This study investigates whether extensive disclosure reduces managerial expropriation of corporate resources by examining the potential effects of enhanced reporting on the values of cash assets and investment ventures, respectively. We uncover evidence that liquid asset holdings are valued at a discount by firms with fewer disclosure practices than their more transparent counterparts. Moreover, disclosure activity substantially improves the value of cash assets in excess of requirements for operations and investment. These findings suggest that detailed reporting facilitates the scrutiny and discipline of capital markets, thus preventing the diversion of cash reserves. In further support of the disciplinary power of greater disclosure, we find that value-destroying projects, through internal capital investment and external acquisitions, are concentrated in firms adopting opaque disclosure policies. Collectively, our results support the premise that extensive disclosure impairs insiders' abilities to utilize corporate resources in a self-serving manner. Data Availability: Data are available from public sources indicated in the text..

This paper examines the link between ownership concentration and corporate bond volatility. We show that more concentrated mutual fund ownership is associated with higher volatility of corporate bonds. This relation is stronger among more illiquid bonds, during periods of heightened bond market illiquidity, and among bonds held by corporate bond funds that invest in more illiquid bonds and experience higher or more correlated liquidity shocks. Using a sample of mutual fund mergers, we further show that increases in bond volatility are unlikely to be driven entirely by the endogenous ownership structure of corporate bonds. Our findings suggest that the concentrated ownership by corporate bond mutual funds provides another channel, apart from illiquidity, to help explain the excess volatility in corporate bonds.

Using a sample of 3004 US firm-years with foreign sales, we provide the first evidence that a firm's employee treatment score is an important determinant of its fraction of foreign sales hedged with currency-based derivatives. The positive relation between employee treatment rating and currency hedging activity is driven by firms operating in competitive industries, businesses with relatively unique products or assets, and companies adopting aggressive business strategies. These results suggest that firms with foreign sales tend to factor employee benefits in their currency hedging policies when their acquisition, development, and retention of human capital are especially costly or highly valued.

We examine institutional investors' responses to corporate disclosure quality conditional on market states. Transient institutions react more positively to corporate disclosure quality during market downturns than during normal market periods, as better disclosure practices lower information asymmetry and are thus associated with reduced uncertainty, enhanced liquidity, and weakened impacts of crises, which are the most desirable features of assets during market downturns. Dedicated institutions are insensitive to corporate disclosure quality in both normal and market downturn periods, as they have access to inside information and rely less on public disclosures. Their reliance on corporate disclosures in market downturns, however, increases sharply after the implementation of Regulation Fair Disclosure, which removes their inside information advantage. We further show that corporate disclosure reduces information asymmetry to a greater extent in market downturns than in normal market periods and that transient ownership in market downturns provides strong price support and stabilizes return volatility, whereas dedicated ownership does not possess such functions. Finally, we show that the results are not simply driven by endogeneity and are robust to alternative corporate disclosure quality measure and to the control of other determinants of institutional holdings.

Using a unique database of Chinese firms bribing initial public offering (IPO) regulators, we examine the impact of bribing on IPO pricing. Our findings suggest that bribing firms are younger, smaller, more volatile in their operating activities, and more generous in compensating underwriters and management. Most important, bribing firms price their IPO shares more aggressively than non-bribing firms and exhibit a higher price-to-earnings ratio, lower first-day return, and poorer post-IPO stock performance. Additional analyses suggest that both bribing and non-bribing firms exhibit negative announcement returns after the arrest of corrupt officials. However, the effect is stronger for bribing firms. Overall, bribing firms are systematically more aggressive than their non-bribing counterparts. They concede less to IPO investors and reward underwriters and management for helping them access the capital market.

This paper examines the potential impacts of artificial smoothing (abnormal accruals) and real smoothing (derivatives) on firm value. We find that the value of the firm decreases with the magnitude of abnormal accruals and increases with the level of derivative use. Moreover, the accrual discount is more pronounced in firms with weak investor protection and the hedging premium is greater for poorly governed firms. These results suggest that although managers can engage in real smoothing to improve the informativeness of firms’ earnings and thus reduce agency costs, they might use artificial techniques to cosmetically improve the income stream in order to expropriate minority shareholders. In further support of agency theories, we report that poor corporate governance motivates the use of abnormal accruals and discourages derivative use.

In this paper, we examine the effect of credit defaults swaps (CDS) initiation on reference firms' cost management strategies. CDS contracts provide insurance protection for creditors, inducing a shift in bargaining power from borrowers to creditors and an excessive incidence of bankruptcy. Anticipating more intransigent creditors in debt renegotiations and higher bankruptcy risk, CDS firms are incentivized to mitigate risk through decreasing cost stickiness after CDS initiation, as cost stickiness lowers liquidity and triggers early covenant violations. We find that, on average, CDS initiation is associated with a decline in reference firms' cost stickiness. This association is more pronounced for less liquid, financially distressed, and lower credit quality firms. We also find that CDS firms with a reduction in cost stickiness will exhibit lower future bankruptcy risk than CDS firms without such as reduction in stickiness. Collectively, our findings suggest that the CDS-induced “empty creditor problem” causes reference firms to undertake more conservative cost management practices to alleviate downside risk.

This study investigates the role of employment policies in reducing internal control ineffectiveness and financial restatements. We provide new evidence that employee treatment policies are an important predictor of ineffective internal control. We also find that employee-friendly policies significantly reduce the propensity for employee-related material weaknesses. These results suggest that greater employee benefits facilitate the acquisition, development, and motivation of the workforce and ameliorate the loss of valuable human capital, thereby mitigating employee failures to implement internal control tasks properly. Moreover, we document novel results that financial restatements, especially those caused by unintentional errors, are less likely to arise in firms that invest more in employee benefits. Collectively, our emphasis on the effect of employee treatment policies on the integrity of internal control and financial reporting distinguishes our paper from previous studies that focus on the role of top executives in accounting practices. Data Availability: Data are available from public sources indicated in the text.