Published and Accepted Research

(reverse chronological order)

1. U.S. Evidence from D&O Insurance on Agency Costs: Implications for Country-Specific Studies with Dain C. Donelson and Brian Monsen. Journal of Financial Reporting, forthcoming.

  • Presented at the 2018 Law and Social Science Workshop and the 2019 American Accounting Association [AAA] Financial Accounting and Reporting Section [FARS] Midyear Meeting.

Abstract: Many studies use country-specific evidence to investigate research questions of broad interest due to research advantages of a given country, such as data availability or to exploit an exogenous event that allows identification. One such research stream largely examines Canadian directors’ and officers’ (D&O) insurance and finds that more coverage (i.e., higher limits) is negatively associated with financial reporting quality and positively related to litigation (accounting-related agency costs). However, the U.S. and Canada differ on key issues relevant to securities litigation and D&O insurance. Thus, we predict and find that premiums, rather than limits, provide information about U.S. accounting-related agency costs. Nonetheless, the incremental information provided by premiums about accounting-related agency costs is limited, and audit fees provide more consistent and better information about these agency costs. Thus, although researchers argue for disclosure of U.S. D&O insurance information, the usefulness of such disclosures may be limited because audit fees are already disclosed. Our findings also suggest caution in broadly generalizing country-specific studies.


2. Measuring Accounting Fraud and Irregularities Using Public and Private Enforcement with Dain C. Donelson, Antonis Kartapanis, and John M. McInnis. The Accounting Review, forthcoming. Internet Appendix available here. Python code to download the Stanford securities class action data available here.

  • Presented at the University of Texas at Austin, Texas A&M University, and the University of Rochester.

Abstract: Most accounting studies use only public enforcement actions (SEC cases) to measure accounting fraud. However, private cases (securities class actions) also play an important enforcement role. We discuss the legal standards and processes for both public and private enforcement regimes, emphasize the importance of screening cases for credible fraud allegations, and show both yield credible fraud measures. Further, we demonstrate these research design choices affect inferences from prior research and a hypothetical research setting. Finally, we show common measures of accounting irregularities using Audit Analytics to proxy for fraud result in significant false positives and negatives and develop a fraud prediction model for use in future research. We recommend using both public and private enforcement with appropriate screening when examining accounting fraud to reduce Type I and II errors, or reporting the sensitivity of findings across regimes. This is particularly important given the reduction in accounting-related enforcement after 2005.

Featured here on Harvard Law School's Forum on Corporate Governance.


3. Does Media Coverage Cause Meritorious Shareholder Litigation? Evidence from the Stock Option Backdating Scandal with Dain C. Donelson and Antonis Kartapanis, Journal of Law and Economics, forthcoming. Internet Appendix available here.

  • Presented at the 2018 AAA Annual Meeting.

Abstract: This study examines the role of media coverage on meritorious shareholder litigation. Asserting a causal effect of the media on litigation is normally difficult due to the endogenous nature of media coverage. However, we use the Wall Street Journal’s backdating coverage to overcome these issues. Using a matched sample of firms with similar probabilities of backdating and related government investigations, we find consistent evidence of a causal relation between media coverage and meritorious litigation. We also find a negative abnormal market reaction to the articles and conduct a variety of analyses to show that it was the content of the articles, rather than the coverage itself, that resulted in litigation. Our results demonstrate that the media serves an important role in corporate accountability that both disincentivizes misconduct and holds firms accountable.

Featured here on Harvard Law School's Forum on Corporate Governance.


4. Internal Control Quality and Bank Risk-Taking and Performance with Matthew Baugh and Matthew Ege. AUDITING: A Journal of Practice & Theory, forthcoming.

  • Presented at the 2017 Arizona State University/University of Arizona Joint Accounting Conference, the 2018 AAA Audit Midyear Meeting, and the 2018 Lone Star Conference.

Abstract: Using a sample of bank-years from 2005 to 2017, we examine the effect of internal control quality on future risk-taking and performance. We find that banks that disclose a material weakness in internal controls have higher risk-taking and worse performance in the future, including having a higher (lower) likelihood of experiencing large losses (gains). These findings suggest that weak controls increase (reduce) downside (upside) risk-taking or conversely that strong controls increase (reduce) upside (downside) risk-taking. Path analyses suggest that 22.3 to 43.7 percent of the effect of internal control quality on future performance is through risk-taking. Additionally, material weaknesses are negatively associated with total asset, loan, interest income, and non-interest income growth, suggesting that internal control quality affects both core and non-core activities of banks. Overall, results suggest that strong internal controls improve bank risk-taking, in part through asymmetrically reducing downside risk-taking while facilitating upside risk-taking, ultimately improving bank performance.


5. Is Tax Aggressiveness Associated with Tax Litigation Risk? Evidence from D&O Insurance with Dain C. Donelson and Jennifer L. Glenn. Review of Accounting Studies, forthcoming.

  • Presented at Texas A&M University and the 2017 AAA Annual Meeting.

Abstract: This study uses directors’ and officers’ (D&O) insurance data to examine the relation between tax aggressiveness and tax litigation risk. D&O insurance covers litigation costs for tax-related cases. Thus, D&O insurance premiums provide an independent and direct assessment of the risk in a firm’s tax aggressiveness strategies, which mitigates some of the challenges in studying tax risk. Based on pricing decisions, D&O insurers appear to view tax aggressiveness, as measured by industry- and size-adjusted cash effective tax rates (a measure where higher rates are associated with more tax aggressiveness), as increasing tax-related litigation risk. Regarding tax uncertainty, premiums increase (decrease) as unrecognized tax benefits (UTB-related settlements with tax authorities) increase. Finally, D&O insurers focus on firms with outbound tax haven activity when pricing tax aggressiveness. Overall, this suggests D&O insurers include aspects of both low taxes and tax uncertainty when pricing tax litigation risk.


6. Insurers and Lenders as Monitors During Securities Litigation: Evidence from D&O Insurance Premiums, Interest Rates and Litigation Costs with Dain C. Donelson. Journal of Risk and Insurance, Vol. 86 (3), pp. 663696, September 2019. Internet Appendix available here.

Abstract: This study examines whether directors’ and officers’ insurers and lenders effectively monitor securities litigation and respond through pricing before case outcomes are known. By “monitoring,” we refer to tracking case progress and obtaining information from the insured (defendant) firm and its counsel prior to case resolution. We find that insurers and lenders increase rates, and that this effect is almost completely isolated to firms with cases that eventually settle. We confirm that this response is reasonable as settled cases are associated with lower future earnings, while there is generally no relation between future earnings and dismissed cases. As direct costs appear low, our results suggest that most costs are indirect in the form of reputational damage. Overall, our results suggest that researchers and policymakers interested in litigation should focus on settled cases, which are the only cases with material long-term costs.


7. Tainted Portfolios: How Impairment Accounting Rules Restrict Security Sales with Brett W. Cantrell. Journal of Business Finance and Accounting, Vol. 46 (5-6), pp. 608635, May/June 2019.

  • Presented at the 2016 AAA FARS Midyear Meeting.

Abstract: Contrary to claims that fair value accounting exacerbated banks’ securities sales during the recent financial crisis, we present evidence that suggests – if anything – that the current impairment accounting rules served as a deterrent to selling. Specifically, because banks must provide evidence of their “intent and ability” to hold securities with unrealized losses, there are strong incentives to reduce, rather than increase, security sales when market values decline to avoid “tainting” their remaining securities portfolio. Validating this concern, we find that banks incur greater other-than-temporary impairment (OTTI) charges when they sell more securities. We then find that banks sell fewer securities when their security portfolios have larger unrealized losses (and thus larger potential impairment charges), and these results are concentrated in banks with homogenous securities portfolios, expert auditors, more experienced managers, and greater regulatory capital slack. Overall, our results suggest that – contrary to critics’ claims – the accounting rules appear to have reduced banks’ propensity to sell their securities during the financial crisis.


8. Déjà vu: The Effect of Executives and Directors with Prior Banking Crisis Experience on Bank Outcomes around the Global Financial Crisis with Anwer S. Ahmed, Brant E. Christensen and Adam J. Olson. Contemporary Accounting Research, Vol. 36 (2), pp. 958998, Summer 2019.

  • Presented at Texas A&M University, the 2016 AAA Annual Meeting, and the 2017 Lone Star Accounting Research Conference.

Abstract: We investigate the effect of executives and directors with prior banking crisis experience on bank outcomes around the global financial crisis (GFC). Executives and directors with previous experience leading banks through a bank crisis may have been uniquely able to understand the risks, recognize the warnings signs early, and thus more effectively respond to the GFC. Controlling for other executive, director, and bank-level characteristics, we examine whether bank performance, risk taking, and accounting quality in the period immediately before and during the GFC are affected by having executives or directors who previously served as bank executives or directors during the 1980s/1990s banking crisis (80s/90s crisis). Overall, we find that banks led by these crisis-experienced executives and directors exhibit stronger performance, lower risk taking, and higher accounting quality in the period around the GFC. These effects are strongest among bank leaders for whom the 80s/90s crisis was most salient. Results are robust to propensity matched samples and other analyses performed to rule out alternative explanations. Our results suggest these individuals were able to learn from prior crisis experience.

Featured here on Columbia Law School's CLS Blue Sky Blog on Corporations and the Capital Markets.


9. Does Fair Value Accounting Provide More Useful Financial Statements Than Current GAAP for Banks? with John M. McInnis and Yong Yu. The Accounting Review, Vol. 93 (6), pp. 257279, November 2018.

  • Presented at Hong Kong University of Science and Technology, National Taiwan University, National University of Singapore, Texas A&M University, the University of Hong Kong, and the University of Texas at Austin.

Abstract: Standard setters contend fair value accounting yields the most relevant measurement for financial instruments. We examine this claim by comparing the value relevance of banks’ financial statements under fair value accounting with that under current GAAP, which is largely based on historical costs. We find the combined value relevance of book value of equity and income under fair value is less than that under GAAP. We also find fair value income is less value relevant than GAAP income because of the inclusion of transitory unrealized gains and losses in fair value income. More surprisingly, we find book value of equity under fair value is not more value relevant than under GAAP, due both to divergence between exit value and value-in-use and to measurement error in fair value estimates. Overall, our results suggest that financial statements under fair value accounting provide less relevant information for bank valuation than financial statements under current GAAP.


10. The Cost of Disclosure Regulation: Evidence from D&O Insurance and Nonmeritorious Securities Litigation with Dain C. Donelson and Justin J. Hopkins. Review of Accounting Studies, Vol. 23 (2), pp. 528588, June 2018.

  • Presented at the University of Chicago, the University of Connecticut, Georgetown University, the University of Pennsylvania, the University of Virginia, and the 2015 AAA Annual Meeting.

Abstract: This study examines whether the required disclosure of directors’ and officers’ (D&O) insurance premiums leads to nonmeritorious securities litigation. Our research setting uses a proprietary D&O insurance database that includes New York and non-New York firms, combined with the fact that New York firms must disclose D&O insurance premiums. We thus can exploit a natural experiment based on inter-state variation in disclosure regulation. Disclosed premiums may influence case selection in two ways. First, higher premiums signal higher limits, which plaintiffs’ lawyers likely believe enable higher settlements. Second, higher premiums indicate higher risk assessments from insurers and thus a higher likelihood that stock price drops signal misconduct rather than bad luck. We find that D&O insurance premiums for New York firms are associated with a higher dismissal rate. Offsetting this higher dismissal rate, plaintiffs’ lawyers can achieve higher settlements in the relatively few successful cases.

Featured here on Columbia Law School's CLS Blue Sky Blog on Corporations and the Capital Markets.


11. The Relation between Religiosity and Private Banks with Brett W. Cantrell. Journal of Banking & Finance, Vol. 91 (1), pp. 86105, June 2018.

Abstract: We examine the effect of headquarters’ local religiosity on private bank outcomes. Religiosity is associated with lower risk-taking for public banks, but the unique features of private banks may result in a different effect for private banks. We find religiosity is associated with greater asset risk-taking. At the same time, however, religiosity, is negatively associated with solvency risk and return on asset (ROA) volatility and is associated with higher ROAs and fewer failures. We reconcile these results by finding banks in areas with higher religiosity recognize larger fees from providing additional banking services, likely due to relationships formed from more risky lending. As a result, these banks are more (less) likely to realize extreme positive (negative) performance. We also find religiosity is associated with lower earnings management and increased conservatism. Collectively, our results confirm private banks are unique and religiosity can have a significant, and nuanced, effect on bank outcomes.


12. The Role of D&O Insurance in Securities Fraud Class Action Settlements with Dain C. Donelson and Justin J. Hopkins. Journal of Law and Economics, Vol. 58 (4), pp. 747778 (lead article), November 2015.

Abstract: Due to previous data unavailability, it is unclear how important directors’ and officers’ (D&O) insurance is in securities fraud class action settlements. Using a unique dataset of U.S. D&O policies, we find that D&O coverage is a less significant determinant of settlement amounts than estimated damages and proxies for case merits. D&O limits are related to settlements in only the weakest cases (those without accounting allegations or institutional lead plaintiffs) where proxies for case merits play a minimal role. Our findings suggest that most securities fraud class action settlements are meritorious and accounting-related cases are a reasonable proxy for fraud.


13. Litigation Risk and Agency Costs: Evidence from Nevada Corporate Law with Dain C. Donelson. Journal of Law and Economics, Vol. 57 (3), pp. 747780, August 2014.

  • Presented at the University of Texas at Austin, the 2013 Donald D. Harrington Fellows Symposium, the 2013 American Law and Economics Association (ALEA) Annual Meeting, and the 2013 AAA Annual Meeting.

Abstract: In 2001, Nevada significantly limited the personal legal liability of corporate officers and directors. We use this exogenous shock to implement a differences-in- differences design that examines the impact of officer and director litigation risk on agency costs. We find decreased firm value, especially for firms with lower levels of investor protection and the highest expected agency costs. We also find that managerial incentives are reduced as measured by lower chief executive officers’ pay-for-performance sensitivity. Finally, we find an adverse impact on operating performance and increased error-based restatements for Nevada firms subsequent to the change. Our findings emphasize that officer and director litigation risk is an important governance mechanism.

Featured here on the Securities Law Prof Blog.


14. Predicting Credit Losses: Loan Fair Values versus Historical Costs with Brett W. Cantrell and John M. McInnis. The Accounting Review, Vol. 89 (1), pp. 147176, January 2014.

  • Presented at the 2012 AAA Annual Meeting, the 2012 AAA FARS Midyear Meeting, the 2012 Lonestar Conference, Cornell University, and Oklahoma State University.

Abstract: Standard setters and many investors argue that loan fair values provide more useful information about credit losses than historical cost information while bankers and others generally disagree. We examine the ability of reported loan fair values to predict credit losses relative to the ability of net historical costs currently recognized under U.S. GAAP. Our analysis is important because credit losses in the banking sector can have severe and widespread economic effects, as the recent financial crisis demonstrates. Overall, we find that net historical loan costs are a better predictor of credit losses than reported loan fair values. Specifically, we find that historical cost information is more useful in predicting future net chargeoffs, non-performing loans, and bank failures over both short and long time horizons. Further tests indicate that the relative predictive ability of reported loan fair values improves in higher scrutiny environments, suggesting that a lack of scrutiny over reported loan fair values may contribute to our findings.


Select Working Papers

Spillover Effects in Securities Litigation with Dain C. Donelson and Rachel Flam.

  • Presented at Texas A&M University, Florida International University, and the 2020 AAA Annual Meeting.

Abstract: This study examines the spillover effect of securities litigation. Peers of the sued firm have negative three-day abnormal returns around case filings and continue underperforming over sixty trading days. Peers also improve financial reporting quality and change qualitative disclosure characteristics by providing more readable and positive annual reports while reducing the use of litigation-related terms. Finally, peers increase voluntary earnings guidance but reduce disclosure timeliness and precision. Results are primarily driven by meritorious cases (i.e., those that eventually settle), while nonmeritorious cases have little spillover. These peer changes appear largely successful as they have lower future litigation incidence.

Featured here on Duke Law School’s The FinReg Blog on the Global Financial Markets.


Litigation Risk and the Independent Director Labor Market with Dain C. Donelson and Elizabeth Tori.

  • Presented at the 2019 Yale Summer Accounting Conference, the University of Texas at Dallas, the University of Iowa, the 2020 AAA FARS Midyear Meeting, and the 2020 Lone Star Conference.

After decades of declining litigation risk, independent directors of public companies are viewed as effectively immune to personal litigation costs. However, the unexpected In re Investors Bancorp decision by the Delaware Supreme Court in 2017 lowered the liability threshold only for directors in derivative litigation over their own equity grants. Investors and firms both reacted to this rare increase in director-only litigation risk. First, Delaware firms experienced significant negative short-window returns, concentrated in firms where equity compensation is most important, consistent with investor concerns about attracting and/or retaining qualified directors. Second, Delaware firms added more qualified directors to the compensation committee. Third, Delaware firms with higher abnormal compensation decreased director compensation. Finally, Delaware firms decreased discussion of director pay in 8-K filings and their use of compensation consultants. Overall, results are consistent with firms acting to mitigate litigation concerns.

Featured here on Columbia Law School's CLS Blue Sky Blog on Corporations and the Capital Markets.


Are All Activists Created Equal? The Effect of Interventions by Hedge Funds and Other Private Activists on Long-term Shareholder Value with Edward P. Swanson and Glen M. Young.

  • Presented at Texas A&M University; the 2016 George Mason Conference on Investor Protection, Corporate Governance, and Fraud Protection; the 2016 AAA Annual Meeting; the 2017 UTS Australian Summer Accounting Conference; and the 2018 AAA FARS Midyear Meeting.

Abstract: Numerous influential critics and corporate managers allege that activist investors demand changes that increase short-term stock prices at the expense of long-term shareholder value (“short-termism”). Research to-date focuses on hedge funds. We provide new evidence by using a larger sample over a 20-year period that includes both hedge funds and other private (non-hedge fund) activists, and we supplement market returns with the reactions of analysts and institutional investors. We find that abnormal returns are positive and economically significant around ownership announcements for both hedge funds and other private activists. The announcement return is somewhat larger for other private activists, however. This is due to their frequent demands for a sale of all, or part, of the firm and the high returns they earn on this type of demand. Over a two-year, post-intervention period, the return differential increases for sale demands and becomes significant for two non-sale demands (Board composition, engage management). Despite sizable short- and long-window stock price increases, equity in companies targeted by activists does not appear to be overvalued: analysts’ recommendations become more favorable – a reversal of the pre-announcement trend – and long-term, “dedicated” institutional investors increase their ownership. Our study provides new evidence that is hard for critics to dismiss showing that interventions by activists increase long-term shareholder value.


Earnings Momentum and Bank Loan Quality with Shuping Chen and John M. McInnis.

  • Presented at Columbia University, New York University, Texas A&M University, Singapore Management University, the University of Alberta, the University of Texas at Austin, the University of Washington, and the 2015 AAA FARS Midyear Meeting.

Abstract: In the aftermath of the financial crisis, bankers, regulators, lawmakers, and others claimed that bank CEOs’ incentives to sustain high past earnings growth (earnings momentum) led banks to originate lower quality loans, which subsequently defaulted at high rates in the financial crisis. We examine this claim. Using a sample of 267 U.S. bank holding companies from 2001 to 2009, we find banks with high earnings momentum have more future non-performing loans (NPLs). In contrast, neither CEO compensation incentives nor benchmark beating metrics are associated with future NPLs. Consistent with career concerns, the effect of earnings momentum on future NPLs is concentrated in banks with younger CEOs. We also find earnings momentum is positively associated with bank failures. Further analyses show results are independent of competition pressures and earnings guidance. Our study contributes to the literature on factors associated with the dramatic collapse of the banking system during the financial crisis.