Joining the debate on the banking sector's impact on the real economy, this study examines the impact of banks' market power on local businesses' financial reporting quality. Based on the market power hypothesis and the information-based hypothesis, we propose four ways the banking market could affect the financial reporting quality. The proposed mechanisms suggest that borrowers and bank lenders face increased market power by implementing different earnings management and monitoring practices. Our documentary evidence suggests that since the banking market deregulation, restrictions on inter- and intra-state banking and branching have been removed, with banks gaining more power and the market becoming more consolidated. Using a large sample of U.S. listed firms from 1995 to 2019, we find a favourable impact of bank market power on corporate financial reporting quality, primarily driven by heightened monitoring by banks with greater market power, supporting the monitoring-stringent conjecture. In addition, this positive relationship is more pronounced among firms heavily reliant on local banks. Our results are robust to a rich set of tests, such as using alternative measurements for financial reporting quality and bank market power, including macroeconomic factors, and considering drastic changes in the bank market structure. We also address the endogeneity concerns and test the robustness of our key findings in a loan syndication setting. Our research suggests that facing increased bank market concentration and power, firms must pay additional attention to their financial reporting, which is widely used to access external finance

We examine whether employee welfare practices are associated with future stock price crash risk. Two competing hypotheses were tested: the stakeholder theory hypothesis & the agency theory hypothesis. According to the stakeholder hypothesis, if strong commitment to employee well-being genuinely aims at strengthening the firm's reputation in the market, enhancing the shareholders' engagement, avoiding costly strikes, and boosting the employees' productivity, higher level of employee welfare would be expected to mitigate stock crash risks. On the contrary, the agency theory predicts that, if managers attempt to use generous employee welfare plans to reduce the likelihood that the employees blow the whistle on the management wrongdoings, better employee welfare would likely be associated with higher crash risk. We find robust evidence supporting the agency theory thesis: high levels of employee welfare standards contribute to stock price crash risk. This finding is consistent with the view that employee welfare plans form a powerful strategy that can help managers in their bad-news-hoarding activities (withholding bad news from investors). Moreover, earnings management and the likelihood of whistleblowing appear to be the channels through which employee welfare impacts stock price crash risk. Our evidence further shows that the positive relation between employee welfare and crash risk is stronger for labor intensive firms and industries, in more regulated labor markets, and in less competitive product markets. Furthermore, this positive relationship is more pronounced in poorly governed firms and in countries with poor investors' protection and lower disclosure requirements

In this study, we use a sample of independent directors (hereafter, IDs) in China, whose primary employers have changed during their tenure as IDs, to examine whether and how geographic distance affects the monitoring role of IDs. Based on 233 relocations of IDs due to the change of their primary employers, we find that when IDs are located farther from the firm headquarters, they attend fewer meetings and express a lower percentage of dissenting opinions. The results are robust with a battery of robustness checks. In addition, we find that the negative relationship between geographic distance and meeting attendance of IDs is mitigated where there are high-speed railways between firm headquarters and the ID or when firms have a higher litigation risk. We also find that the negative relationship is more pronounced for state-owned firms. Our tests on the effectiveness of monitoring show that firms with more distant IDs have more tunneling activities and earnings management, lower sensitivity of CEO compensation to firm performance, and lower sensitivity of investment expenditure to investment opportunities. Furthermore, we focus on the relocations that make IDs more distant from the firm headquarters and find that after the relocations, firms are more likely to acquire firms in the provinces that the IDs relocate to. We find that the market reactions of M&As in the provinces that IDs relocate to are more positive after the relocations, which suggests that distant IDs have an advisory role. Finally, we find that firms with more distant IDs have lower performance and that firms are less likely to reappoint IDs in future sessions if these IDs move farther away from the firm headquarters. Our study, based on exogenous changes in geographic distance between IDs and the firm headquarters, provides new evidence that IDs who are located farther from the firm headquarters are less effective monitors due to higher cost of information acquisition