see an explicit statement in the registrant’s cybersecurity risk disclosures on whether or not the firm suffered security breaches during a reporting period. The SEC scrutinizes cybersecurity risk disclosures to verify they are sufficient subsequent to a published security breach. Firms change their disclosure behavior one year after receiving a comment letter. Specifically, the length of cybersecurity risk disclosures increases, specificity increases, and readability and clarity improve one year after a registrant receives a comment letter that points to deficiencies in the firm’s cybersecurity risk disclosures.     

What Drives Quality of Firm Risk Disclosure? : The Impact of a National Disclosure Standard and Reporting Incentives under IFRS

This paper examines the impact of a detailed national disclosure standard on the quality of firms' overall risk reviews under IFRS. We use data from a sample of listed Finnish firms around the introduction of the standard and find that national regulatory bodies have been able to raise the quality of risk disclosure on several dimensions even under IFRS. We find increases in the quantity of risk disclosure with more extensive and more comprehensive information. We do not, however, find a corresponding increase in quantitative disclosures and therefore there is some question regarding the influence of the standard on the substance of the risk information provided. In addition to the coercive effect of the standard, several important reporting incentives, such as firm size, profitability, and foreign listing status are documented. We also find some evidence that the impact of the standard on quality is more pronounced among less profitable firms. Additional findings are that larger firms and firms reporting under the requirements of the SEC disclose more quantitative risk information, and that the quality improvements are permanent in the subsequent years. The findings have implications for standard-setters evaluating different strategies with the aim to increase the quality of the narratives in annual reports.     

Decision Usefulness and Accelerated Filing Deadlines

In this study we examine the impact of the Securities and Exchange Commission's (SEC) decision to accelerate the filing of 10‐Ks. The SEC argued that the accelerated deadline would increase the relevance of the disclosures, making the reports more useful. Opponents countered that the accelerated deadline would decrease the representational faithfulness of the disclosures, especially for smaller firms. We document a significant decrease in the 10‐K market reaction for smaller firms as they accelerate from 90 to 75 days. For larger firms we find no significant change in the market reaction from 90 to 75 days. However, as these larger firms accelerate their 10‐K deadline to 60 days, we find a significant increase in the market reaction. We also examine changes in reporting quality, shifts in information content, and changes in 10‐K filing order and clustering and find results that are consistent with accelerated filing having significant impacts on representational faithfulness and relevance.     

Strategic Subsidiary Disclosure

Although subsidiary disclosures in firms’ filings with the Securities and Exchanges Commission (SEC; Exhibit 21) represent the most granular required public disclosure of a firm's geographic footprint, little is understood about the quality of the disclosure, and anecdotal evidence suggests firms may not fully comply with the disclosure requirements. We use data provided by multinational firms to the Internal Revenue Service regarding their foreign subsidiary locations to explore the accuracy of public subsidiary disclosures on Exhibit 21 of Form 10-K per SEC rules. The overall incidence of nondisclosure is low, suggesting that most firms comply with Exhibit 21 disclosure rules, and that for most applications, Exhibit 21 disclosures provide a reasonable proxy for locations of significant subsidiaries. Nevertheless, there is some evidence of nondisclosure, particularly when subsidiaries are in tax havens, when the firm is more highly scrutinized in the media, or when the firm has other characteristics consistent with low-quality disclosures such as SEC comment letters.     

The SEC revolving door and comment letters

Government officials, advocacy groups, and the business press have raised concerns that former SEC employees may continue to influence the SEC after leaving the agency. Using hand-collected data on the characteristics of 1,384 lawyers who represented firms in responding to SEC comment letters between 2005 and 2016, we examine the impact of post-revolving SEC employees on the SEC comment letter process. Among other determinants, we find that older and larger firms with a history of litigation are more likely to hire former SEC lawyers over non-SEC lawyers. Relative to firms that involve only non-SEC lawyers, we find that firms that involve former SEC lawyers in responding to SEC comment letters negotiate to a greater extent with the SEC, and have a lower likelihood and number of amendment filings, after matching on lawyer, law firm, comment letter, and firm characteristics.     

Trade secrets and cyber security breaches

We study the association between firms’ disclosures in Forms 10-K of the existence of trade secrets, and cyber theft of corporate data (which we refer to as “Breaches”). Prior academic research explaining occurrence of Breaches is scarce, and no prior study has focused specifically on Breaches that likely target trade secrets. We provide such evidence, and our use of Form 10-K contents related to trade secrets is a first step toward determining whether corporations actually attract Breach activity through their public disclosures. We find that firms mentioning the existence of trade secrets have a significantly higher subsequent probability of being Breached relative to firms that do not do so. Our results are stronger among younger firms, firms with fewer employees, and firms operating in less concentrated industries. By conducting a battery of additional tests, we attempt to go beyond merely establishing correlations to provide evidence whether such proprietary information can actually attract cyber attacks. Specifically, our results are robust to additional control variables, an instrumental variable approach, firm fixed effects, and a propensity score matching technique.     

The consequences of deviating from financial reporting industry norms: Evidence from the disclosure of foreign cash

This study examines how investors respond to firms’ disclosure practices that deviate from the majority of industry peers (i.e., industry norms). The SEC has made repeated calls for the disclosure of foreign cash in order for investors to have more information in determining firms’ liquidity positions. We examine the association between firm value and the non-disclosure of foreign cash in industries where the majority of firms choose to disclose foreign cash. We define partial disclosure as disclosing permanently reinvested earnings (PRE), but withholding the disclosure of foreign cash, and find that when the majority of industry peers disclose foreign cash, investors discount the firm-specific partial disclosure of foreign operations. This finding suggests that investors have similar information demands as the SEC, and that withholding foreign cash results in a valuation discount. We also find that this discount is more pronounced for firms predicted to have higher levels of foreign cash and higher levels of PRE. The discount in firm value is also concentrated among firms with managers who have more career concerns, suggesting that managers shift the cost of partial disclosure to shareholders instead of bearing the personal reputational cost of full disclosure. Our results are robust to multiple matched samples and entropy balancing. While previous literature has considered the valuation implications of foreign cash disclosures, we reveal the consequences of opting to withhold the disclosure of foreign cash. Our findings should be of interest to both managers and policy-setters in forming their disclosure protocols.