Journal of Accounting and Public Policy, accepted manuscript (with Axel Adam-Mueller)
We examine companies’ compliance with IFRS risk disclosure rules for the first fiscal year following 2007. For a sample of 383 firms from 20 European countries, we find that average risk disclosure compliance is only 62 percent. Countries’ enforcement strength is generally positively associated with risk disclosure compliance and even more effective in the presence of outsider monitoring. We highlight that cross-country differences in enforcement must be properly accounted for to ensure consistent risk disclosure compliance.
Not all clawbacks are the same: Consequences of strong vs. weak clawback provisions.
Journal of Accounting and Economics (66), pp. 291-317, 2018 (with Ying Gan and Burcin Yurtoglu)
We develop a Clawback Strength Index and show that while some firms adopt unambiguous and strong clawback provisions, others adopt weak ones. We find that strong clawback adopters experience improvements in financial reporting quality, fewer CEO turnovers, and lower CEO pay. We advance two possible explanations: First, clawback strength may be primarily responsible for the improvements in reporting quality. Second, strong clawbacks may yield benefits because they are part of a broader reform package. While our findings on reporting quality and CEO turnover are consistent with both explanations, our results on CEO pay support only the broader reform explanation.
International evidence on the impact of adopting English as an external reporting language.
Journal of International Business Studies, 46, pp. 180-205, 2015 (with Thomas Jeanjean, Hervé Stolowy and Teri Lombardi Yohn)
This study investigates the economic consequences of non-English-speaking companies adopting English as an external reporting language. We examine a sample of European companies that initiate the voluntary issuance of an annual report in English in addition to the local language annual report. To control for self-selection, we use a difference-in-differences design with a propensity score matched control sample. We find that adoption of English as an external reporting language is associated with increased foreign ownership, decreased information asymmetry, and increased analyst following. We also find that these benefits are not conditional on the use of IFRS for financial reporting. Our findings hold if we run a number of robustness checks to control for correlated events (creation of an investor relations service, provision of conference calls,and/or changes in management). These results are consistent with the language used in the annual report acting as a barrier to investment for some investors and with annual reports issued in English reducing investors’ information processing costs.
Non-financial information: State of the art and research perspectives based on a bibliometric study.
Comptabilité, Control et Audit, 21 (3), pp. 13-90, 2015 (with Luc Paugam and Hervé Stolowy)
We conduct a bibliometric analysis of academic articles published on the topic of non-financial information (NFI). This analysis covers 787 articles published in 53 journals over the timespan 1973 to 2013. We examine several important questions about the state of the art of academic research on NFI: How is NFI defined in the literature? Can NFI be precisely defined? How has interest in NFI evolved over time in the academic literature? What are the main topics covered by NFI research? What are the main methodologies used by researchers? To what extent are studies country-specific? We find that many articles do not define the concept of NFI but refer to underlying concepts such as social, environmental, human capital or corporate social responsibility (CSR) reporting. We document that academic research on NFI reached a certain degree of maturity around the late 1990s / early 2000s, a time when several new specialized journals were created that now capture an important share of the market. We identify 10 topics covered by research on NFI and show that the most frequently-studied topic in NFI research is CSR reporting. We also discover that the volume of research concerning auditing of NFI is growing, whereas management accounting/control research on NFI is limited. We find that the growth in NFI research is fueled mainly by articles using archival data (quantitative or qualitative) and essay methodologies. Finally, we suggest directions for future research.
Welcome back? CEO reappointments.
With Ying Gan and Hervé Stolowy
We analyze reappointments of former CEOs of U.S. listed firms over the period 1992 – 2016. For a sample of around 200 CEO reappointments, we find that shareholders of these firms experience statistically significant negative stock valuation consequences. Our findings are robust to multiple return measurement windows and alternative definitions of abnormal returns. We also document that market reactions depend on certain executive-specific attributes, such as whether she is the founder of the firm or whether she is also appointed as chairman of the board of directors. Finally, we show that firm performance deteriorates after a former CEO is appointed relative to appointing a non-former CEO. Our results provide evidence that the market considers reappointed CEOs as “leaders of last resort” and highlights the importance of CEO succession planning.
Market perception and economic consequences of banking deregulation
With Ying Gan
Six years after the introduction of the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA) in 2010, various congressional and presidential attempts have been made to roll-back part of the DFA. Such attempts include the Financial Choice Acts of 2016 and 2017 and the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018. We study 28 events related to the deregulation of financial markets and find significant positive market reactions around such events for 298 banks: The cumulative abnormal returns vary between 1.20% and 2.53% depending on the benchmark market portfolio. We further find that riskier, medium-sized, and better governed financial firms experience more positive market returns. Finally, we document that firms experiencing such positive abnormal returns subsequently increase their lending activity and their Tier 1 capital ratio. Our findings suggest that shareholders, banks and debtors will likely benefit from financial market deregulation.
Actions speak louder than words: Earnings management vs. unlock day trading.
With Yun Dai
We show that, around unlock days of initial public offerings (IPOs), pre-IPO shareholders inflate earnings to get a high price to cash out. Yet, the unlock day trading plays a counter-effective role, alerting investors to interpret earnings cautiously. The unlock day returns react negatively to previous earnings management, and a high level of earnings management in post-lockup earnings announcement is punished by low stock return.
Clawback strength and accounting conservatism
With Ying Gan and B. Burcin Yurtoglu
Based on the notion that both clawback provisions and accounting conservatism can be part of a firm’s available set of governance tools to constrain managerial opportunistic behavior, we test whether clawback provisions and accounting conservatism act as complements or substitutes. We build on the Clawback Strength Index developed by Erkens et al. (2018) and categorize firms into ‘committed’ and ‘non-committed’ firms to proxy for their commitment to good governance practices. For a sample of 418 U.S. firms we find that clawbacks and accounting conservatism act as substitutes for committed firms: The relation between clawbacks and many proxies for accounting conservatism is consistently negative. Moreover, shareholders associate the change in governance structure with better investment decisions as evidenced by significantly positive announcement returns around M&A transactions.
Determinants of clawback strength
With Ying Gan
The paper analyzes the determinants of the strength of voluntarily adopted clawback provisions. It does so by constructing a Clawback Strength Index that reflects the core elements of a strong clawback policy. An extensive linguistic analysis is employed to study 4,464 clawbacks from all Russell 3,000 non-financial firms over 2007-2013. I find that executive power, the executives’ pay level, firm complexity and firm risk are associated with weak policies, whereas the strength of a clawback is increasing in directors’ experience.
Economic consequences of Dodd-Frank
With Ying Gan and Baohua Xin
We analyze the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA) on banks’ risk-taking behavior of large and complex financial institutions. We argue that the heightened prudence and more transparent disclosure standards should make banks more risk averse. To the best of our knowledge, prior research has mainly focused on the stock and bond market reaction to the key events leading to the passage of the DFA and the impact of the DFA on corporate bond ratings, but has not studied changes in banks’ risk-taking behavior.
With Emre Ertunc
We examine the economic consequences of cross-delisting taking into account the legal environments of the home countries. We find no evidence suggesting that cross-delisting from a U.S. stock exchange on average results in an increase in information asymmetry or a decrease in liquidity.