We exploit two regulatory changes, one under US GAAP and the other under IFRS, that mandate improved disclosure of pension asset allocation. While the changes are otherwise similar, US GAAP retains the expected rate of return (“ERR”) on pension assets, which preparers can more easily manipulate if asset allocation remains opaque, while IFRS eliminates the ERR. We find that the IFRS standard improves pension asset transparency more than the US standard, which only mandates higher-quality disclosure without changing recognition or measurement and hence leaves unchanged preparers’ incentives to obfuscate. The US standard elicits a mixed response that reduces transparency in some respects. We isolate the relative deterioration in US firms’ transparency to firms with stronger incentives to inflate ERRs. Overall, our study highlights the potential for standard setters to learn from each other by comparing their regulatory experience on a specific accounting topic with clearly identifiable managerial incentives.
We examine whether retail investor trading enhances or impedes the market’s processing of earnings information. To address the endogenous nature of retail trading decisions, we exploit brokerage outages as plausibly exogenous shocks to retail trading during earnings announcement windows. Our findings show that retail trading significantly enhances price responses to earnings news. Exogenous reductions in retail trading weaken earnings response coefficients and slow price adjustment. These results are driven by investors at traditional broker platforms providing liquidity; the impact of Robinhood-only outages is statistically insignificant. Distinguishing between the broad retail population and Robinhood traders helps reconcile prior mixed evidence on the role of retail traders in impounding earnings news into price. Our outage-based tests find limited evidence that retail trading reduces post-earnings announcement drift. Overall, our results demonstrate that retail investors enhance earnings-related price discovery through liquidity provision while revealing important heterogeneity across trading platforms.
This study examines how ownership complexity affects firm valuations by analyzing Korean chaebols’ transition from opaque circular-shareholding to more transparent pyramidal structures between 2011 and 2018. Ownership complexity can obfuscate investors’ understanding of agency conflicts between controllers and minority investors. Simplifying ownership creates transparency about controller incentives and affects valuations through two channels: increasing earnings informativeness and enabling investors to update expectations about future fundamentals. Because these forces can oppose each other, simplification can create divergent valuation effects. We find that firms with tighter controller-minority incentive alignment gain value as investors discover better-than-expected governance, while firms with greater incentive conflict lose value as transparency reveals worse-than-expected agency problems. These effects are not driven by concurrent real changes in governance, monitoring, operations, or resource allocation. Governance reforms aimed at improving transparency can thus produce heterogeneous valuation outcomes, depending on what that transparency reveals.
We examine whether disproportionate insider control, or the divergence between insider voting and cash flow rights at dual-class firms, influences the extent to which stock price reflects information about future firm performance. We find that current returns incorporate less information about future earnings and cash flows as disproportionate insider control increases. However, monitoring by influential institutional investors, strong board oversight, and high-quality disclosure significantly attenuate this effect, such that disproportionate insider control does not result in less informative stock prices. Collectively, our findings reveal that, although the dual-class structure is associated with less informative stock prices, on average, monitoring and disclosure can alleviate investor concerns about disproportionate insider control while allowing firms to take advantage of the benefits of a dual-class ownership structure.
Anti-recharacterization laws significantly increase the rights of securitization creditors by allowing the buyers of securitized assets to exclusively and immediately seize collateral in bankruptcy. However, strengthening the rights of securitization creditors can limit other creditors’ ability to recover loans. We find that, after a state adopts an anti-recharacterization law, local banks operating in the same state accrue more loan loss provisions, tighten their loan contracts, and incur higher future loan charge-offs. These findings are consistent with the argument that a safe harbor for securitization transactions advantages Wall Street-style structured finance at the expense of Main Street-style lending.
