The impact of corporate fraud on director‐interlocked firms: Evidence from bank loans

We examine the impact of corporate fraud committed by one firm (the “fraudulent firm”) on other firms with interlocking directors (the “interlocked firms”), focusing on the debtholder side. We argue that the revelation of a fraudulent firm's fraud can damage the reputation of the interlocked firms because corporate governance can propagate via director interlocks. Empirically, we find that the interlocked firms' cost of debt is higher and the loan covenants become stricter after the fraud cases of the fraudulent firms are revealed. Consistent with the corporate governance propagation explanation, our results are weaker (stronger) for interlocked firms that have better (worse) pre‐event corporate governance standards. Our findings suggest that corporate fraud of fraudulent firms can affect other firms through director‐interlocks beyond shareholder value.     

The spillover effect of fraudulent financial reporting on peer firms' investments

We investigate how high-profile accounting frauds affect peer firms' investment. We document that peers react to the fraudulent reports by increasing investment during fraud periods. We show that this finding is not driven by frauds that have a higher ex ante likelihood of detection or by an association between fraud and investment booms. In addition, we find that peers’ investments increase in fraudulent earnings overstatements, and in industries with higher investor sentiment, lower cost of capital and higher private benefits of control. We also find evidence consistent with equity analysts potentially facilitating the spillover effect.     

Learning about common and private values in oligopoly

We characterize a duopoly buffeted by demand and cost shocks. Firms learn about shocks from common observation, private observation, and noisy price signals. Firms internalize how outputs affect a rival's signal, and hence output. We distinguish how the nature of information —public versus private—and of what firms learn about—common versus private values—affect equilibrium outcomes. Firm outputs weigh private information about private values by more than common values. Thus, prices contain more information about private‐value shocks.     

The spillover effect of disclosure rules and materiality thresholds: Evidence from profit warnings issued in Hong Kong market

Dual-listed firms simultaneously follow the relevant rules in their home country and in their cross-listed country. In contrast, other firms only listed in the cross-listed country are only subject to the local regulations. Previous literature has found evidence that cross-listing can improve firms’ information transparency because of more stringent listing rules in the cross-listed country. The existing research, however, has not paid enough attention to the potential influence of dual-listed firms and their home country institutional factors (e.g. unique disclosure policies) on other firms only listed in the cross-listed country (i.e. spillover effect). In the Hong Kong market, Chinese dual-listed firms are under the mandatory profit warning regulation of mainland China, but other firms listed only in Hong Kong only need to follow the voluntary disclosure rule of the Hong Kong Stock Exchange. Such a setting provides us with the opportunity to investigate a spillover effect, i.e. whether these Chinese dual-listed firms influence their peers only listed in Hong Kong to release profit warnings. We find that firms only listed in Hong Kong are more likely to issue profit warnings if their Chinese dual-listed peers have also issued warnings. We further find that this spillover effect increases with the market capitalization of Chinese dual-listed firms and increases with the market share of these firms before they dominate the industry. Lastly, due to an underlying duty to disclose material information in Hong Kong, the spillover effect is weaker for firms with large earnings surprises.     

Business groups and the incorporation of firm-specific shocks into stock prices

Firm-specific information has a damped effect on business group-affiliated firms’ stock prices. Such firms’ idiosyncratic stock returns are less responsive to idiosyncratic commodity price shocks than are the idiosyncratic returns of otherwise similar unaffiliated firms in the same country and commodity-sensitive industry. Using global commodity shocks means we assess responses to common idiosyncratic shocks of the same magnitude, frequency, and observability. Further identification follows from difference-in-difference tests exploiting successful and matched exogenously failed control block transactions. We conclude that business group firms’ stock prices provide less firm-specific information to capital providers and managers.     

同行业间避税与企业的战略反应——来自我国A股上市公司的经验证据

本文运用2007-2016年中国A股上市公司数据,引入同行业竞争者的股票异常回报作为工具变量,研究同行业竞争者避税行为对企业战略反应的影响。研究发现,相比国有企业,民营企业的同行业竞争者避税行为与企业避税存在战略互补效应,即同行业竞争者的避税行为越激进,企业会选择更加激进的避税策略。探究可能影响这种战略互补效应的机制,结果显示民营企业很可能会模仿同行业领导者等被认为避税行为更有效合理的竞争对手制定避税策略。进一步发现地理距离衰减有利于降低同行业信息收集成本,导致同行业间战略互补反应更显著,即同行业避税政策模仿具有“本土偏好”。本文提供了同行业竞争对企业避税影响的因果关系证据,揭示了同行业竞争者避税行为是企业避税行为的重要影响因素。     

注册制改革会产生溢出效应吗?——基于企业投资行为的视角北大核心

提高资本市场资源配置效率是注册制推行的重要目标之一,本文以此为出发点,构建了多期倍分法(DID)模型,探究了科创板(试点注册制)公司信息披露对同行业公司的溢出效应。研究发现,科创板公司信息披露会促使同行业公司提高研发投入,且该效应随着信息披露内容的丰富、精确度的增加而有所提高。机制分析表明,该溢出效应源自信息不确定性的降低和竞争压力的产生。同时,创板信息披露提高了同行业公司管理层对创新的认知程度以及增加了媒体关注度,进而促进公司研发投入。进一步研究发现,同行业公司研发投入受到正向溢出效应影响的同时,固定资产投入有所降低,投资结构的改变最终导致投资效率提升,显著抑制了过度投资。本文为强制性信息披露的溢出效应研究提供了因果证据,也为注册制改革政策效果的全面评估提供了支持。     

Adopting a Label: Heterogeneity in the Economic Consequences Around IAS/IFRS Adoptions

This study examines liquidity and cost of capital effects around voluntary and mandatory IAS/IFRS adoptions. In contrast to prior work, we focus on the firm‐level heterogeneity in the economic consequences, recognizing that firms have considerable discretion in how they implement the new standards. Some firms may make very few changes and adopt IAS/IFRS more in name, while for others the change in standards could be part of a strategy to increase their commitment to transparency. To test these predictions, we classify firms into “label” and “serious” adopters using firm‐level changes in reporting incentives, actual reporting behavior, and the external reporting environment around the switch to IAS/IFRS. We analyze whether capital‐market effects are different across “serious” and “label” firms. While on average liquidity and cost of capital often do not change around voluntary IAS/IFRS adoptions, we find considerable heterogeneity: “Serious” adoptions are associated with an increase in liquidity and a decline in cost of capital, whereas “label” adoptions are not. We obtain similar results when classifying firms around mandatory IFRS adoption. Our findings imply that we have to exercise caution when interpreting capital‐market effects around IAS/IFRS adoption as they also reflect changes in reporting incentives or in firms’ broader reporting strategies, and not just the standards.     

Anti-Mafia Police Actions,Criminal Firms,and Peer Firm Tax Avoidance

Mafia firms introduce distortions in the markets in which they operate, increasing the cost of doing business for peer firms. We investigate whether peers respond by increasing their tax avoidance and thus increasing funds available to compete with the Mafia firms. Using a sample of Italian anti-Mafia police actions that resulted in the removal of Mafia firms and a difference-in-differences approach, we find that peers reduce their tax avoidance following these actions. We further show that, following anti-Mafia police actions, peer firms improve their performance and increase capital investment while enjoying a reduction in the cost of raw materials. Overall, our results highlight the microlevel channels through which Mafia can affect firm outcomes and local economies.     

Financial Misrepresentation and Its Impact on Rivals

This paper examines how the announcement of an accusation of fraudulent financial misrepresentation affects industry rivals of the accused firm. Consistent with the importance of the industry competition effect, we find that rivals in less competitive industries benefit from the event. However, in competitive industries, the information spillover effect dominates the competition effect, resulting in negative returns to rival shareholders following the event. The spillover effect increases in importance with the severity of the accusation and is more important for opaque rivals and for rivals that had positive stock price reactions to past positive earnings surprises of the accused firm.     

Controlling shareholder share pledging and the cost of equity capital: Evidence from China

We propose and test the incentive view—that the margin call pressure and ownership-control discrepancy associated with insider share pledging increase investors’ perceived risk, and thus also the cost of equity capital, in an emerging market. Using a controlling shareholder share pledging sample for Chinese listed firms, we find that firms with share pledging have a cost of equity capital that is 23.7 basis points higher than firms without share pledging. Further, share pledging increases the cost of equity capital through the information risks and agency conflicts channels. Cross-sectional analyses show that share pledging has a stronger effect on the cost of equity capital in non-state-owned enterprises, firms without monitoring of multiple large shareholders, firms with controlling shareholders assuming the position of chairperson, and firms with a weak institutional environment. In addition, using the global financial crisis and the outbreak of the coronavirus (COVID-19) as quasi-natural experiments, we disentangle the potential confounding effect of firm fundamentals and show that share pledging is positively associated with the cost of equity capital. Overall, the results are consistent with our incentive view that share pledging increases the cost of equity capital in an emerging market.     

Information Aggregation Bias and Samuelson's Dictum

Under the assumption of incomplete information, idiosyncratic shocks may not dissipate in the aggregate. An econometrician who incorrectly imposes complete information and applies the law of large numbers may be susceptible to information aggregation bias. Tests of aggregate economic theory will be misspecified even though tests of the same theory at the microlevel deliver the correct inference. A testable implication of information aggregation bias is “Samuelson's Dictum” or the idea that stock prices can simultaneously display “microefficiency” and “macroinefficiency;” an idea accredited to Paul Samuelson. Using firm-level data from the Center for Research in Security Prices, we present empirical evidence consistent with Samuelson's dictum. Specifically, we conduct two standard tests of the linear present value model of stock prices: a regression of future dividend changes on the dividend-price ratio and a test for excess volatility. We show that the dividend price ratio forecasts the future growth in dividends much more accurately at the firm level as predicted by the present value model, and that excess volatility can be rejected for most firms. When the same firms are aggregated into equal-weighted or cap-weighted portfolios, the estimated coefficients typically deviate from the present value model and “excess” volatility is observed; this is especially true for aggregates (e.g., S&P 500) that are used in most asset pricing studies. To investigate the source of our empirical findings, we propose a theory of aggregation bias based on incomplete information and segmented markets. Traders specializing in individual stocks conflate idiosyncratic and aggregate shocks to dividends. To an econometrician using aggregate data, these assumptions generate a rejection of the present value model even though individual traders are efficiently using their available information.     

On the Costs of a Bank-Centered Financial System: Evidence from the Changing Main Bank Relations in Japan

We examine the effects of bank–firm relationships on firm performance in Japan. When access to capital markets is limited, close bank–firm ties increase the availability of capital to borrowing firms, but do not lead to higher profitability or growth. The cost of capital of firms with close bank ties is higher than that of their peers. This indicates that most of the benefits from these relationships are appropriated by the banks. Finally, the slow growth rates of bank clients suggest that banks discourage firms from investing in risky, profitable projects. However, liberalization of financial markets reduces the banks' market power.     

Learn from peers? The impact of peer firms' analyst earnings forecasts on a focal firm's corporate investment efficiency

We explore whether a firm can learn from information on peers produced by analysts. Based on a sample of Chinese firms, we document that analyst earnings forecast accuracy (dispersion or optimism) of peer firms is positively (negatively) associated with the focal firm's investment efficiency. The effect is more salient when the focal firm operates in a competitive industry, when analysts are predicting positive earnings, when peers produce low-quality annual reports, or when the focal firm has high information asymmetry. Overall, our findings provide new insights on learning from peer information produced by a third party and show that analyst earnings forecasts have spillover effects in the product market.     

Does Limited Attention Constrain Investors’ Acquisition of Firm‐specific Information?

According to the framework outlined in Peng and Xiong ( 2006 ), attention‐constrained investors tend to process more market‐ and sector‐level information. We empirically test this theory. We find that firms with higher media coverage have lower contemporaneous stock return synchronicity. Such an effect is robust to analyses within size deciles, inclusion of firm fixed effects, estimation using a matched sample, and a two‐stage least squares approach. The effect becomes less pronounced during the financial crisis period when both the quantity and quality of firm‐specific information decrease. Further, the attention from media coverage has a spillover effect on the firm's industry peers without media coverage. Finally, investors of firms with higher media coverage are more efficient in incorporating future firm performance into current stock prices. Collectively, our findings support the theory in Peng and Xiong ( 2006 ) that investors increase their acquisition of firm‐specific information when a firm captures their attention.     

Corporate Scandals and Household Stock Market Participation

We show that, after the revelation of corporate fraud in a state, household stock market participation in that state decreases. Households decrease holdings in fraudulent as well as nonfraudulent firms, even if they do not hold stocks in fraudulent firms. Within a state, households with more lifetime experience of corporate fraud hold less equity. Following the exogenous increase in fraud revelation due to Arthur Andersen's demise, states with more Arthur Andersen clients experience a larger decrease in stock market participation. We provide evidence that the documented effect is likely to reflect a loss of trust in the stock market.     

Voluntary Disclosure and Information Asymmetry: Evidence from the 2005 Securities Offering Reform

In 2005, the Securities and Exchange Commission enacted the Securities Offering Reform (Reform), which relaxes “gun‐jumping” restrictions, thereby allowing firms to more freely disclose information before equity offerings. We examine the effect of the Reform on voluntary disclosure behavior before equity offerings and the associated economic consequences. We find that firms provide significantly more preoffering disclosures after the Reform. Further, we find that these preoffering disclosures are associated with a decrease in information asymmetry and a reduction in the cost of raising equity capital. Our findings not only inform the debate on the market effect of the Reform, but also speak to the literature on the relation between voluntary disclosure and information asymmetry by examining the effect of quasi‐exogenous changes in voluntary disclosure on information asymmetry, and thus a firm's cost of capital.     

Volatility and information flows in emerging equity market: A case of the Korean Stock Exchange

Applying the generalized autoregressive conditional heteroskedasticity (GARCH) model to the Korean Stock Exchange, this study examines: (1) the statistical property of time-varying volatility in returns and trading volume data found in an emerging capital market, and (2) the property of the conditional variances of returns in predicting the flow patterns of information across the firms of different sizes. The results find that current trading volume as a proxy of information arrival dramatically reduces the persistence of the conditional variance, meaning that the arrival of information is a source of the ARCH effect in the emerging market just as it is in the U.S. The results also show that just as the volatility of larger firms can be predicted by shocks to smaller firms, the volatility of smaller firms can be predicted by shocks to larger firms. However, the volatility spillover effect from larger to smaller firms is more significant than that from smaller to larger firms.     

Accounting conservatism and common ownership by dedicated institutional blockholders

We examine the peer effects of accounting conservatism in a common dedicated institutional blockholder (CDIB) setting. We find a positive correlation in accounting conservatism between focal firms and their CDIB peers. To corroborate our main findings, we document that the peer effect is stronger for firms connected through CDIBs that are activists or that have more active shares, for firms with larger CDIB ownership and for firms with weaker corporate governance mechanisms and higher information asymmetry. The results suggest that managers view following peer firms’ conservatism as a way of pleasing CDIBs. We also find that in proxy voting, firms receive less support from their investors when their conservatism deviates more from their CDIB peers. Finally, we find that the CDIB peer effect remains significant after controlling for the effect of industry and local peers. Overall, our paper presents evidence consistent with firms adapting their accounting conservatism in response to their incumbent dedicated institutional investors’ preference.     

Cooking the books: Recipes and costs of falsified financial statements in China

We examine the causes and consequences of falsified financial statements in China. Using bivariate probit regression analysis, we find that firms with high debt and that plan to make equity issues are more likely to manipulate their earnings and thus have to restate their financial reports in subsequent years. We also find that corporate governance structures have an effect on the occurrence and detection of financial fraud. There are significant negative consequences to fraudulent financial statements. Restating firms suffer negative abnormal stock returns, increases in their cost of capital, wider bid-ask spreads, a greater frequency of modified audit opinions, and greater CEO turnover. We also find that firms located in highly developed regions suffer more severe consequences when they manipulate their accounts.