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.     

The impact of accelerating 20-F filing

This study examines the impact of the SEC’s decision to accelerate the 20-F filing deadline from six to four months after the fiscal year-end for foreign private issuers (FPIs). We find that only large FPIs experience a significant positive market reaction around the accelerated 20-F filing date, and such acceleration is associated with an improved reporting environment. We also find that only large FPIs benefit from further acceleration of 20-F filing deadline from four to three months after the fiscal year-end. Additionally, any further acceleration of 20-F filing does not benefit all sizes of the FPIs. Our results contribute to the debate about whether it is beneficial for the FPIs to accelerate their 20-F filing deadline to align with the 10-K filing deadlines.     

The new Form 8-K disclosures

The Securities and Exchange Commission (SEC) has mandated new disclosure requirements in Form 8-K, which became effective on August 23, 2004. The SEC expanded the list of items that have to be reported and accelerated the timeliness of these reports. This study examines the market reactions to 8-Ks filed under the new SEC regime and investigates whether periodic reports (10-K/Qs) became less informative under the new 8-K disclosure rules. We observe that the newly required 8-K items constitute over half of all filings and that most firms disclose the required items within the new shortened period (four business days). We find that all disclosed items (old and new) are associated with abnormal volume and return volatility around both the event and the SEC filing dates, and some items have significant return drifts after the SEC filings. Surprisingly, we find that the information content of periodic reports has not diminished by the more expansive and timely 8-K disclosures under the new guidance, possibly indicating that investors may use periodic filings to interpret the effects of material events that had been disclosed earlier.     

The 15-day debate and the value of early release of information: Evidence from 10-K filings

We analyze the impact of enforcing a 60-day 10-K deadline on large accelerator filers (LAFs) relative to enforcing a 75-day deadline on accelerator filers (AFs) from 2006 to 2015. Using a regression discontinuity design, we find that LAFs are more likely to issue restatements after the 2006 SEC filing acceleration (“regulation”) has been introduced. The regulation causes LAFs to have lower information asymmetry, which is consistent with our finding that LAFs’ Internet search traffic for filings is lower. Overall, the market does not react stronger toward LAFs’ 10-K filings even though their 10-K filings are more timely. An unintended consequence of the regulation is an increase in filings by other firms during LAFs’ 10-K filing dates, which reduces investors overall attention toward these filings.     

Proximity to the SEC and Stock Price Crash Risk

We explore the possibility that Securities Exchange Commission (SEC) oversight influences disclosure practices in a manner that reduces the likelihood of individual stock price crashes. Firms located farther from the SEC have greater stock price crash risk and this result is more pronounced for firms with financial statements that are less readable (those with larger 10‐K filings) and more pronounced when SEC budgets are relatively smaller. Similar results are obtained in response to SEC regional office location changes that are more likely to be exogenous. Our results suggest that SEC oversight induces disclosure practices that reduce the likelihood of large negative disclosures.     

Enforcement mechanisms for SEC reporting deadlines

SEC filing deadlines accelerated for many firms over the past decade; nevertheless, the percentage of late 10-K filings has decreased by historical standards. From 2000 to 2007, six percent of 10-Ks are late but remain SEC compliant (via a Form 12b-25 filing). An additional 2.5 percent of all 10-K filings are both late and non-compliant. When analyzing all 10-K filings (i.e., both timely and late filings), we find that (1) relatively large stock exchanges, (2) greater analyst coverage, and (3) larger audit firms are each associated with improved timeliness and compliance in 10-K report filings.     

The benefits of specific risk-factor disclosures

Practitioners have long criticized risk-factor disclosures in the 10-K as generic and boilerplate. In response, regulators emphasize the importance of being specific. By using a computing algorithm, this paper establishes a new measure (Specificity) to quantify the level of specificity of firms’ qualitative risk-factor disclosures. We first examine determinants of variations in Specificity, and document that firms with high proprietary costs provide less specific risk-factor disclosures. More importantly, we find that, controlling for numerous determinants, the market reaction to the 10-K filing is positively and significantly associated with Specificity. In addition, our results suggest that analysts are better able to assess fundamental risk when firms’ risk-factor disclosures are more specific. Together, these findings suggest that more specific risk-factor disclosures benefit users of financial statements.     

The information content of mandatory risk factor disclosures in corporate filings

Beginning in 2005, the Securities and Exchange Commission (SEC) mandated firms to include a “risk factor” section in their Form 10-K to discuss “the most significant factors that make the company speculative or risky.” In this study, we examine the information content of this newly created section and offer two main results. First, we find that firms facing greater risk disclose more risk factors, and that the type of risk the firm faces determines whether it devotes a greater portion of its disclosures towards describing that risk type. That is, managers provide risk factor disclosures that meaningfully reflect the risks they face. Second, we find that the information conveyed by risk factor disclosures is reflected in systematic risk, idiosyncratic risk, information asymmetry, and firm value. Overall, our evidence supports the SEC’s decision to mandate risk factor disclosures, as the disclosures appear to be firm-specific and useful to investors.     

The effect of EDGAR on the market reaction to 10-K filings

This paper examines the impact of making accounting information available on the Internet simultaneously and almost costlessly to all market participants. More specifically, we examine if filing form 10-K on EDGAR has any effect on the information dissemination process when compared to the traditional method of filing. We examine a random sample of firms that file on EDGAR for the first time and compare the market response to their 10-K filing to that of the previous year's filing which was not on EDGAR. Consistent with the preexisting literature, we do not find a market reaction to the pre-EDGAR filing. In contrast, we find both a price and volume reaction to 10-K's filed on EDGAR. We perform a variety of univariate and multivariate tests to ensure that our results are not driven by other factors, i.e., firm characteristics and timing of 10-K filings. Overall, we find evidence that the market reacts more significantly to 10-K's filed on EDGAR. In our multivariate tests we also examine whether the EDGAR effect is more important for certain types of firms. Consistent with our expectations, we find the EDGAR effect is smaller for faster growing firms for which we believe there are more non-EDGAR sources of information. Finally, we document that, on average, 10-K's filed on EDGAR are filed earlier than 10-K's filed under traditional methods.     

Did accelerated filing requirements and SOX Section?404 affect the timeliness of 10-K filings?

This paper examines the effect of Sarbanes-Oxley provisions on 10-K filing delays. We find that tightened filing deadlines for accelerated and large accelerated filers are not associated with changes in the incidence of late filing. While Section 404 compliance does not affect filing timeliness for firms with effective internal controls, we find that about half the firms disclosing internal control weaknesses are late filers. As a consequence, many Section 404 material weakness firms experience negative abnormal returns around late filing notifications before filing the 10-K. Lastly, we find that market reactions to late filing notifications are more negative when management provides no meaningful explanation for the delay, consistent with managers’ incentives to withhold bad news.     

Cross-market information transfers of ADR firms: An investigation of emerging market economies

Level II and III ADRs permit issuers to be listed on the major U.S. exchanges with the stipulation that they comply with extensive SEC disclosure requirements. Foreign private issuers are compelled to file a set of audited financial statements prepared in accordance with U.S. GAAP, or alternatively, IFRS or Home Country Accounting Principles with attendant reconciliation to U.S. GAAP prior to 2008. Although the Form 20-F reconciliation is discontinued in 2008 for IFRS filers, non-U.S. issuers are required to satisfy other Form 20-F stipulations such as expanded Item 17 and Item 18 disclosures. We conjecture that non-U.S. firms choosing to be listed on the major U.S. exchanges will incur the added costs associated with the supplemental disclosure requirements in order to attract sufficient investor attention as to have the disclosures impounded in the home country equity share price in the manner described by Fishman et al. (1989). Because a prominent attribute of ADR firms is that they benefit from multiple-market trading, we investigate whether the Form 20-F disclosure cross-market information transfers are associated with emerging market economy status. We employ models of the cross-market ADR and equity security share returns and trading volume controlling for the emerging economy status and incremental firm-specific SEC Form 20-F accounting principles disclosures. Preliminary results indicate that (1) U.S. listed ADR firms from emerging economies experience greater cross-market information transfers associated with the SEC Form 20-F filing, and (2) that the increased cross-market information transfers associated with the SEC Form 20-F filing are proportional to the difference in quality of accounting principles employed for home country reporting purposes vis-à-vis the accounting principles employed for SEC Form 20-F reporting purposes. Results are consistent with a feedback process through which the new information disclosed by the SEC Form 20-F reporting requirements in the ADR market attenuates the price discovery process in the home country equity market when the difference in information environment quality is large.     

Unintended Consequences of Granting Small Firms Exemptions from Securities Regulation: Evidence from the Sarbanes‐Oxley Act

This paper provides evidence about the unintended consequences arising when small companies are exempted from costly regulations—these firms have incentives to stay small. Between 2003 and 2008, the SEC postponed compliance with Section 404 of the Sarbanes‐Oxley Act of 2002 (SOX) for “non‐accelerated filers” (firms with public float less than $75 million). We hypothesize and find that some of these firms had an incentive to remain below this bright line threshold. Moreover, we document that these firms remained small by undertaking less investment, making more cash payouts to shareholders, reducing the number of shares held by non‐affiliates, making more bad news disclosures, and reporting lower earnings than control firms. Finally, there is no evidence that firms remaining small are doing so to maintain insiders' private control benefits. These findings have implications beyond SOX because numerous federal and state regulations exempt small firms via bright line size thresholds.     

Financial reporting complexity and investor underreaction to 10-K information

We study the immediate and delayed market reaction to U.S. Securities and Exchange Commission (SEC) EDGAR 10-K filings. Unusual trading volumes and stock-price movements are documented during the days around the 10-K filing dates. The abnormal price movements are positively associated with future accounting profitability, indicating that 10-K reports contain useful information about future firm performance. In addition, investors’ reaction to 10-K information seems sluggish, as demonstrated by the stock-price drift during the 12-month period after 10-K filing. We find that investors’ underreaction tends to be stronger for firms with more complex 10-K reports.     

The information content of SEC accounting series release no. 190

The study examines the security price behavior of firms at the time of three events: the proposal of the SEC's accounting series release (ASR 190) to require replacement cost disclosures, the adoption of ASR 190, and the initial filing of the data with the SEC. The primary analysis focuses upon differential security return behavior among reporting firms. Several extensions, including a comparison with nonreporting firms, are also conducted. The basic findings indicates no security price effects and is consistent with the hypothesis that no information was provided to the market during the three time intervals studied. Alternatively, the inability to find an effect may be due to a misspecification in the research design. However, the basic finding is robust under several additional analyses and specifications.     

Do short sellers anticipate late filings?

Exploiting the setting of firms that are unable to disclose timely financial reports and thus must file with the U.S. Securities and Exchange Commission (SEC) the NT 10-K (Q) report, this study examines whether short sellers target firms with financial reporting weaknesses. We find that short interest increases in firms prior to the NT 10-K (Q) filing, suggesting that short sellers identify and target firms that cannot file their financial reports in a timely manner. Short selling is positively significantly related to subsequent late filing status, and is more pronounced in late filers with high newswire activity and with accelerated filing deadlines. Short selling of late filing firms is significantly negatively related to subsequent performance thereby suggesting that short sellers' trades pertinent to late filers are profitable. Overall, the results underscore a high information processing ability of short sellers in the setting of firms that exhibit financial reporting deficiencies.     

Large‐Sample Evidence on Firms’ Year‐over‐Year MD&A Modifications

The Securities and Exchange Commission (SEC) has expressed concern about the informativeness of firms’ Management Discussion and Analysis (MD&A) disclosures. A firm's MD&A is potentially uninformative if it does not change appreciably from the previous year after significant economic changes at the firm. We introduce a measure for narrative disclosure—the degree to which the MD&A differs from the previous disclosure—and provide three findings on the usefulness of MD&A disclosure. First, firms with larger economic changes modify the MD&A more than those with smaller economic changes. Second, the magnitude of stock price responses to 10‐K filings is positively associated with the MD&A modification score, but analyst earnings forecast revisions are unassociated with the score, suggesting that investors—but not analysts—use MD&A information. Finally, MD&A modification scores have declined in the past decade even as MD&A disclosures have become longer; the price reaction to MD&A modification scores has also weakened, suggesting a decline in MD&A usefulness.     

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.     

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.     

Eliminating the 20-F reconciliation from IFRS to U.S. GAAP: Short-term and long-term liquidity effects

This paper examines the effects of the SEC’s 2008 decision to no longer require foreign private issuers using IFRS and trading on U.S. exchanges to reconcile their financial statements to U.S. GAAP. Extant research has found conflicting results using short event windows, while studies using longer event windows have found limited capital market impact from eliminating the reconciliation. Motivated by the SEC’s interest in understanding how disclosure rules impact market liquidity, we examine changes in effective bid-ask spreads, the price impact of trades, and quoted depth around 20-F filing dates for a sample of foreign private issuers. We find that effective spreads increase more around 20-F filing dates for filers using IFRS than for filers using U.S. GAAP, suggesting the 20-F report is more informative for filers using IFRS. We then find, in a subsample of filers using IFRS, that the increase in effective spreads for IFRS firms around 20-F filing dates is directly related to the magnitude of differences in book values between IFRS and U.S. GAAP. In sum, our results suggest a loss of useful information after the SEC’s rule change.