Policy and oversight of corporate political activities and the cost of equity capital

This paper investigates the effect of voluntary adoption and disclosure of policies/oversight of corporate political activities/spending on the cost of equity capital for S&P 500 firms over the period 2015–2018. Using the CPA-Zicklin Index to measure the level of policies, oversight, and disclosure of corporate political activities, we find that firms with a greater level of policies and oversight enjoy a lower cost of equity capital. We also document that a higher index is associated with higher stock liquidity. The negative relation is more pronounced among firms with higher exposure to political risk and firms with higher dependence on government spending. We also find that a firm’s information environment plays an important role in moderating the relation between policies and oversight of corporate political activities and the cost of equity capital. Our findings suggest that voluntary adoption and disclosure of policies and oversight mitigates risks and uncertainties related to firms’ political activities, thereby reducing information asymmetry and the cost of equity capital.     

Compliance with pension‐related mandatory disclosures and debt financing

Using hand‐collected data on the level of pension‐related mandatory disclosures required by International Accounting Standard 19 Employee Benefits, we test whether compliance levels with these disclosures convey information that affects firms’ access to the public instead of the private debt market, as well as the cost of their new debt issues. We document a higher tendency to access the public debt market for firms with higher levels of pension‐related disclosure. Furthermore, we find that firms with higher levels of pension‐related disclosure enjoy a lower cost in terms of issuance of public debt, but not a lower cost for private debt issues. Thus, the benefits of disclosure in reducing information risk are only realisable when creditors rely heavily on financial statements in their decision making, due to the limited access to private information. Additional tests reveal that high compliance levels effectively mitigate the negative effect of pension deficits on the cost of public debt. These findings provide novel evidence in the extant literature on the role of mandatory (and, in particular, pension‐related) disclosures on firms’ debt financing. They also have important policy implications.     

Voluntary disclosure of corporate political spending

In this paper, we study voluntary political spending disclosure, a widespread yet relatively unexplored corporate voluntary disclosure practice. Using an index created by the CPA-Zicklin Center that measures the level of voluntary political spending disclosure for S&P 500 firms, we examine firm-level characteristics associated with such disclosures, and their importance. We find that firms with greater political expenditures, direct political connections, higher investor activism, better corporate social responsibility performance and governance, and more industry competition tend to have a higher level of political spending disclosure. We also find that a higher level of political spending disclosure is positively associated with both the number of institutional investors and the proportion of shares owned by institutional investors, particularly socially responsible institutional investors, after controlling for the quality of other disclosures. The level of political spending disclosure is also associated with a higher analyst following, lower forecast error, and smaller forecast dispersion. Finally, we find that political spending disclosure enhances the positive relationship between annual corporate political spending and firm financial performance. Together, these results are consistent with the view that voluntary political spending disclosure helps align managers’ interests with those of shareholders.     

Voluntary disclosure,ownership structure,and corporate debt maturity: A study of French listed firms

This study examines the effect of voluntary disclosure on corporate debt maturity and the role of ownership structure in this effect. For a sample of 440 French listed firms from 2007 to 2013, the empirical results indicate that firms with greater voluntary disclosure have more long-term debt, suggesting that companies benefit from extensive disclosure through greater access to long-maturity debt. This finding is consistent with the evidence that voluntary disclosure provides an efficient monitoring mechanism in firms where long-term debt could insulate firms from lender scrutiny for long periods. The results also show that the positive association between voluntary disclosure and long-term debt is relevant only when the control rights of the controlling shareholders are significantly in excess of cash-flow rights. This finding supports recent work showing that better disclosure policies are viewed more positively by the market in environments where the risk of wealth expropriation by dominant shareholders is higher.     

Determinants and consequences of voluntary corporate social responsibility disclosure: Evidence from private firms

We examine whether and how private firms differ from public firms in determining corporate social responsibility (CSR) disclosure policies. We document that private firms are less likely to issue CSR reports compared with their public peers. Adopting a bivariate probit model that accommodates partial observability, we find that the effect is mainly driven by a supply-side force rather than a demand-side force. From a debtholder-oriented perspective, while public firms enjoy more favorable credit ratings and a lower cost of debt due to CSR disclosure, private firms do not reap similar benefits from CSR disclosure. Corporate governance and CSR assurance alleviate debtholders' concern on private firms’ engagements in CSR.     

Determinants and consequences of voluntary disclosure in an emerging market: Evidence from China

In this paper we examine empirically the determinants of voluntary disclosure in the annual reports of Chinese listed firms that issue both domestic and foreign shares and determine if the cost of debt capital is related to the extent of voluntary disclosure. We find the level of voluntary disclosure is positively related to the proportion of state ownership, foreign ownership, firm performance measured by return on equity, and reputation of the engaged auditor. There is no evidence, however, that companies benefit from extensive voluntary disclosure by having a lower cost of debt capital.     

Voluntary Disclosure, Earnings Quality, and Cost of Capital

We investigate the relations among voluntary disclosure, earnings quality, and cost of capital. We find that firms with good earnings quality have more expansive voluntary disclosures (as proxied by a self‐constructed index of coded items found in 677 firms' annual reports and 10‐K filings in fiscal 2001) than firms with poor earnings quality. In unconditional tests, we find that more voluntary disclosure is associated with a lower cost of capital. However, consistent with the complementary association between disclosure and earnings quality, we find that the disclosure effect on cost of capital is substantially reduced or disappears completely (depending on the cost of capital proxy) once we condition on earnings quality. Extensions probing alternative proxies show that our findings are robust to measures of earnings quality and cost of capital, but not to other measures of voluntary disclosure. In particular, we find opposite relations for voluntary disclosure measures based on management forecasts and conference calls, and we find no relations for a press release based measure.     

Voluntary disclosure practices by foreign firms cross-listed in the United States

This is one of the first large-scale studies to examine the voluntary disclosure practices of foreign firms cross-listed in the United States. We proxy for voluntary disclosure using three attributes of firms’ management earnings guidance: (1) the likelihood of issuance; (2) the frequency of earnings guidance; and (3) a guidance quality measure. After first establishing that market participants view these firms’ disclosures as credible and economically important (i.e., the disclosures are negatively related to analyst forecast errors and the implied cost of equity capital), we compare cross-listed firms’ disclosure practices with comparable US firms and explore variations in disclosure practices among cross-listed firms. We find that cross-listed firms issue less frequent and lower quality management earnings guidance than comparable US firms. We further show that the gap between US and cross-listed firms widened after passage of Regulation FD, a regulation which induced greater public disclosure of firm-specific information. Focusing on the sample of cross-listing firms, we show that firms from common-law countries disclose more than firms from code-law countries. Finally, our results indicate that cross-listed firms that do not list on an organized US exchange provide more frequent and higher quality disclosure than those that do list on organized exchanges.     

Do higher value firms voluntarily disclose more information? Evidence from China

This paper examines the effect of guanxi on the relation between firm value and voluntary disclosure of information about new investment projects in China's institutional setting. We find a negative relation between firm value and voluntary disclosure for firms that rely heavily on guanxi in their value creation (e.g. non-high-tech firms, and firms located in regions with underdeveloped institutions). By contrast, for firms that rely less heavily on guanxi and more on other sources of core competencies (e.g. high-tech firms, and firms in high-marketisation regions), we find a positive relation between firm value and voluntary disclosure. The moderating role of guanxi on the relation between firm value and voluntary disclosure is explained by firms conscientiously balancing the costs and benefits of voluntary disclosure relative to guanxi. Specifically, high guanxi-dependence firms refrain from detailed voluntary disclosures for fear of revealing sensitive information that may harm their guanxi. In contrast, low guanxi-dependence firms rely more heavily on voluntary disclosures to reduce information asymmetry and financing cost, with such incentives being particularly strong for high value firms. Our evidence has implications for research on motives for disclosure and regulation of financial reporting.     

Citizens United vs. FEC and corporate political activism

This paper analyzes the effect that the U.S. Supreme Court's landmark decision on Citizens United vs. FEC had on corporate political activism. The decision opened the door for corporate treasuries to engage in independent political spending. Politically connected firms have lower announcement returns at the ruling than non-connected firms. The estimates suggest that the value of a political connection decreases by $6.9 million. To evaluate the effect of Citizens United on corporate political activism, we explore the fact that Citizens United also lifts bans on independent political spending in states where such bans existed. After the ruling, firms headquartered in states where bans are lifted have fewer state-level connections relative to firms in other states. Overall, our evidence supports the hypothesis that independent political spending crowds out political connections. We do not find any significant crowding-out effects of independent political expenditures on lobbying activity, executive contributions, and political action committees (PAC) contributions.     

The Relationship between Voluntary Disclosure,External Financing and Financial Status

Using unique Swedish disclosure data from 2007 to 2012, this paper reports three important sets of findings with regard to the relationship between firms’ voluntary disclosure, external financing and financial status. First, financially strong firms disclose more than weaker ones. Second, firms that obtain new financing (equity or debt) disclose more than firms that do not. Third, the association between voluntary disclosure and financing events is stronger in financially weak firms. This last finding is new in the literature. Perhaps financially weak firms that obtain external funding have higher disclosure to counteract contracting and valuation problems in the financial markets.     

Conditional Mandates on Management Earnings Forecasts: The Impact on the Cost of Debt

Exploiting a unique conditional disclosure mandate on management earnings forecasts (MEFs) in China, we examine the differential effects of voluntary and mandatory MEFs on the cost of debt. We find that firms providing voluntary MEFs have lower cost of debt than do mandatory forecasters and nonforecasters. The results of the channel analyses reveal that voluntary forecasters have greater commitment to voluntary MEFs in future periods than do mandatory forecasters and nonforecasters, and the precision, accuracy, and timeliness of MEFs are higher for voluntary forecasters than for mandatory forecasters. Additional analyses show that the differential effects of voluntary and mandatory MEFs on cost of debt are stronger for voluntary forecasters operating in opaque information environments, issuing high-quality and confirming forecasts, controlled by private shareholders, and operating in highly competitive product markets. Overall, our results indicate that, compared with mandatory MEFs, voluntary MEFs are more informative for credit investors, particularly for firms facing greater information risk and operating uncertainty.     

The impact of multi-dimensional corporate transparency on us firms’ credit ratings and cost of capital

This study examines corporate transparency in the US market for a sample of 319 S&P 500 firms. We examine whether a number of disparate measures of corporate transparency used by other researchers are distinct, cohere as measures of a single factor of corporate transparency, or capture multiple different dimensions. Next, we begin to examine the impact of corporate transparency, conceived in the broadest sense, and not limited to financial reporting, on US firms. We develop a model of corporate transparency based on a broad definition and framework proposed by Bushman, Piotrowski and Smith, which we extend in several ways, and then study the effect of corporate transparency on cost of debt, credit rating, and cost of equity. First, we find that corporate transparency is neither a unitary concept nor merely an ambiguous term for multiple distinct concepts: factor analysis of ten corporate transparency variables identifies four independent underlying dimensions: public disclosure information, intermediary information, earnings quality information and insider information. Second, we find that corporate transparency has significant power to explain cross-sectional variation in credit rating and cost of capital. More specifically, (i) credit rating, cost of debt, and beta are significantly associated with disclosure information transparency; (ii) credit rating, cost of equity, and beta are significantly associated with intermediary information transparency; and (iii) cost of equity and beta are significantly associated with insider information transparency. Our findings offer a more comprehensive evaluation of corporate transparency than prior studies, and we demonstrate direct economic implications for both US firms and markets.     

Debt Financing and Voluntary Adoption of the International Financial Reporting Standards: Evidence from Korean Unlisted Firms

We investigate the effect of debt financing on the voluntary adoption of the International Financial Reporting Standards (IFRS) by unlisted firms and such adoption’s effect on bond credit rating. We find that unlisted firms with public debts are more likely to voluntarily adopt IFRS. Subsequent to the voluntary application of IFRS, the unlisted firms exhibit, on average, enhanced credit ratings. These findings suggest that the public debt market’s demand for high-quality financial reporting may drive those unlisted firms to voluntarily adopt IFRS. Furthermore, rating agencies seem to reward such firms by elevating their bond credit ratings.     

Bank Debt,Flexibility, and the Use of Proceeds from Asset Sales

In the theory of financial intermediation, bank debt is often characterized as being more readily renegotiable than public debt. Banks are also conjectured to gain valuable non-public information through closer monitoring. Given these features, bank debt can theoretically be more flexible than public debt and can lead to better investment/liquidation decisions. We investigate this possibility using a sample of firms facing the important decision of whether to reinvest the proceeds from asset sales or whether to distribute the proceeds to debtholders. While higher levels of leverage are associated with an increased probability of distributing proceeds to creditors, this relationship is significantly muted for bank debt as opposed to public debt. This finding is consistent with the conjecture that bank debt provides enhanced flexibility when compared to public debt. Further we find that asset sale announcement period abnormal stock returns are increasing in firms’ use of bank debt, but not public debt. This suggests that market participants believe that banking relationships are leading to better decision making for this particular type of investment/liquidation decision. We find no significantly different effects of bank vs. public debt on the initial decision to undertake an asset sale in the first place. Thus, in the context of asset sales, the main observable difference arises in the use of proceeds decision, rather than the initial asset sale decision.     

董事长个人特征、代理成本与营收计划的自愿披露——来自沪深上市公司的经验证据

本文基于高层梯队理论和代理理论,研究了董事长个人特征和代理成本对公司营收计划自愿披露的影响。以2008—2010年度A股上市公司为样本,研究发现,公司董事长年龄、性别以及股权代理成本与营收计划自愿披露相关。董事长年龄越大、董事长为女性以及股权代理成本越小的公司,其自愿披露营收计划的可能性越大。研究还发现公司规模、董事长和总经理两职合一以及交叉上市对公司营收计划自愿披露也有显著影响。本文的研究丰富了相关文献,特别是为从管理者特征方面来解释我国上市公司的自愿披露行为提供了经验证据。     

Firms’ debt choice in Africa: Are institutional infrastructure and non-traditional determinants important?

We use a World Bank survey data on the financing of incremental production to examine firms’ debt choice decision in eleven African countries, where capital markets are evolving and/or fraught with inadequate institutional infrastructure. Such a landscape suggests that hitherto overlooked nontraditional factors and institutions may be important determinants of debt choice. Interestingly, we find that some nontraditional factors and institutional infrastructure are robust debt choice determinants. Education level of managers, national incidence of corruption and ethnicity of owners are important for non-bank debt choice in Africa, with non-bank debt markets populated largely by the less formal trade credit and lease markets. Both effective legal and political infrastructures foster firms’ preference for non-bank debt while macro-instability discourages preference for non-bank debt; thus, flagging institutional infrastructures as vital for effective non-bank debt markets. Furthermore, we find evidence which confirms that capital markets in Africa are insufficiently spanned by the necessary debt markets; this should motivate relevant authorities to hasten development of public debt markets to supplement the currently limiting non-bank debt markets of trade credits and leases.     

Credit Default Swaps and Managers’ Voluntary Disclosure

We investigate how the availability of traded credit default swaps (CDSs) affects the referenced firms’ voluntary disclosure choices. CDSs enable lenders to hedge their credit risk exposure, weakening their incentives to monitor borrowers. We predict that reduced lender monitoring in turn leads shareholders to intensify their monitoring and demand increased voluntary disclosure from managers. Consistent with this expectation, we find that managers are more likely to issue earnings forecasts and forecast more frequently when traded CDSs reference their firms. We further find a stronger impact of CDS availability on firm disclosure when (1) lenders have higher ability and propensity to hedge credit risk using CDSs, and (2) lender monitoring incentives and monitoring strength are weaker. Consistent with an increase in shareholder demand for public information disclosure induced by a reduction in lender monitoring, we find a stronger effect of CDSs on voluntary disclosure for firms with higher institutional ownership and stronger corporate governance. Overall, our findings suggest that firms with traded CDS contracts enhance their voluntary disclosure to offset the effect of reduced monitoring by CDS‐protected lenders.     

The impact of narrative disclosure readability on bond ratings and the cost of debt

Prior research on the determinants of credit ratings has focused on rating agencies’ use of quantitative accounting information, but the there is scant evidence on the impact of textual attributes. This study examines the impact of financial disclosure narrative on bond market outcomes. We find that less readable financial disclosures are associated with less favorable ratings, greater bond rating agency disagreement, and a higher cost of debt. We improve causal identification by exploiting the 1998 Plain English Mandate, which required a subset of firms to exogenously improve the readability of their filings. Using a difference-in-differences design, we find that the firms required to improve the readability of their filings experience more favorable ratings, lower bond rating disagreement, and lower cost of debt. Collectively, our evidence suggests that textual financial disclosure attributes appear to not only influence bond market intermediaries’ opinions but also firms’ cost of debt.     

A theory of voluntary disclosure and cost of capital

This paper explores the links between firms’ voluntary disclosures and their cost of capital. Existing studies investigate the relation between mandatory disclosures and cost of capital and find no cross-sectional effect but a negative association in time-series. In this paper, I find that when disclosure is voluntary firms that disclose their information have a lower cost of capital than firms that do not disclose, but the association between voluntary disclosure and cost of capital for disclosing and nondisclosing firms is positive in aggregate. I further examine whether reductions in cost of capital indicate improved risk-sharing or investment efficiency. I also find that high (low) disclosure frictions lead to overinvestment (underinvestment) relative to first-best. As average cost of capital proxies for risk-sharing but not investment efficiency, the relation between cost of capital and ex ante efficiency may be ambiguous and often irrelevant.