Simplifying Complex Disclosures: Evidence from Disclosure Regulation in the Mortgage Markets
Coauthored with Patrick Kielty and K. Philip Wang
Published in The Accounting Review in 2023
Complex disclosures have long been a major source of borrowers’ poor understanding of mortgages. We examine the effect of simplifying mortgage disclosures in a difference-in-differences design around a significant disclosure rule mandated by the Consumer Financial Protection Bureau in 2015. We find that inexperienced borrowers (first-time home buyers) pay significantly lower interest rates after the disclosure regulation relative to experienced borrowers (repeat buyers), suggesting that simplifying these disclosures reduces mortgage interest costs. Additional tests show that the reduction in interest costs is not accompanied with more upfront non-interest costs paid by borrowers. Our cross-sectional analyses reveal two mechanisms through which simplifying disclosures lowers interest costs: curbing predatory lending and facilitating borrower shopping. We further find that disadvantaged borrowers (Black, Hispanic, and single female) benefit more from simplified disclosures. Last, we do not find that simplifying disclosures affects mortgage loan performance.
The tradeoff between relevance and comparability in segment reporting
Coauthored with Lisa Hinson and Jenny Tucker
Published in the Journal of Accounting Literature in 2019
The rule change for segment reporting in 1998 has arguably made segment reporting more relevant through the adoption of the management approach. Meanwhile, the management approach has resulted in a decrease in the comparability of segment income. We introduce firm-specific measures of changes in relevance and comparability due to the rule change. Our treatment firms experienced an increase in the relevance of segment reporting but a large decrease in the comparability of segment income; our benchmark firms barely experienced any changes in relevance and comparability. We examine earnings forecasts before vs. after the rule change issued by financial analysts—a major user group of segment reporting. Relative to benchmark firms, treatment firms’ analyst forecast error reductions around the segment disclosure event are not significantly different after the rule change than before the rule change, but treatment firms’ forecast dispersion reductions around the segment disclosure event are significantly larger after the rule change than before the rule change. These results suggest that despite the decrease in comparability, the new segment reporting rule has increased the decision usefulness of segment information by decreasing disagreement among analysts.
Product Market Threats: Implications for Future Profitability and its Use by Market Participants
Coauthored with Marcus Kirk and Jeffery Piao
Working paper
This study establishes the informational value of a firm’s product market competition, a measure derived from narrative disclosures in 10-K filings. Consistent with Fluidity capturing dynamic competitive pressures and instability related to emerging threats from rivals, we find that product market fluidity has large explanatory power for future performance and uncertainty. Specifically, higher Fluidity (i.e., higher product market threats) is negatively associated with future earnings, operating cash flows, and margins; and positively associated with the variability of future earnings and operating cash flows. However, capital market participants do not fully use this information leading to predictable future stock returns and sell-side analyst forecast errors. A trading strategy exploiting this information is associated with abnormal future returns. In subsample analyses, we find the results are strongest amongst firms with lower flexibility to adapt to the changing product market. Overall, our findings suggest that qualitative disclosures can convey valuable information to capital market participants and capture a dynamic measure of competition distinct from existing measures.
The Effect of Financial Reporting for Restructuring on Firm Choice of Divestiture Form
Dissertation
I examine whether financial reporting for restructuring influences managers’ choice of divestiture form. Firms have three major divestiture form options: a firm can sell a unit to another firm in a sell-off; sell a percentage of shares in a unit to new shareholders in an equity carve-out; or separate a unit and pro-ratably distribute the new unit’s shares to existing shareholders in a spin-off. My study is set around a financial reporting change, adopted in FAS 146 in 2002 and FAS 141(R) in 2007 for two different types of restructurings, that delays the recognition of restructuring charges until the costs are incurred. Prior to this reporting change, firms could recognize restructuring charges before they were incurred—a “big bath” opportunity that enabled financially struggling firms, which tend to divest through sell-offs, to show improvement after the completion of a restructuring. After the reporting change, firms must delay the recognition of restructuring charges until they are incurred, thereby reducing opportunistic use of restructuring costs. I predict and find that the accounting change reduces the desirability of a sell-off and increases the relative likelihood of a spin-off. Overall, my findings suggest that financial reporting for restructuring influences managers’ choice of divestiture form. This paper contributes to the literature on the real effects of accounting by providing evidence that financial reporting rules influence execution of a decision.
Analyst extraversion: characteristics and career outcomes
Coauthored with Patrick Kielty and Marcus Kirk
Working paper
This study investigates whether sell-side analysts’ personality characteristics are associated with job performance and career outcomes. Using well-established statistical linguistic learning techniques, we determine the extraversion level of each analyst. We find that extraverted analysts issue more pessimistic earnings forecasts and less accurate but bolder earnings forecasts. We find that extraverted analysts are less likely to participate on conference calls and, when they do, talk less and have fewer dialogues with management. We also find that extraverted analysts are less likely to be recognized as Institutional Investor All-Stars. Our findings suggest that while prior research finds that extraversion is related to positive outcomes in the executive setting, it is related to more negative outcomes in an analyst setting.