We examine how regulatory restrictions on capital market activity affect the compensation contracting environment within firms. This study aims to expand our understanding of how financial market development affects firm risk‐taking via management compensation designs. Specifically, taking advantage of the staggered implementation of the Interstate Banking and Branching Efficiency Act (IBBEA), which increases bank competition and loan geographical diversification, this study examines how borrowing firms' compensation structures change when banks increase risk tolerance in their loan portfolios. Using hand‐collected compensation data of firms with market capitalization less than $75 million, we hypothesize and find that borrowing firms are likely to increase risk incentives after IBBEA and that this increase is more pronounced for firms located in states with less banking competition in the pre‐IBBEA period. We also show the findings to be more significant for borrowers whose lenders acquire more diversification benefits after IBBEA. These findings suggest that following deregulation, when banks face increased competition as well as an enhanced ability to diversify their credit risk geographically, these same banks tend to increase their tolerance for borrowers' risk‐taking. That is, their clients—nonfinancial firms borrowing from them—adjust their compensation contracts that are previously constrained by bank distaste for risk. We also document that firms that increase their risk incentives the most invest more in R&D, suggesting that management compensation is a complementary channel through which IBBEA affects firm innovation.

Les auteurs étudient comment l’information privilégiée et le contrôle continu influent sur le rôle de la qualité de la comptabilité dans la réduction de la sensibilité des investissements aux flux de trésorerie. Selon eux, l’accès à l’information privilégiée et les restrictions directes dont les investissements font l’objet sont susceptibles d’influer sur la mesure dans laquelle la qualité de la comptabilité réduit les contraintes financières. Les résultats de l’étude semblent indiquer que, dans le cas des sociétés soumises à des contraintes financières, l’accès des banques à l’information privilégiée atténue l’importance de la qualité de la comptabilité. Les auteurs constatent en outre que dans les sociétés, qu’elles soient ou non soumises à des contraintes financières, les clauses restrictives qui s’appliquent directement aux dépenses en immobilisations atténuent également l’importance de la qualité de la comptabilité. Les résultats de l’étude donnent à penser que, si les problèmes d’asymétrie de l’information sont susceptibles d’être très importants, la qualité de la comptabilité est elle aussi très importante. Toutefois, l’importance de la qualité de la comptabilité est moindre si les bailleurs de fonds externes ont accès à l’information privilégiée, et elle est nulle si ces bailleurs de fonds imposent à la société des restrictions contractuelles applicables aux investissements. Les auteurs démontrent également que l’accès des banques à l’information privilégiée réduit la sensibilité des liquidités aux flux de trésorerie et atténue l’importance de la qualité de la comptabilité dans la réduction de cette sensibilité. Cette preuve supplémentaire indique, semble‐t‐il, que les résultats obtenus par les auteurs en ce qui a trait à la sensibilité des investissements aux flux de trésorerie ne sont pas le fait d’une erreur de mesure de l’ensemble des occasions d’investissement.

We examine stock and bond market reactions to the key events leading to the passage of the Dodd–Frank Act to assess the markets’ expectations about the effectiveness of the Act on systemically important financial firms. Using small/medium sized domestic financial institutions as a control group, we find that large financial institutions overall had negative abnormal stock returns and positive abnormal bond returns, suggesting that the markets expect the Act to be effective in reducing these banks’ risk-taking. We further investigate the market reactions for (1) larger and more interconnected financial institutions; and (2) the Big 6 banks to evaluate the markets’ assessment about the effectiveness of the act in ending the too-big-to-fail policy. We document that larger and more interconnected financial institutions experienced more negative abnormal stock returns and more positive abnormal bond returns as compared to other banks in our sample, but these relations are not present during the final phase of the passage. Likewise, we find that both shareholders and bondholders of the Big 6 banks initially experienced significant negative returns, followed by insignificant returns during the final phase of the passage. These results appear to suggest the markets are doubtful about the effectiveness of the final version of the bill to end the too-big-to-fail status in particular for the Big 6 banks.

We examine the commitment effect provided by mandatory disclosure and the information effect of voluntary disclosure on market illiquidity by exploring a regulatory change that allows smaller reporting companies to reduce the disclosure of certain information in their SEC filings. This regime change allows us to separate the commitment effect provided by mandatory disclosure from the information effect of voluntary disclosure. We find that firms that are eligible to reduce their disclosure, but voluntarily maintain their disclosure level, experience an increase in market illiquidity. We also find that the increase in illiquidity is more pronounced for firms with higher agency costs. These findings suggest that mandatory disclosure serves as a credible commitment mechanism and that losing such commitment by disclosure deregulation is costly in the absence of a loss of information. Our study suggests that while voluntary disclosure is effective in reducing information asymmetry, it cannot replace mandatory disclosure in addressing information problems. Data Availability: Data are available from sources identified in the text.