We examine whether requiring insiders to sell their stock shares based on pre-disclosed plans can mitigate opportunistic insider selling activities and, more importantly, to what extent insiders can circumvent this regulation. Using China's mandate enacted in 2017 as the setting, we demonstrate that a sell-by-plan mandate can reduce opportunistic selling activities. However, insiders can circumvent this mandate by strategically initiating their plans before bad news. We find that this gaming practice is widespread in China. It is concentrated in firms with weak governance but largely absent in firms with strong governance. We also find that China's stock market cannot discern whether a plan is opportunistically motivated upon its announcement. Overall, this paper highlights a new form of opportunism in insider trading—opportunistic planning—and proposes a method to identify such plans. Our results also suggest that government regulation, without strong governance, could be ineffective in curbing corporate executives' opportunistic behaviors.

Abstract We study how financial certifier competition influences loan contracting in the context of financial auditing. Exploiting the unexpected demise of Arthur Andersen that exogenously decreased auditor competition, we find a greater decrease in loan spread for borrowers in markets in which certifier competition declined more. Additional analyses suggest the result stems from enhanced audit quality and reduced credit risk. The effect of certifier competition is stronger for borrowers with weaker external monitoring and those generating significant revenue for their auditors. Our evidence highlights negative consequences of financial certifier competition. (JEL D43, G21, M42, M49)

Abstract We document firms often determine CEO equity grants based on a predetermined dollar value (value-based equity grant) instead of on the number of shares (share-based grant). Value-based equity grants weaken the relationship between stock performance and CEO equity pay, lower CEO portfolio delta, and slow firms’ investment in R&D. We find that retention pressure is a key reason for the use of value-based equity pay, while governance could also matter. Overall, this paper alerts boards to the unintended consequences of pursuing a target pay level or pay structure because such practices can lead to value-based equity grants in CEO compensation.

With the recent evolution of the cryptocurrency market, financial misconduct has become a major concern. Using on-chain data from the 500 most traded NFT (non-fungible token) collections, this study investigates wash trading in NFT markets. We first detect suspicious wash trades that form closed loops and then validate the prices of these trades using Benford’s Law. Excluding token-incentivized wash trades, we propose a conceptual model and argue that collusion between wash traders and insiders is the primary motivation of wash trading. Empirical analysis reveals that insiders tend to sell during or shortly after wash trading. This manipulation creates a pump-and-dump effect, causing losses for buyers during the pump phase. Our research reveals the underlying mechanisms of such misconduct and highlights the need for regulation in the cryptocurrency market.

ABSTRACT The SEC's Disclosure Effectiveness Initiative (December 2013) highlights a difference between accounting regulators and academics in their perceptions of Item 1A risk factor disclosure effectiveness. Because most academic evidence relies on pre‐financial crisis data, we compare changes in risk factor disclosure informativeness before and after the crisis as a possible explanation for this disconnect. We further explore this discrepancy by considering (i) three classes of market participants, (ii) new, discontinued, and repeated disclosures, and (iii) nonmarket outcomes. Our results confirm previous findings but indicate that those results no longer hold in the subsequent period. Specifically, we find that although equity, option, and bond markets react to unexpected risk factor disclosures in the period leading up to the financial crisis (2006–2008), the market reactions decline significantly in the post‐crisis period (2009–2014). Perhaps surprisingly, the documented changes in informativeness are not driven by disclosures repeated from one year to the next but instead result from new disclosures initiated in the current year and, in the option and debt markets, also from disclosures discontinued from the previous year. Finally, using the Altman Z ‐score as an objective bankruptcy risk measure, we find that the association between risk factor disclosures and companies’ future bankruptcy risk declines significantly in the post financial crisis period. Taken together, these findings contribute to the current disclosure effectiveness debate by highlighting that risk factor disclosures, which were informative in the preceding period, become less reflective of the underlying economic risks and thus less informative to investors in the post‐crisis period. La déclaration des facteurs de risque est‐elle toujours pertinente ? Données tirées des réactions du marché à la déclaration des facteurs de risque avant et après la crise financière

Abstract We study how derivatives (with nonlinear payoffs) affect the underlying asset’s liquidity. In a rational expectations equilibrium, informed investors expect low conditional volatility and sell derivatives to the others. These derivative trades affect different investors’ utility differently, possibly amplifying liquidity risk. As investors delta hedge their derivative positions, price impact in the underlying drops, suggesting improved liquidity, because informed trading is diluted. In contrast, effects on price reversal are ambiguous, depending on investors’ relative delta hedging sensitivity (i.e., the gamma of the derivatives). The model cautions of potential disconnections between illiquidity measures and liquidity risk premium due to derivatives trading.

ABSTRACT We present theory and empirical evidence that greater financial reporting quality can incentivize myopic investments. In the model, greater financial reporting quality increases investor response to earnings, elevating the manager’s incentive to invest myopically to improve earnings. Using the setting of Big N auditors’ acquisitions of non-Big Ns, which increased investor response to earnings for the acquired client firms, we find evidence supporting myopic investments. Specifically, acquired clients decrease intangible investments, particularly when (1) the increase in investor response to earnings is larger and (2) the horizon of shareholders is shorter. The investment decrease is inefficient, as evidenced by reduced profitability, fewer exploratory innovations, and other measures. JEL Classifications: G14; G34; M41; M42; O31; O34; N22.

We test the predictions of Titman (1984) and Berk, Stanton, and Zechner (2010) by examining the effect of leverage on labor costs. Leverage has a significantly positive impact on cash, equity-based, and total compensation of chief executive officers (CEOs). Compensation of new CEOs hired from outside the firm is positively related to prior-year firm leverage. In addition, leverage has a positive and significant impact on average employee pay. The incremental total labor expenses associated with an increase in leverage are large enough to offset the incremental tax benefits of debt. The empirical evidence supports the theoretical prediction that labor costs limit the use of debt.