We investigate the effects of NASD Rule 2711 on analysts' conflict of interest in corporate financing activities. Specifically, we examine the relations (1) between analysts' guidance in earnings forecasts and recommendations and corporate external financing and (2) between external financing and future stock returns during the 1994–2010 period. We find a positive relation of analysts' guidance in earnings forecasts and recommendations (especially long-term growth forecast and recommendations) and corporate financing activities, but the relation is weaker in the post-Rule period than in the pre-Rule period. We also find a negative relation between corporate external financing and future stock returns, but the relation is weaker in the post-Rule period. Moreover, the changes of these relations after the implementation of the Rule are greater for firms with greater conflicts of interest. Our empirical results suggest that Rule 2711 has reduced the extent of analysts' conflicts of interest in corporate financing activities.

This study examines the relevance of modified audit opinions (MAO) in private debt contracting. We use the auditor׳s explanatory language to partition MAOs into Inconsistency opinions, resulting from an accounting change or a restatement; and Inadequacy opinions, arising from a material uncertainty or a going concern (GC) opinion. Using the loan contracts of firms with MAOs, we find that, compared with loans issued in the year after a clean opinion, loans issued in the year after an MAO are associated with higher interest spreads (17 basis points on average), fewer financial covenants, more general covenants, smaller loan sizes, and a higher likelihood of requiring collateral. We find that the effect on loan spreads (as well as on other non-price terms) varies by the type of MAO, ranging from no effect for an accounting change to an average increase of 107 basis points for a GC opinion. Additional analyses of GC opinions find that auditors communicate incremental information to lenders about clients’ credit risk. Overall, our empirical results suggest that lenders incorporate the information contained in MAOs into debt contracting.

This paper develops a theoretical model to explain corporate divestment in the context of accounting-based valuation and provides empirical evidence to support the model's predictions. Building on Zhang's (2000) real-options-based equity value model, we develop a model to explain why firms with multiple business segments may have incentives in financial reporting to shift earnings from one segment to another to influence market valuation. Cross-segment earnings shifting, however, causes information asymmetry about segmental performance, which leads to market misvaluation. Divestment arises as a voluntary commitment by (some) firms to not engage in segmental earnings manipulation, with the aim of restoring valuation accuracy. Our theoretical analysis yields a number of testable implications. Consistent with our model's predictions, we find empirically that (1) divestment is preceded by an increased divergence in profitability between the divested and continuing segments of the divesting firm, (2) there are positive abnormal stock returns surrounding divestment announcements that are not dependent on increased expectations about future operating performance, (3) the magnitude of market revaluation increases with the profitability divergence between the divested and continuing segments, and (4) market revaluation is greater for more complex firms (in terms of having a larger number of segments and greater uncertainty facing investors).

Applying a real-options-based valuation approach, we develop and test a model that addresses the incremental value relevance of segment data beyond firmlevel accounting data. Prior studies (e.g., Zhang 2000; Biddle et al. 2001) show that equity valuation requires accounting data (in part) because accounting provides signals that guide capital investments underlying value creation. In this study, we establish that the usefulness of segment data beyond aggregate data relates to heterogeneity of investment opportunities across segments, caused by divergences of segment profitability and growth potential. Empirical results are consistent with the model's predictions. We also assess the magnitude of the valuation impact of segment information relative to that of firm-level information.

Looking at a sample of nearly 2,400 banks in 69 countries, we find that stronger creditor rights tend to promote greater bank risk taking. Consistent with this finding, we also show that stronger creditor rights increase the likelihood of financial crisis. On the plus side, we find that stronger creditor rights are associated with higher growth. In contrast, we find that the benefits of information sharing among creditors appear to be universally positive. Greater information sharing leads to higher bank profitability, lower bank risk, a reduced likelihood of financial crisis, and higher economic growth.

ABSTRACT How prior trust moderates investor responses to restatements is unknown. We examine how societal trust affects the changes in institutional investors’ shareholdings around a restatement. We consider two competing hypotheses based on the erosion of trust and confirmatory bias. We find the change in institutional investors’ shareholdings around a restatement is more negative for investors from high trust areas compared to low trust areas, consistent with an erosion of trust where high trust institutional investors view the restatement as a violation of trust. Further analyses show that our findings vary with the regulatory or economic environment, type of institution, and type of restatement. Our results are also robust to different tests that address endogeneity and use alternative societal trust measures. Overall, we contribute to the literature by examining the role of societal trust in a dynamic setting where investors’ trust-based beliefs about the credibility of accounting information are not realized. Data Availability: GSS Sensitive Data Files are not available from the authors. Persons interested in obtaining these data should contact the GSS at [email protected]. Other data are available from the public sources cited in the text. JEL Classifications: G11; G23; G41.

ABSTRACT We study whether cross‐country differences in regulations have affected international bank flows. We find strong evidence that banks have transferred funds to markets with fewer regulations. This form of regulatory arbitrage suggests there may be a destructive “race to the bottom” in global regulations, which restricts domestic regulators’ ability to limit bank risk‐taking. However, we also find that the links between regulation differences and bank flows are significantly stronger if the recipient country is a developed country with strong property rights and creditor rights. This suggests that, while differences in regulations have important influences, without a strong institutional environment, lax regulations are not enough to encourage massive capital flows.

In this study, we examine whether firms that act more socially responsible receive more favorable media coverage, and we consider whether firms use CSR to actively manage their media image. We focus on all news stories about a firm, not just those that report on specific CSR initiatives, and find that more socially responsible firms receive more favorable news reportage overall, i.e., they have a more positive media image. These findings are robust after controlling for potential endogeneity. Further, consistent with firms actively managing their media image, we find a stronger relation between CSR and media favorability when incentives to improve a firm’s media image are high, e.g., among firms in sin industries, during periods of low investor sentiment, and prior to seasoned equity offerings. Finally, we find that for firms that demonstrate superior social responsibility and receive more favorable news reporting, there is a significant interaction between social responsibility and media favorability that increases (decreases) a firm’s equity valuation (cost of capital). Our results are consistent with the media slanting their reporting in favor of good performing CSR firms. Overall, we contribute to the literature by showing that firms can influence their media coverage through a relatively subtle channel, CSR performance.

ABSTRACT This paper documents that changes in litigation risk affect corporate voluntary disclosure practices. We make causal inferences by exploiting three legal events that generate exogenous variations in firms' litigation risk. Using a matching-based fixed-effect difference-in-differences design, we find that the treated firms tend to make fewer (more) management earnings forecasts relative to the control firms when they expect litigation risk to be lower (higher) following the legal event. The results are concentrated on the earnings forecasts conveying negative news and are robust to alternative specifications, samples, and outcome variables. JEL Classifications: D80; G14; K22; K41; M41.