Against the backdrop of an increasing threat of misinformation on social media, several countries have enacted regulations to curb the spread of misinformation. This study examines how corporate social media strategy responds to misinformation regulations. Using a large cross-country dataset of corporate tweets and a stacked regression analysis, we show that misinformation regulations lead to less corporate social media disclosure. This result suggests that, by deterring misinformation, these regulations reduce firms’ need to use social media to counteract its adverse effects. Additional analyses show that the effect strengthens among countries with higher social media usage and those with stronger investor protection but weakens for firms with stronger information environments. Finally, we provide direct evidence that firms post fewer tweets refuting misinformation about themselves following the enactment of these regulations.

Securities litigation risk is a well‐recognized yet underexplored source of financial reporting complexity or unreadability. This study examines the effect of litigation risk on the readability of corporate financial reports. The 1999 Silicon Graphics Inc. (SGI) court ruling unexpectedly reduced litigation risk for firms within the Ninth Circuit Court's jurisdiction. Using a difference‐in‐differences design centered on the SGI court ruling, we find that, while the readability of financial reports generally declines over the sample period, treated firms in the Ninth Circuit experience a comparatively smaller decline in readability than control firms in other states after the ruling. Put differently, treated firms experience a relative improvement in reporting readability following the ruling. This effect is concentrated among firms prone to securities litigation and those with greater external financing needs, but it is muted for firms engaging in earnings management. Furthermore, improved reporting readability among treated firms can be partially attributed to alleviated concerns about the adequacy of cautionary language, as evidenced by a significant decrease in negative forward‐looking statements, particularly risk‐related ones. Collectively, our findings suggest that securities litigation risk contributes to reduced readability in financial reporting.

Despite a longstanding debate over the pros and cons of imposing legal liability on directors and officers (D&Os), there is limited evidence on how D&O liability affects corporate innovation. We study this question by exploiting Nevada's 2001 corporate law change that dramatically lowered D&O legal liability and helped Nevada become the second most popular state for out-of-state incorporations. We find that firms incorporated in Nevada exhibit an increase in innovation outputs relative to matched control firms after the law change, particularly firms facing higher litigation risk or operating in more innovative industries. The results are driven mainly by exchange-listed firms that are subject to better governance than over-the-counter (OTC) listed firms. Lower D&O liability also enables firms to pursue more risky, but potentially more rewarding, explorative innovation. Therefore, although holding D&Os liable may be desirable overall, it also entails a cost by discouraging innovation in some firms. Our study has implications for how the litigation environment may influence sustainable growth via innovation.

Using a large sample of U.S. firms for the period 1995–2008, we provide strong and robust evidence that corporate tax avoidance is positively associated with firm-specific stock price crash risk. This finding is consistent with the following view: Tax avoidance facilitates managerial rent extraction and bad news hoarding activities for extended periods by providing tools, masks, and justifications for these opportunistic behaviors. The hoarding and accumulation of bad news for extended periods lead to stock price crashes when the accumulated hidden bad news crosses a tipping point, and thus comes out all at once. Moreover, we show that the positive relation between tax avoidance and crash risk is attenuated when firms have strong external monitoring mechanisms such as high institutional ownership, high analyst coverage, and greater takeover threat from corporate control markets.

Using a large sample of U.S. firms for the period 1993–2009, we provide evidence that the sensitivity of a chief financial officer's (CFO) option portfolio value to stock price is significantly and positively related to the firm's future stock price crash risk. In contrast, we find only weak evidence of the positive impact of chief executive officer option sensitivity on crash risk. Finally, we find that the link between CFO option sensitivity and crash risk is more pronounced for firms in non-competitive industries and those with a high level of financial leverage.

This study investigates the effect of managerial sentiment on corporate disclosure decisions. Using terrorist attacks in the United States as adverse shocks to managerial sentiment, we find that firms located in the metropolitan areas attacked issue more negatively biased earnings forecasts. The effect is stronger for firms with higher operating uncertainty and firms with younger, inexperienced, or less confident executives and it is weaker for firms located in states with increasing violent crime rates. A potential alternative explanation is that managers strategically bias earnings forecasts downward and attribute the poor performance to terrorist attacks. To address this issue, we conduct a battery of additional analyses and find results more consistent with managerial sentiment than strategic attribution. In addition, we show that our results are unlikely to be driven by any economic effects of terrorist attacks. Finally, firms in attacked areas exhibit a more pessimistic tone in 10-K/10-Q filings.

Product market advertising, while containing little new information, triggers spikes in investor attention. Using weekly advertising data, we find that sell‐side analysts issue optimistic earnings forecasts in response to heavier advertising in the prior week. This effect is not driven by confounding earnings or product news. It is more pronounced for experienced analysts and analysts affiliated with brokerages that rely solely on trading revenues. The optimistic forecast bias intensifies the impact of advertising on investor trades of the underlying stock during the following week, especially on retail buying. Overall, analysts appear to issue optimistic forecasts to exploit retail investor attention spikes induced by advertising.

The protection of free speech enhances the ability of various public stakeholders to disseminate privately observed adverse information about public firms, making it difficult for corporate managers to conceal negative information about their companies. Using the staggered enactment of anti‐strategic lawsuit against public participation (anti‐SLAPP) laws across U.S. states as a shock that strengthens free speech protection, we show that stronger protection is associated with less concealment of bad news. This is evidenced by a lower likelihood of stock price crashes, a decreased probability of accounting fraud, and an increased frequency of firm‐initiated negative press releases. These results are more pronounced for states with stronger anti‐SLAPP laws and where such laws are likely to be more influential. Moreover, the impact of free speech protection on bad news concealment is more significant for firms with greater ex ante incentives to conceal negative information. Further analyses suggest that free speech protection likely enhances the ability of short sellers, employees, and the media, among others, to reveal bad news about public firms. Finally, we find evidence that strengthened free speech protection also improves financial reporting quality. Our study highlights the importance of free speech protection in enhancing corporate transparency.

Using a sample of borrowing firms that disclosed internal control weaknesses (ICW) under Section 404 of the Sarbanes-Oxley Act, this study compares various features of loan contracts between firms with ICW and those without ICW. Our results show the following. First, the loan spread is higher for ICW firms than for non-ICW firms by about 28 basis points, after controlling for other known determinants of loan contract terms. Second, firms with more severe, company-level ICW pay significantly higher loan rates than those with less severe, account-level ICW. Third, lenders impose tighter nonprice terms on firms with ICW than on those without ICW. Fourth, fewer lenders are attracted to loan contracts involving firms with ICW. Finally, our within-firm analyses show that banks increase loan rates charged to ICW firms after their disclosure of internal control problems and that banks reduce loan rates after firms remediate previously reported ICW.

We investigate whether firms in close customer–supplier relationships are better able to identify and implement tax avoidance strategies via supply chains. Consistent with our prediction, we find that both principal customers and their dependent suppliers avoid more taxes than other firms. Further analysis suggests that principal customers and dependent suppliers likely engage in tax strategies involving shifting profits to tax haven subsidiaries. Moreover, tax benefits appear to explain both principal customer firms’ and dependent supplier firms’ organizational decisions. Overall, our study provides evidence of the importance of tax avoidance as a source of gains from these relationships.