Our analysis of how banks’ responses to asset price changes can result in procyclical leverage reveals that, for banks with a binding regulatory leverage constraint, absent differences in regulatory risk weights across assets, procyclical leverage does not occur. For banks without a binding constraint, fair value and bank regulation both can contribute to procyclical leverage. Empirical findings based on a large sample of U.S. commercial banks reveal that bank regulation explains procyclical leverage for banks relatively close to the regulatory leverage constraint and contributes to procyclical leverage for those that are not. We also show that fair value accounting does not contribute to procyclical leverage.

We provide evidence that firms with more transparent earnings enjoy a lower cost of capital. We base our earnings transparency measure on the extent to which earnings and change in earnings covary contemporaneously with returns. We find a significant negative relation between our transparency measure and subsequent excess and portfolio mean returns, and expected cost of capital, even after controlling for previously documented determinants of cost of capital.

We examine how analysts respond to public information when setting stock recommendations. We model the determinants of analysts' recommendation changes following large stock price movements. We find evidence of an asymmetry following large positive and negative returns. Following large stock price increases, analysts are equally likely to upgrade or downgrade. Following large stock price declines, analysts are more likely to downgrade. This asymmetry exists after accounting for investment banking relationships and herding behavior. This result suggests recommendation changes are “sticky” in one direction, with analysts reluctant to downgrade. Moreover, this result implies that analysts' optimistic bias may vary through time.

This study tests predictions that pricing multiples on and incremental explanatory power of equity book value (net income) increase (decrease) as financial health decreases. Tests using a sample of 396 bankrupt firms and tests using a larger, pooled sample both yield inferences consistent with predictions. Findings are robust to inclusion of controls for industry, size, return-on-equity, and volatility of equity returns. Equity book value and net income multiples and incremental explanatory power vary predictably across three illustrative industries, selected based on the likely extent of unrecognized intangible assets.

This study analyzes the relation between auditors' perceived business risk and audit fees to determine whether audit firms or their clients bear the expected legal costs of business risk. We predict that hourly audit fees and the number of audit hours are increasing in business risk. Using confidential survey data collected by a large international accounting firm for 422 audits, we find that high business risk increases the number of audit hours, but not the fee per hour. This implies that firms perceive firm‐level differences in business risk and obtain compensation through billing additional hours, not by raising the hourly charge.

Amendment of IAS 39 by the IASB in 2008 provided an option to reclassify investments from fair value to historical cost. We predict that too-important-to-fail (TITF) banks took less advantage of this option because the political protection they enjoyed insulated them from regulatory pressure. Banks that did not enjoy this protection had greater reason to make use of this option since doing so would protect their Tier 1 capital. As predicted, findings reveal that TITF banks made less use of the reclassification option to protect their Tier 1 capital and there is a significant moderating influence of TITF status on the incentive to reclassify investments for banks with lower regulatory capital. This finding is consistent with TITF banks placing less weight on protecting regulatory capital and thereby retaining flexibility to sell assets. Our findings provide evidence that accounting choices are affected by the importance of banks to their economies.

This study examines whether the implementation of industry-specific accounting standards helps capital market participants in making decisions about providing capital to firms. We predict and find an, on average, increase in firms’ capital growth in years following implementation of the relevant industry standard. The increase in capital growth arises primarily from equity issuances and is attributable to the implementation of the standards rather than industry-specific trends or economic shocks. We explore heterogeneity in industry standards and find more pronounced effects for (i) industry standards that reveal new information, provide explicit guidance, or increase accounting uniformity, and (ii) small firms, firms with greater information asymmetry, and firms with greater capital constraints before implementation of the standards. We also find evidence consistent with two channels explaining the documented increase in capital flows: reduction of information asymmetry and increase in financial statement comparability.

This study provides evidence that private loan issuance offers opportunities for borrowers to learn new information about their own risks and subsequently disclose such information in their risk factor disclosures (RFDs) to satisfy lenders’ demand for transparency about borrowers’ risks. This loan issuance effect on risk disclosures is more pronounced when greater learning opportunities are present and when lenders have a stronger demand for borrowers’ risk information transparency. Further analyses suggest that the enhanced risk disclosures following loan issuance not only benefit lenders by reducing the costs of accessing the secondary credit markets, but also create spillover benefits for equity investors by increasing risk information about the borrower and reducing uncertainty about the borrower’s risk. Taken together, these findings suggest that borrowers’ private interactions with lenders provide new opportunities for managers to generate and reflect fresh information in corporate risk disclosures, ultimately benefiting a wide range of capital market participants. Data Availability: Data are available from the sources identified in the paper.

We directly test the reliability and relevance of investee fair values reported by listed private equity funds (LPEs). In our setting, disaggregated fair value measurements are observable for funds’ investees; and investee accounting fundamentals are also publicly disclosed. We find that LPE fair value measurements reflect equity book value and net income in a manner consistent with stock market pricing of listed companies. However, LPE fair value measurements appear to distinguish between Level 1 and Level 3 inputs – they reflect investee net income to a lesser extent for Level 3 inputs. Further evidence based on the stock market pricing of LPE funds indicates that the discretion exercised by LPE fund managers when determining investee valuations is perceived as reliable.