The economic consequences of increased disclosure: Evidence from international cross-listings

We examine market behavior around earnings announcements to understand the consequences of the increased disclosure that non-U.S. firms face when listing shares in the U.S. We find that absolute return and volume reactions to earnings announcements typically increase significantly once a company cross-lists in the U.S. Furthermore, these increases are greatest for firms from developed countries and for firms that pursue over-the-counter listings or private placements, which do not have stringent disclosure requirements. Additional tests support the hypothesis that it is changes in the individual firm's disclosure environment, rather than changes in its market liquidity, ownership, or trading venue, that explain our findings.     

Multinational banking and the international transmission of financial shocks: Evidence from foreign bank subsidiaries

Using bank-level data on 368 foreign subsidiaries of 68 multinational banks in 47 emerging economies during 1994–2008, we present consistent evidence that internal capital markets in multinational banking contribute to the transmission of financial shocks from parent banks to foreign subsidiaries. We find that internal capital markets transmit favorable and adverse shocks by affecting subsidiaries’ reliance on their own internal funds for lending. We also find that the transmission of financial shocks varies across types of shocks; is strongest among subsidiaries in Central and Eastern Europe, followed by Asia and Latin America; is global rather than regional; and becomes more conspicuous in recent years. We also explore various conditions under which the international transmission of financial shocks via internal capital markets in multinational banking is stronger, including the subsidiaries’ reliance on funds from their parent bank, the subsidiaries’ entry mode, and the capital account openness and banking market structure in host countries.     

Beauty is in the eye of the beholder: The effect of corporate tax avoidance on the cost of bank loans

We find that firms with greater tax avoidance incur higher spreads when obtaining bank loans. This finding is robust in a battery of sensitivity analyses and in two quasi-experimental settings including the implementation of Financial Accounting Standards Board Interpretation No. 48 and the revelation of past tax sheltering activity. Firms with greater tax avoidance also incur more stringent nonprice loan terms, incur higher at-issue bond spreads, and prefer bank loans over public bonds when obtaining debt financing. Overall, these findings indicate that banks perceive tax avoidance as engendering significant risks.     

Renegotiation of financial contracts: Evidence from private credit agreements

Using a large sample of private credit agreements between U.S. publicly traded firms and financial institutions, we show that over 90% of long-term debt contracts are renegotiated prior to their stated maturity. Renegotiations result in large changes to the amount, maturity, and pricing of the contract, occur relatively early in the life of the contract, and are rarely a consequence of distress or default. The accrual of new information concerning the credit quality, investment opportunities, and collateral of the borrower, as well as macroeconomic fluctuations in credit and equity market conditions, are the primary determinants of renegotiation and its outcomes. The terms of the initial contract (e.g., contingencies) also play an important role in renegotiations; by altering the structure of the contract in a state contingent manner, renegotiation is partially controlled by the contractual assignment of bargaining power.     

The flight home effect: Evidence from the syndicated loan market during financial crises

This paper shows that the collapse of the global market for syndicated loans during financial crises can in part be explained by a flight home effect whereby lenders rebalance their loan portfolios in favor of domestic borrowers. The home bias of lenders' loan origination increases by approximately 20% if the bank's home country experiences a banking crisis. This flight home effect is distinct from flight to quality because borrowers of different quality are equally affected. The results indicate that the home bias in capital allocation tends to increase when adverse economic shocks reduce the wealth of international investors.     

Relationship lending,hierarchical distance and credit tightening: Evidence from the financial crisis

This paper examines the firms’ credit availability during the 2007–2009 financial crisis using a dataset of 5331 bank–firm relationships provided by borrowers’ credit folders of three Italian banks. It aims to test whether a strong lender–borrower relationship can produce less credit rationing for borrowing firms even during a credit crunch period. The results show that exclusivity of the relationship can mitigate the firm credit rationing. We also verify the influence of lending organizational structure during crisis. A new measure of distance in lending technologies has been introduced: the hierarchical distance calculated as the distance between the branch that originates the loan and the location of the hierarchical level responsible for financing decision. Our findings document a negative impact of distance on credit availability, consistent with the idea that proximity facilitates the transmission of soft information.     

'The apotheosis of holding company accounting': Unilever's financial reporting innovations from the 1920s to the 1940s

The annual reports of Unilever were widely hailed in the 1940s as outstanding examples of holding company accounting. The accounts did indeed contain many new and innovative features, including segment reporting of sales turnover. This contrasts with the frequently negative assessments of the company's reporting before World War II, and the fact that the company was on record as a relatively late adopter of consolidated statements. In this paper, Unilever's reporting practices from the 1920s to the 1940s are analysed. We argue that the reporting changes of the 1940s had clear antecedents in the 1920s and 1930s, when they emerged in conjunction with the transformation of Unilever from a family-dominated enterprise into a professionally managed organisation. We also argue that, in order to evaluate properly Unilever's pre-war reporting practices, one needs to take into consideration the nature of Unilever as a complex federation of companies, rather than a unitary organisation, and to examine the chairman's address at the annual general meetings. The speeches by Francis D'Arcy Cooper, in particular, contained important disclosures not found in the annual reports. By the early 1940s, Unilever's commitment to improve its financial reporting was sufficiently developed for its officials, in particular Geoffrey Heyworth and P.M. Rees, to play important roles in the drafting of the English Institute's Recommendations on Accounting Principles and in the deliberations of the Company Law Amendment Committee whose report led to the Companies Act 1947. We therefore conclude that Unilever should be ranked with such companies as Dunlop Rubber among the key actors in the modernisation of British financial reporting during the 1930s and 1940s.     

Corporate tax,capital structure,and the accessibility of bank loans: Evidence from China

In this paper, we investigate whether listed firms in China adjust their capital structure in response to an increase in the corporate tax rate. Although theories of capital structure suggest that corporate tax is an important determinant of capital structure, how exogenous changes of the tax rate affect firms’ leverage decisions has not been fully explored. We examine a unique circumstance in which the Chinese government increased the corporate tax rate of firms that had previously received local government tax rebates. The evidence indicates that these firms increased their leverage when the corporate tax rate increased. Further investigation suggests that the adjustment of leverage was mostly driven by firms with a high level of access to bank loans.     

Financial market development and the importance of internal cash: Evidence from international data

We examine the impact of financial market development on the extent to which firms have to rely on internal capital for making investments. Using international data from 31 countries for the 1987–1997 period, we find evidence of a negative relationship between financial market development and the importance of internal capital. The evidence is consistent across different estimation procedures, alternative measures of financial constraints and cash flow, and the use of bootstrapped standard errors. Finally, we find that the distortionary effect of negative cash flow observations reported earlier for US data extends to international data as well.     

The adverse selection effect of corporate cash reserve: Evidence from acquisitions solely financed by stock

Corporate cash reserve has an adverse selection effect. Specifically, if investors know a company does not have to issue to invest, an attempt to do so sends a strong signal of overvaluation. This notion has not been explicitly studied in the extant empirical literature, despite its intuitiveness. Using a sample of acquisitions solely financed by stock to exclude the potential complications of free cash flow, I find that announcement returns are lower for a bidder with a higher excess cash reserve. This effect is stronger in hot equity market years or when a bidder's standalone value is more difficult to evaluate. I also find evidence supporting the idea that targets request cash payment to remove “lemon” bidders in normal (non-hot equity market) years, but accept too many stock offers in hot equity market years. After acquisitions, high-excess-cash-reserve bidders operationally outperform low-excess-cash-reserve bidders. Further, they spend more funds on reducing debt but not more on investments, compared with low-excess-cash-reserve bidders. Combined, these results show that cash reserve has information costs. Further, they highlight the importance of the two-sided information asymmetry framework of Rhodes-Kropf and Viswanathan (2004) in describing merger outcomes without resorting to behavioral or agency explanations.     

The capital market implications of the frequency of interim financial reporting: an international analysis

This study examines empirically the extent to which the frequency of interim financial reporting affects stock price volatility over the course of the fiscal year in four countries with different interim reporting regimes: the United States and Canada with quarterly reporting, and Great Britain and Australia with semi-annual interim reporting. It is hypothesized that, in the tradeoff between timeliness and predictive value of the interim reports, semi-annual interim reporting will lead to lesser price volatility after accounting for other potential influences. These expectations are supported in the results found. Moreover, additional tests conducted on American ADRs of British and Australian companies show that those firms have higher volatility than comparable purely domestic firms on their home stock exchanges.

International equity valuation: the relative importance of country and industry factors versus company‐specific financial reporting information

The relative importance of country‐ and industry‐specified factors vis‐à‐vis company‐specific financial statement–based information in explaining equity valuation multiples in an international setting is examined. Both country‐specific effects via previously identified variables and an indicator variable approach are analysed. While company‐specific factors are predominant in explaining cross‐sectional differences in valuation, country and industry factors have sizable incremental explanatory power over them; the latter are not independent, so their relative importance is influenced by how we adjust for this commonality. Using country indicators provides larger incremental explanatory power than using country‐specific factors, suggesting that previously identified factors may be measured with sizeable error or omitted factors are important.     

The effectiveness of position limits: Evidence from the foreign exchange futures markets

This study considers the effects of the relative size of hedger and speculator open interests and the potential impact of implementing position limits on the price discovery process in both JPY–USD and EUR–USD futures markets. Hedging trading exerts a negative impact, regardless of its size, on price discovery in futures markets. Hedgers are less likely to be information motivated, so their trading uniformly delays the price discovery process. However, there is a positive and nonlinear impact of speculators’ trade size on price discovery, the contribution of which depends on the relative size of the speculative open interest. Contrary to conventional wisdom among regulators, speculative trading does not harm the market in terms of market efficiency; as long as the percentage of speculators’ open interest is below an endogenously determined threshold (approximately 20% for EUR–USD and 16.3% for JPY–USD), speculative trading even improves futures market efficiency.     

The role of state and foreign owners in corporate risk-taking: Evidence from privatization

Using a unique database of 381 newly privatized firms from 57 countries, we investigate the impact of shareholders' identity on corporate risk-taking behavior. We find strong and robust evidence that state (foreign) ownership is negatively (positively) related to corporate risk-taking. Moreover, we find that high risk-taking by foreign owners depends on the strength of country-level governance institutions. Our results suggest that relinquishment of government control, openness to foreign investment, and improvement of country-level governance institutions are key determining factors of corporate risk-taking in newly privatized firms.     

The effect of foreign currency hedging on the probability of financial distress

This paper investigates the effect of foreign currency hedging with derivatives on the probability of financial distress. I use Merton’s (1974) structural default model to compute firms’ distance to default as a proxy for their probability of financial distress. Using an instrumental variables approach to control for endogenous hedging and leverage, I find that the extent of foreign currency hedging is associated with a lower probability of financial distress. Whereas previous research finds that the probability of financial distress is a determinant of a firm’s hedging policy, this paper provides direct evidence supporting the hypothesis that the extent of hedging reduces a firm’s probability of financial distress.     

The Dependency of the Banks' Assets and Liabilities: Evidence from Germany

Two decades of developments in risk‐transfer instruments may have fundamentally changed the extent to which banks practice on‐balance sheet term and liquidity transformation. These changes should be deliberated in on‐balance sheet asset‐liability dependencies. By using correlation analyses, we investigate asset‐liability dependency for all three sectors of German universal banks from 1994 to 2007 and find that it declined over our sample period. We also investigate whether asset‐liability dependency varies systematically with a bank's affinity for using risk‐transfer instruments, regulatory capital, and profitability and document several differences between the three sectors of German universal banks.     

The interplay between mandatory country-by-country reporting,geographic segment reporting,and tax havens: Evidence from the European Union

We investigate whether mandatory public country-by-country reporting (CBCR) by European Union (EU) banks affects geographic segment reporting. We find no significant change in the reported number of geographic segments, country segments, or line items per geographic segment disclosed in segment reporting notes after the introduction of CBCR. Consistent with the notion that EU banks may aggregate geographic segments to obfuscate tax haven activities, we find a positive association between tax haven intensity and geographic segment aggregation. Further, we document the location of banks’ operations and the extent of their economic presence in tax havens. We find that EU banks report significantly higher profit margins, turnover per employee, and profit per employee, and lower book effective tax rates for operations located in tax havens, relative to non-tax havens. Our evidence suggests that mandatory public CBCR has limited impact on geographic segment reporting. Nevertheless, CBCR provides additional information to better identify the existence and scale of tax haven involvement. Our results should be informative for EU policymakers currently considering the expansion of public CBCR to all industries. They might also be relevant to researchers considering the decision usefulness of CBCR for financial statement users in estimating after-tax profitability and tax enforcement risk.     

Bank incentives and suboptimal lending decisions: Evidence from the valuation effect of bank loan announcements in Japan

Using a sample of bank loan announcements in Japan, we examine whether or not banks have incentives to engage in suboptimal lending that results in wealth transfer from the banks to the borrowing firms. We find that abnormal returns for borrowing firms are significantly positive, but those for lending banks are sometimes significantly negative. Furthermore, the announcement returns for borrowing firms are negatively related to those for lending banks, especially when poorly performing firms borrow from financially healthy (low-risk) banks. Our results suggest that the positive valuation effect of bank loan announcements for borrowing firms is mainly due to a wealth transfer from lending banks.     

The global institutionalization of financial reporting: The case of the United Arab Emirates

Almost 100 countries have agreed to adopt or work towards convergence with the International Accounting Standards Board's international financial reporting standards (IFRS). Applying an institutional theory framework at a nation state level, and using publicly available data about the emerging economy of the United Arab Emirates (UAE) as a case, this paper identifies some of the global coercive, normative and mimetic pressures which have contributed to this widespread adoption. The challenge for emerging economies such as that of the UAE is whether the reality of IFRS implementation can match the image of IFRS adoption.     

The interest group theory of financial development: Evidence from regulation

We use a new dataset of de jure measures of trade, capital account, product market, and domestic financial regulation for 91 countries from 1973 to 2005 to test Rajan and Zingales’s (2003) interest group theory of financial development. In line with the theory, we find strong evidence that trade liberalization is a leading indicator of domestic financial liberalization. This result is robust to the use of different data frequencies (annual, 5-year intervals), estimation methods (OLS, 2SLS, system GMM) and a check for non-linear effects. However, in contrast to the theory, we do not find consistent evidence of an effect of capital account liberalization.