Nondisclosure and adverse disclosure as signals of firm value

We present a model in which some of the firm's information ('news')can be disclosed verifiably and some information ('type') cannot,to show that some firms may voluntarily withhold good news anddisclose bad news. We describe an equilibrium in which high-typefirms withhold good news and disclose bad news, whereas low-typefirms disclose good news and withhold bad news. Under some parametervalues, this equilibrium exists when other more traditionalequilibria are ruled out by standard equilibrium refinements.The model explains some otherwise anomalous empirical evidenceconcerning stock price reactions to disclosure, provides somenew empirical predictions, and suggests that mandatory disclosurerequirements may have the undesirable consequence of makingit more difficult for firms to reveal information that cannotbe disclosed credibly.     

The impact of environmental,social, and governance disclosure on firm value: The role of CEO power

Using a large cross-sectional dataset comprising of FTSE 350 listed firms, this study investigates whether superior environmental, social and corporate governance (ESG) disclosure affects firm value. We find a positive association between ESG disclosure level and firm value, suggesting that improved transparency and accountability and enhanced stakeholder trust play a role in boosting firm value. We also report that higher CEO power enhances the ESG disclosure effect on firm value, indicating that stakeholders associate ESG disclosure from firms with higher CEO power with greater commitment to ESG practice. This evidence is strong and consistent for three different measures of ESG-related disclosure: the ESG, environmental and social disclosure scores. The results are robust to the use of an instrumental variable approach, and the Heckman two-stage estimation procedure.     

Consolidation and value creation in the insurance industry: The role of governance

We examine the long run performance of M&A transactions in the property–liability insurance industry. We specifically investigate whether such transactions create value for the bidders’ shareholders, and assess how corporate governance mechanisms, internal and external, affect such performance. Our results show that M&A create value in the long run as buy and hold abnormal returns are positive and significant after 3 years. While tender offers appear to be more profitable than mergers, our multivariate evidence does not support the conjecture that domestic transactions create more value than cross-border transactions. Furthermore, positive returns are significantly higher for frequent acquirers and in countries where investor protection is weaker. Internal corporate governance mechanisms, such as board independence, and CEO share ownership, are also significant determinants of the long run positive performance of bidders.     

The disclosure policy of the firm in an efficient market

This study analyzes the information content of the financial reports of the management-controlled firm in an efficient market. The firm's disclosure fulfills two roles: it is the basis of the principal-agent contract—stewardship role, and it is an input to the market price informativeness (decision making) role. Optimal disclosure is derived as the outcome of the firm's owner-manager-potential buyer game. The seller and the buyer maintain principal-agent relationships with the manager, who alone observes verifiable and unverifiable information on the value of the firm. The market's price of the firm, as well as the manager's compensation, depend on the firm's reports. The firm's owner directs the manager to report verifiable information, at least, (due to the threat of coalition forming) and stewardship information, at most. The market's reaction to the financial reports depends on the information available to the market prior to their release.     

The association between risk disclosure and firm characteristics: a meta-analysis

The empirical literature on the determinants of risk disclosures offers mixed results. This complicates efforts among stakeholders to understand the factors affecting firms’ decision to report risk information. The aim of our paper is to analyze the findings of 42 empirical studies using a meta-analysis technique. We examine whether differences in the findings are attributable to random error or due to legal and institutional systems, uncertainty avoidance, disclosure regime (mandatory vs. voluntary), industry types, and the proxies used to measure corporate characteristics. We find that all moderators affect the relationship between corporate size and risk reporting. Legal system, disclosure regime, industry types, and leverage ratio measurement moderate the association between leverage ratio and risk disclosure. Industry types and uncertainty-avoidance level affect the relationship between profitability and risk disclosure. Finally, the association between risk factor and risk disclosure is moderated by industry types. We discuss the implications of our findings and offer suggestions for future research.     

Monitoring,loan renegotiability,and firm value: The role of lending syndicates

The positive response in capital markets to announcements of private financings is well documented and typically rationalized as a reflection of valuable monitoring and screening services provided by banks and other private lenders. This paper investigates the hypothesis that the capacity to renegotiate private debt contracts relatively inexpensively complements monitoring as a source of value to borrowers. The context for our study is lending by syndicates of private lenders. As the number of lenders increases, contracting costs increase and the value associated with the capacity to renegotiate should decline. Our evidence supports this hypothesis. We conduct additional tests to determine whether our results are robust to alternative interpretations, such as information leakage or the prospect that syndicate size proxies for information-related variables. Syndicate size remains related to the scale of the market's reaction, after taking various borrower and loan characteristics into account.     

The role of accounting in financial disclosure

This paper examines the various demands facing accounting in attempting to supply diverse groups with differing needs the data they desire. Beginning with the notions that, first, accounting is trying to describe a complex stewardship relation and, second, that what we call accounting is in reality many accountings, it examines several current issues in financial disclosure. Essentially, it concludes that a complex set of economic relations must simultaneously rely on several distinct accountings to properly perform the task of disclosure. In general, this conclusion is viewed as desirable.     

The optimal allocation of decision and exit rights in organizations

We show that in a bilateral relation with conflicting preferences and transferable utility it is unambiguously optimal to assign the authority over project decisions to the privately informed rather than the uninformed party. This holds irrespective of the degree of conflict and the distribution of private information. Under the optimal contract, the uninformed party is protected by an exit option, which it will exert when the decision maker has not chosen the promised decision. Exit terminates the relation and diminishes the project surplus. We show that the first‐best efficient solution can be obtained by such a contract.     

Related party transactions and firm value: The moderating role of corporate social responsibility reporting

This study investigates the influence of related party transactions (RPTs) on firm value. Further, it examines whether a firm’s corporate social responsibility (CSR) reporting reflects its corporate values and ethical concerns, therefore mitigating the value-destroying effects of RPTs. Based on 274 observations from publicly listed firms in Indonesia, our results show that RPTs (i.e., related party sales) are negatively related to firm value. Further, we find that in the presence of better CSR reporting, the relationship between RPTs and firm value becomes more positive. This is in line with the view that CSR reporting, which reflects firms’ ethical concerns, may serve as a mechanism against managers’ opportunism. However, we find that related party payables have a positive relationship with firm value. Further investigation reveals that, although certain RPTs show a short-term, value-enhancing effect, these transactions seem to result in subsequent tunneling activities, suggesting managerial opportunism in the long term.     

Corporate voluntary disclosure and the separation of cash flow rights from control rights

We find that corporate voluntary disclosure is negatively associated with the separation of cash flow rights from control rights. This result is consistent with the notion that as the separation of cash flow rights from control rights increases, controlling owners have larger incentives to expropriate the wealth of minority shareholders and low corporate disclosure constitutes a mechanism to facilitate controlling owners in masking their private benefits of control. The negative association between voluntary disclosure and the separation of cash flow rights from control rights is less pronounced for firms with greater external financing needs. This result suggests that for firms with high separation of cash flow rights from control rights, those with greater external financing needs undertake higher firm-level voluntary disclosure to reduce information asymmetry. We also find that the negative association between voluntary disclosure and the separation of cash flow rights from control rights is less pronounced for firms that have a large non-management shareholder. Our result supports the role of large non-management shareholder in mitigating agency problems associated with the separation of ownership and control.

The economics of club bidding and value creation

Many acquisitions are conducted by clubs, i.e., coalitions of acquirers that submit a single bid. We present a novel analysis of club bidding where the club creates value by aggregating, at least partially, bidders' values. We show that club formation can lead to higher acquisition prices when the number of bidders is exogenously fixed and large. However, when entry costs require bidders to optimize their participation decisions, club formation acts as an endogenous limit on competition and reduces the target's premium. In contrast, social efficiency with club bidding is always higher. Our findings can reconcile the contradictory evidence on club bidding.     

The impact of carbon disclosure mandates on emissions and financial operating performance

Review of Accounting Studies - We examine the impact of a disclosure mandate for greenhouse gas emissions on firms’ subsequent emission levels and financial operating performance. For...     

The substitutive relation between voluntary disclosure and corporate governance in their effects on firm performance

Review of Quantitative Finance and Accounting - Prior literature shows that financial disclosures and corporate governance both impact firm performance. This paper documents an important topic that...     

Family firm disclosure and accounting regulation reform in the Middle East: The case of Jordan

We examine the quality of accounting disclosures by family firms using mandatory and voluntary disclosures as proxies for the quality of disclosure. We find that family firms comply more fully with mandatory disclosure requirements than do non-family firms but they disclose significantly less voluntary information. We also document that the enhanced accounting regulation improves the strength of the association between family ownership and mandatory disclosure compliance. Another important finding is the greater disclosure, both mandatory and voluntary, for firms with high family ownership compared to firms with low family ownership.     

Information disclosure,firm growth,and the cost of capital

We study how information disclosure affects the cost of equity capital and investor welfare in a dynamic setting. We show that a firm’s cost of capital decreases (increases) in the precision of public disclosure if the firm’s growth rate is below (above) a certain threshold. The threshold growth rate is higher when the firm’s cash flows are more persistent, or when other firms in the economy are growing at low rates. While current shareholders always prefer maximum public disclosure, future shareholders’ welfare decreases (increases) in the precision of public disclosure if the firm’s growth rate is below (above) the threshold.     

The effects of social ratings on firm value

This paper examines, in a short-term perspective, the effects of Vigeo social ratings announcements on the firm's shareholder value. From an event study on a large sample of European firms, we show that the announcement of ratings generates a strong positive stock market reaction regardless of whether the rating is good or bad. This finding underlines the relevance of ratings and reveals the value effects of corporate social responsibility (CSR). We also find that the overall rating has no impact on shareholders’ wealth. We highlight that specific CSR dimensions drive the value effects. Some are value enhancing and others value destroying. Our study complements the literature on the complex links between socially responsible practices and firm value. It gives arguments to measure properly the benefits and risks associated with non-financial factors, and to integrate them into asset pricing models and allocation processes.     

Cost of government and firm value

Do high expenditures incurred in running the government benefit or hurt firms? Using Chinese data between 1999 and 2006, we find that higher administrative expenditures in provincial governments are associated with lower firm value, lower stock and financial performance, and lower labor productivity. Local governments that spend more on public administration tend to collect more fees from companies and spend less on social welfare and infrastructures. Our evidence is consistent with the “grabbing hand” hypothesis and has important policy implications.     

The use of foreign currency derivatives and firm market value

This article examines the use of foreign currency derivatives(FCDs) in a sample of 720 large U.S. nonfinancial firms between1990 and 1995 and its potential impact on firm value. UsingTobin's Q as a proxy for firm value, we find a positive relationbetween firm value and the use of FCDs. The hedging premiumis statistically and economically significant for firms withexposure to exchange rates and is on average 4.87% of firm value.We also find some evidence consistent with the hypothesis thathedging causes an increase in firm value.     

The role of bank lenders in firm leverage adjustments

In this article we examine the impact of bank loan characteristics on firm leverage adjustments, with a special focus on the conflicts of interest between shareholders and creditors. The results show that, on average, more bank loans slow down leverage adjustments. The subsample analysis reveals that bank loans slow down leverage adjustments in underlevered firms but speed up adjustments in overlevered firms. This finding suggests that bank lenders are able to limit their risk exposure in borrowers and protect their own rights. Further evidence indicates that the effect of bank loans is more notable during the global financial crisis and when a firm is financially constrained. Bank loan concentration and maturity have a significant impact on leverage adjustments as well.     

The role of firm characteristics in pharmaceutical product launches

I examine the determinants of new pharmaceutical launches since 1980 in G7 nations. Both market and firm characteristics, and their interaction, are important in explaining entry. New drugs are 1.5 times more likely to be launched in markets that share a border or a language of a drug company's country of headquarters. The effect of competition depends on the characteristics of both the potential entrant and incumbents: domestic entrants prefer to compete with domestic incumbents. Despite the potential for licensing and low transportation costs, the match between the innovating firm and market conditions remains an important determinant of entry.