Publications (in chronological order)
Published in The Accounting Review Vol. 89 (1), pp. 147-176, January 2014. Presented at the 2012 AAA Annual Meeting, the 2012 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.
Published in The Journal of Law and Economics Vol. 57 (3), pp. 747-780, August 2014. Presented at the University of Texas at Austin, the 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.
Published in The Journal of Law and Economics Vol. 58 (4), pp. 747-778 (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.
Published in the Review of Accounting Studies Vol. 23 (2), pp. 528-588, June 2018. Presented at the University of Chicago, University of Connecticut, Georgetown University, University of Pennsylvania, 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 the CLS Blue Sky Blog: Columbia Law School's Blog on Corporations and the Capital Markets.
Published in the Journal of Banking & Finance Vol. 91 (1), pp. 86-105, 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.
Forthcoming in The Accounting Review, Vol. 93 (6), November 2018. Presented at Hong Kong University of Science and Technology, National Taiwan University, National University of Singapore, Texas A&M University, 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.
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.
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Presented at Texas A&M University and the 2017 AAA Annual Meeting.
Abstract: This study examines the relation between tax risk and litigation costs. We document a recent increase in non-IRS tax-related litigation, and show how directors’ and officers’ (D&O) insurers have changed policy pricing regarding measures of tax planning and financial reporting for income taxes. First, the rate of tax-related litigation, including SEC enforcement and shareholder litigation, increased roughly 300 percent from 1996-2005 (25 total cases, with settlements of $215 million) to 2006-2016 (99 total cases, with settlements of $486 million and 26 cases still pending). Second, concurrent with tax-related litigation becoming more economically significant, D&O insurance premiums switch from being associated with relatively simpler tax planning proxies, such as effective tax rates and book-tax differences, in the earlier period to more complex proxies, such as tax accrual quality and disclosed uncertain tax positions, in the more recent period. Overall, D&O insurance premiums provide useful information about tax risk related to litigation.
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.