This study examines the relation between narrative risk disclosures in mandatory reports and the pricing of credit risk. In particular, we investigate whether and how the Securities and Exchange Commission ( SEC ) mandate of risk factor disclosures ( RFD s) affects credit default swap ( CDS ) spreads. Based on the theory of Duffie and Lando (2001), we predict and find that CDS spreads decrease significantly after RFD s are made available in 10‐K/10‐Q filings. These results suggest that RFD s improve information transparency about the firm's underlying risk, thereby reducing the information risk premium in CDS spreads. The content analysis further reveals that disclosures pertinent to financial and idiosyncratic risk are especially relevant to credit investors. In cross‐sectional analyses, we document that RFD s are more useful for evaluating the business prospects and default risk of firms with greater information uncertainty/asymmetry. Overall, our findings imply that the SEC requirement for adding a risk factor section to periodic reports enhances the transparency of firm risk and facilitates credit investors in evaluating the credit quality of the firm.

Finance theory suggests that the privileged information that traditional banks obtain about borrowers through monitoring creates opportunities for banks to impose informational hold-up costs on such borrowers. Because a surge in borrower risk increases banks’ hold-up power, banks with information monopoly should be able to increase their rates beyond the level explained by borrower risk alone. We test this theory using the setting of activist short sellers’ public allegations—a setting that increases borrower risk and restricts borrower access to public financing sources—and find, on average, that, after controlling for both ex ante and ex post changes in borrower credit risk, banks increase loan pricing following activist short sellers’ allegations. Our loan pricing results not explained by changes in borrower credit risk are consistent with banks extorting borrowers during times of adversity.

This study investigates whether and how the deviation of cash flow rights (ownership) from voting rights (control), or simply the ownership‐control wedge, influences the likelihood that extreme negative outliers occur in stock return distributions, which we refer to as stock price crash risk. We do so using a comprehensive panel data set of firms with a dual‐class share structure from 20 countries around the world for the period of 1995–2007. We predict and find that opaque firms with a large wedge are more crash prone than opaque firms with a small wedge. In addition, we predict and find that the positive relation between the wedge and crash risk is less pronounced for firms with more effective external monitoring and for firms with greater growth opportunities. The results of this study are broadly consistent with Jin and Myers’s theory that agency costs, combined with opacity, exacerbate stock price crash risk.

This study examines whether and how labor unionization influences firm-specific stock price crash risk. Using a regression discontinuity design that leverages locally exogenous variation in unionization generated by close union elections, we find that unionization leads to a significant decline in crash risk. We further explore the underlying mechanisms through which unionization affects crash risk and find that unions limit risk-taking, constrain overinvestment, and improve information flow, which in turn reduces crash risk. Overall, our study resolves some of the current debate over the implications of unions and sheds new light on their net impact on shareholder welfare.

Using a sample of non-U.S. firms from 22 countries during 2003–2007, we examine the effect of firm-level governance on various features of loan contracting in the international loan market. We find that banks charge lower loan rates, offer larger and longer-maturity loans, and impose fewer restrictive covenants to better-governed firms. We also find that the favorable effect of firm-level governance on some loan contracting terms is stronger in countries with strong legal institutions than in countries with weak legal institutions. Our results suggest that banks view a borrower's internal governance as a factor that mitigates agency and information risk, and that country-level legal institutions and firm-level governance mechanisms complement each other in influencing loan contracting terms.

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.

We examine whether the use of eXtensible Business Reporting Language (XBRL) for financial reporting (i.e., interactive data submissions) reduces earnings management during the period of XBRL implementation by the SEC. Using a sample of mandated XBRL filers, we compare the magnitude of absolute discretionary accruals in the XBRL adoption quarters with that in the non‐adopting quarters. We also take advantage of staggered (three‐stage phase‐in) XBRL implementations to perform difference‐in‐differences analyses. Our results show that absolute discretionary accruals decrease significantly from the pre‐ to the post‐XBRL period, suggesting that XBRL adoption constrains earnings management via discretionary accrual choices. Our analyses further reveal that the use of standardized official XBRL elements significantly reduces the levels of discretionary accruals, while the use of customized extension elements does not, suggesting that the former discourages accrual‐based earnings management, while the latter does not. Our results are robust to a variety of sensitivity checks.

This study examines whether and how linguistic information quality (measured by readability) of customer firms' management earnings forecast reports (MEFRs) affects supplier firms' investment quality (measured by investment efficiency). Our analyses reveal that supplier investment efficiency is positively associated with the average linguistic information quality of customers' prior MEFRs, and the positive association between supplier investment efficiency and customer MEFRs' numerical information quality is stronger in supplier firms with more readable customer MEFRs. Our analyses also reveal that higher linguistic information quality of customer MEFRs improves the monitoring of supplier firms by their outside stakeholders, such as institutional investors and financial analysts, and ameliorates the negative impact of suppliers' customer‐dependence on their investment efficiency. Our results suggest that greater linguistic information quality of a customer firm's forward‐looking disclosures is associated with higher‐quality investments made by its suppliers along the supply chain.

Recent research suggests that insiders’ incentives for capturing cash flows affect price formation process in which insiders are inclined to withhold good news and to accelerate the release of bad news (Jin and Myers, 2006). We investigate whether insiders’ incentives for private control benefit, proxied by control-ownership wedge, affect firm-specific return characteristics. We find that control-ownership wedge is negatively related to the likelihood of positive return jumps and positively related to the extent of asymmetric market reaction to good news rather than to bad news. Overall, our results support the notion that corporate insiders increase opaqueness and withhold good news in order to capture unexpected cash flow.