online appendix the economics of disclosure and financial...

Online Appendix

The Economics of Disclosure and Financial Reporting Regulation:

Evidence and Suggestions for Future Research

Christian Leuz University of Chicago & NBER

Peter Wysocki University of Miami

May 2016

This online appendix is part of the review provided in Leuz and Wysocki (JAR 2016). It provides a series of tables listing key empirical studies on the economic consequences of disclosure and financial reporting regulation (as of 2015). We draw on both U.S. and international evidence, mostly but not exclusively in published studies. The tables are not meant to be comprehensive in their coverage of the literature but instead highlight many key studies, most of which were discussed in our review. We organize the tables by section and briefly summarize a study’s setting, the relevant variable of interest or outcome, its research design and key empirical findings. We state the main empirical findings in the study, focusing on the statistical relations or associations shown in the paper, rather than provide the authors’ interpretations. For the latter, we refer readers to the studies. In case of errors in our descriptions, please contact us. Please cite the corresponding review in JAR when you are referring to this appendix.

Keywords: Transparency; Regulation; Accounting standards; Capital markets; Institutional economics; International accounting; Disclosure; IFRS; Political economy; Cost-benefit analysis; Real effects

JEL Classifications: D78; D82; G14; G18; G30; G38; K22; K42; M41; M42

http://onlinelibrary.wiley.com/doi/10.1111/1475-679X.12115/abstract

1

List of Tables Included in Online Appendix

Tables Referenced in Section 3

Table 3.1: Potential Effects and Outcomes Associated with Firms’ Disclosure and Financial Reporting Activities

Table 3.2: Studies on the Association between Corporate Disclosure and Reporting Activities and Capital Market Outcomes

Table 3.3: Studies on the Association between Disclosure and Corporate Investments

Table 3.4: Studies on the Association between Corporate Disclosure and Reporting Activities and Firm-Specific Costs

Table 3.5: Studies on the Association between Corporate Disclosure and Reporting Activities and Market-Wide Outcomes


Table 4.1: Studies on Introduction of U.S. Securities Regulation

Table 4.2: Studies on Subsequent Extensions of U.S. Disclosure Regulation in the OTC Markets

Table 4.3: Studies on Major Changes in U.S. Disclosure Regulation

Table 4.4: International Evidence on Costs and Benefits of Disclosure Regulation

Table 4.5: Real-Effects and Other Studies on Disclosure Regulation


Table 5.1: Key Findings in IFRS Studies – Changes in Reporting Properties and Financial Disclosures

Table 5.2: Key Findings in IFRS Studies – Capital Market Outcomes

Table 5.3: Key Findings in IFRS Studies – Beyond Capital Market Effects

Table 3.1: Potential Effects and Outcomes Associated with Firms’ Disclosure and Financial Reporting Activities

This table provides an overview of key (hypothesized) links between corporate disclosure and reporting activities and various economic outcomes. We list the specific economic outcome, the expected theoretical relation and then state and reference the commonly documented direction of the relation. We acknowledge that, in many cases, the expected theoretical relation does not necessarily go only in one direction. We discuss the (in our view) predominant link and, at times, note that there are countervailing forces.

Association between corporate disclosure and reporting activities and capital-market outcomes Outcome Hypothesized link / Association / Empirical evidence Reference table Market liquidity Corporate disclosure and reporting mitigate information asymmetries among investors and reduce

adverse selection, which increases market liquidity. Empirical evidence documents a positive association between corporate disclosure and reporting and market liquidity.

Table 3.2

Cost of capital Corporate disclosure and reporting mitigate adverse selection problems, improve risk sharing in the economy, and reduce estimation risk. Empirical evidence on the link between corporate disclosure and reporting and cost of capital is mixed.

Table 3.2

Analyst information environment

Precision: Corporate disclosure and reporting increase the precision of public information available to all analysts, leading to more precise analyst earnings forecasts. However, disclosure and reporting also reduce analyst incentives to acquire costly specific information about the firm, leading to less precise analyst earnings forecasts. Empirical evidence documents a positive association between corporate disclosure and reporting analyst forecast accuracy. Dispersion: Corporate disclosure and reporting increase the precision of public information available to all analysts and decrease incentives to acquire private information, leading to lower forecast dispersion. Empirical evidence is mixed. Following: Corporate disclosure and reporting decrease analyst information acquisition costs, increasing analysts following. However, disclosure and reporting also decrease the returns from analysts’ information acquisition, which decreases analysts following. Empirical evidence documents mostly a positive association between corporate disclosure and reporting and analyst following.

Table 3.2

Investor trading & portfolio choices

Corporate disclosure and reporting reduce the benefits from private information (acquisition), which decreases the trading incentives of informed investors. However, disclosure and reporting also reduce adverse selection, monitoring costs, and improves risk sharing, which increases trading incentives for uninformed investors. Thus, theoretical prediction depends on the relative roles of informed and uninformed investors. Empirical evidence generally finds a positive relation. Empirical evidence on the link between corporate disclosure and reporting and investors’ portfolio choices is mixed.

Table 3.2

Capital raising Corporate disclosure and reporting mitigate ex ante adverse selection and ex post moral hazard problems reducing borrowing costs and relaxing financial constraints. Empirical evidence documents a positive association between corporate disclosure and reporting and capital raising and/or IPO outcomes.

Table 3.2

Association between corporate disclosure and reporting activities and corporate investments Outcome Hypothesized link / Association / Empirical evidence Reference table Investment efficiency Corporate disclosure and reporting reduce information asymmetries and lower monitoring costs, which

decreases inefficiencies in managerial decisions. Empirical evidence on the association between corporate disclosure and reporting and investment efficiency is mixed.

Table 3.3

Association between corporate disclosure and reporting activities and firm-specific costs Outcome Hypothesized link / Association / Empirical evidence Reference table Fixed costs and economies of scale

Corporate disclosure and reporting have (partially) fixed costs. Disclosure and reporting activities are negatively related to firm size. Empirical evidence documents a positive relation between corporate disclosure and reporting and firm size (and negative relation with preparation and reporting costs).

Table 3.4

Proprietary costs The proprietary nature of some corporate information reduces the (capital-market) benefits of disclosure and can have so-called proprietary costs, i.e., negative product or labor market effects, such as an increase in competition or a decrease in innovation. There is empirical evidence supporting that corporate disclosure and reporting have proprietary costs.

Table 3.4

Competition Corporate disclosure and reporting decrease potential entrants’ uncertainty about industry performance, which can increase entry competition. Relation between within-industry competition and disclosure is complex and depends among other things on the type of competition (Bertrand vs. Cournot). Empirical evidence on the association between corporate disclosure and reporting and competition is mixed.

Table 3.4

Litigation costs Litigation threat creates incentives to disclose bad news early, but lowers incentives to provide forward-looking disclosures. Disclosure can decrease the cost or outcomes of litigation. Empirical evidence is largely consistent with these relations.

Table 3.4

Association between corporate disclosure and reporting activities and market-wide outcomes Outcome Hypothesized link / Association / Empirical evidence Reference table Intra-industry information transfers

Corporate disclosure and reporting provide information to investors’ of other firms in the same industry or with similar activities, leading to information transfers and spillovers. Empirical evidence is consistent with information transfers around earnings announcements within industries and spillovers to other firms.

Table 3.5

Market effects from accounting restatements and misreporting of other firms

Accounting frauds and restatements of financial reporting convey information about restating firms’ competitors, which in turn can affect peer firms’ behavior (e.g., investment choices).

Table 3.5

Table 3.2: Studies on the Association between Corporate Disclosure and Reporting Activities and Capital-Market Outcomes

This table summarizes key empirical findings from (selected) studies examining the association between corporate disclosure and reporting activities and capital market outcomes. Selected studies are listed by capital market outcome and then in alphabetical order, delineating the main outcome (or construct) and key findings.

Association between corporate disclosure and reporting activities and market liquidity References Main outcome (or construct) Empirical evidence Balakrishnan, Billings, Kelly, and Ljungqvist (2014)

Bid-ask spread More corporate disclosure is associated with higher market liquidity.

Brown and Hillegeist (2007) Probability of informed trading More corporate disclosure is associated with higher market liquidity. Healy, Hutton, and Palepu (1999)

Bid-ask spread More corporate disclosure is associated with higher market liquidity.

Heflin, Shaw, and Wild (2005) Bid-ask spread and quoted depth More corporate disclosure is associated with higher market liquidity. Lang and Maffett (2011) Liquidity uncertainty More disclosure and transparency is associated with lower liquidity volatility,

fewer extreme illiquidity events and lower correlations between firm-level liquidity and both market liquidity and market returns.

Leuz and Verrecchia (2000) Bid-ask spread, trading volume and volatility

(Commitment to) more corporate disclosure is associated with higher market liquidity.

Ng (2011) Sensitivity of stock returns to unexpected changes in market liquidity

More corporate disclosure is associated with lower liquidity risk.

Welker (1995) Bid-ask spread More corporate disclosure is associated with higher market liquidity. Association between corporate disclosure and reporting activities and cost of capital References Main outcome (or construct) Empirical evidence Aboody, Hughes, and Liu (2005) Expected return from four-factor asset-

pricing model Accounting quality is priced risk factor and has negative association with expected returns.

Barth, Konchitchki, and Landsman (2013)

Excess and mean portfolio returns, and expected cost of capital using four-factor asset pricing model

Earnings transparency is negatively associated with the cost of capital.

Bhattacharya, Ecker, Olsson, and Schipper (2012)

Implied cost of equity More corporate disclosures is negatively associated with cost of capital (both directly and indirectly via market liquidity).

Botosan (1997) Implied cost of equity More corporate disclosure is negatively associated with cost of capital, but only for firms with low analyst following.

Botosan and Plumlee (2002) Implied cost of equity More corporate disclosure is negatively associated with cost of capital. Core, Guay, and Verdi (2008) Expected returns using two-stage cross-

sectional regressions Accounting quality is not a priced risk factor.

Ecker, Francis, Kim, Olsson and Schipper (2006)

Earnings quality factor or e-loading in asset pricing regressions

Stock returns are associated with (sensitive to) to earnings quality.

Francis, Khurana, and Pereira (2005)

Implied cost of equity capital and cost of debt (using interest)

More corporate disclosure is negatively associated with the cost of equity and the cost of debt.

Francis, LaFond, Olsson, and Schipper (2005)

Implied cost of equity capital, cost of debt and returns

Accounting quality is negatively associated with the cost of capital.

Hail (2002) Implied cost of capital More corporate disclosure is negatively associated with cost of equity capital. Kim and Qi (2010) Expected returns using two-stage cross-

sectional regressions Accounting quality is priced risk factor and has negative association with expected returns.

Nikolaev and van Lent (2005) Cost of debt More corporate disclosure is negatively associated with the cost of debt. Lang, Lins, and Maffett (2012) Bid-ask spread, proportion of zero-return

days, implied cost of capital, Tobin’s Q More corporate disclosure is associated with higher market liquidity, which in turn is associated with decrease in the cost of capital and an increase in Q.

Leuz and Schrand (2009) Firm-level betas and changes in beta in response to transparency shock

Firms respond to cost of capital shock by increasing corporate disclosure; More corporate disclosure is associated with decline in cost of capital.

Ogneva (2012) Uses ERC framework to decompose realized returns into cash flow shocks and returns

Accounting quality is priced risk factor and has a negative association with returns.

Sengupta (1998) Cost of debt More corporate disclosure is negatively associated with the cost of debt. Verdi (2006) Implied cost of capital Accounting quality is negatively associated with the cost of capital. Association between corporate disclosure and reporting activities and analysts’ information environment References Main outcome (or construct) Empirical evidence Bowen, Davis, Matsumoto (2002)

Analyst forecast accuracy and dispersion More corporate disclosure is associated with an increase in analyst forecast accuracy and a decrease in analyst forecast dispersion.

Bushee and Miller (2012) Analyst following More corporate disclosure is associated with an increase in analyst following. Hope (2003) Analyst forecast accuracy More corporate disclosure is associated with an increase in analyst forecast

accuracy. Irani and Oesch (2013) Analyst following Decrease in analyst following (negative coverage shock) is associated with a

decline in corporate reporting quality. Lang and Lundholm (1996) Analyst following, analyst forecast accuracy

and dispersion More corporate disclosure is associated with more analyst following, more forecast accuracy, and less forecast dispersion.

Lehavy, Reuven, Li, and Merkley (2011)

Analyst forecast accuracy and dispersion More readable corporate disclosures are associated with an increase in analyst forecast accuracy and a decrease in forecast dispersion.

Association between corporate disclosure and reporting activities and investor trading and portfolio allocations References Main outcome (or construct) Empirical evidence Aggarwal, Klapper, and Wysocki (2005)

Mutual fund investment using MSCI Emerging Markets Index as the benchmark

Positive association between firms’ voluntary disclosures and foreign mutual fund investment. Association is more pronounced for firms that reside in jurisdictions with less-mandatory disclosure.

Bushee, Matsumoto, and Miller (2004)

Examine (intraday) trading data during conference calls

Regulation Fair Disclosure changes trading during the conference call window for firms most affected by the new requirement.

Bushee and Noe (2000) Institutional (mutual fund) ownership Higher AIMR disclosure rankings are positively associated with institutional ownership.

Gelos and Wei (2005) Portfolio holdings of emerging market funds Funds systematically invest less in less transparent countries. In addition, during crises, funds have a greater propensity to exit nontransparent countries.

Healy, Hutton, and Palepu (1999)

Institutional investors’ holdings Corporate disclosure is positively associated with institutional investors’ holdings.

Lawrence (2013) Retail investor holdings Corporate disclosure and retail (individual) investor holdings are positively associated.

Leuz, Lins, and Warnock (2009) Holdings of all U.S. investors as of December 1997

Foreigners’ (or U.S. investors’) holdings are negatively associated with insider control and earnings opacity when these firms are domiciled in countries with weaker disclosure regulation and outside investor protection.

Maffett (2012) Cross-country trading and returns earned by international mutual funds

Opacity is positively associated with privately informed trading by institutional investors. Association is stronger when country-level reporting infrastructure is also opaque.

Association between corporate disclosure and reporting activities and capital raising References Main outcome (or construct) Empirical evidence Lang and Lundholm (2000) Seasoned security offerings Firms increase the level of corporate disclosure around SEOs. Firms increasing

the level of disclosure experience price increases before the SEOs. Frankel, McNichols, and Wilson (1995)

Seasoned security offerings underpricing Corporate disclosures are positively associated with SEOs.

Shroff, Sun, White, and Zhang (2013)

Cumulative market-adjusted return around seasoned security offerings announcements

Firms increase pre-offering disclosures around the Securities Offering Reform. Pre-offering disclosures are negatively associated with SEO underpricing.

Schrand and Verrecchia (2005) IPO underpricing More corporate disclosure is associated with a lower IPO underpricing. Leone, Rock, and Willemborg (2007)

IPO underpricing More corporate disclosure is associated with a lower IPO underpricing.

Table 3.3: Studies on the Association between Disclosure and Corporate Investments

This table summarizes key empirical findings from (selected) studies examining the association between corporate disclosure and reporting activities and corporate and managerial behavior. Selected studies are listed in alphabetical order, delineating the main investment proxy (or construct) and key findings.

Association between corporate disclosure and reporting activities and capital investment efficiency References Investment Proxy Empirical evidence Bens and Monahan (2004) Excess value of diversification Corporate disclosure is positively associated with excess value of diversification. Biddle and Hilary (2006) Investment efficiency Accounting quality is positively associated with investment efficiency. Biddle, Hilary, and Verdi (2009) Investment efficiency Accounting quality is negatively associated over- and under-investments. Badertscher, Schroff, and White (2013)

Investment sensitivity to growth shocks Greater public firm presence in an industry is positively associated with the investment sensitivity to growth shocks of private firms.

Cheng, Dhaliwal, and Zhang (2013)

Investment efficiency Firms with material weaknesses exhibit investment inefficiencies compared to propensity-matched firms without weaknesses. Investment inefficiencies disappear in the years after the disclosure of material weakness.

Goodman, Neamtiu, Schroff, and White (2014)

Investment efficiency Corporate disclosure is positively associated with investment efficiency.

Jung, Lee, and Weber (2014) Labor investment efficiency Corporate disclosure is positively associated with labor investment efficiency. Cho (2015) Capital allocation efficiency Firms with better segment disclosures upon adoption of SFAS 131 exhibit

higher capital allocation efficiency after the adoption of SFAS 131.

Table 3.4: Studies on the Association between Corporate Disclosure and Reporting Activities and Firm-Specific Costs

This table summarizes key empirical findings from (selected) studies examining the association between corporate disclosure and reporting activities and firm-specific costs. Selected studies are listed by cost construct and then in alphabetical order, delineating key findings.

Association between corporate disclosure and reporting activities and fixed costs and economies of scale References Empirical evidence Lang and Lundholm (1993) Corporate disclosures are negatively associated with firm size Association between corporate disclosure and reporting activities and proprietary costs (or competition) References Empirical evidence Bens, Berger, and Monahan (2011)

For firms reporting multiple external segments, aggregation of segments is associated with both agency and proprietary costs.

Berger and Hann (2003) Under SFAS 14, firms aggregated segments with higher abnormal profitability and operations with more divergent performance. Findings are consistent with proprietary and agency costs. After SFAS 131, there is an increase in the disclosure of segments and changes in firm behavior consistent with improved monitoring.

Berger and Hann (2007) Managers tend to withhold information about the segments with relatively low abnormal profits rather than information about segments with relatively high abnormal profits.

Botosan and Stanford (2005) Firms appeared to hide profitable segments operating in less competitive industries under SFAS 14. Burke, Cuny, Jerakos, Granja (2015)

The increase in competition following the relaxation of interstate branching restrictions is associated with an increase in voluntary disclosure.

Harris (1998) Firms are less likely to disclose information about operations in less competitive industries. Hope and Thomas (2008) Firms that stop the disclosure of geographic earnings after the passage of SFAS 131experience greater expansion of foreign

sales, lower foreign profit margins, and lower firm value relative to firms that continue to disclose geographic earnings. Leuz (2004) Firms are less likely to voluntarily disclose segment information if profitability across segments is heterogeneous and

consolidated profitability is less revealing. Verrecchia and Weber (2006) A redaction of proprietary information from material contracts is positively associated with a larger adverse selection

component of the bid-ask spread, reductions in market depth, and lower market turnover. Association between corporate disclosure and reporting activities and litigation costs References Empirical evidence Billings and Cedergren (2015) Firms are more likely to warn of negative news and are more likely to abstain from issuing a positive forecast as ex ante

litigation risk increases. Field, Lowry, and Shu (2005) Disclosure is negatively associated with subsequent litigation. Francis, Philbrick, and Schipper (1994)

Voluntary disclosures of adverse earnings news (via pre-earnings management forecasts) are associated with shareholder litigation.

Johnson, Kasznik, and Nelson (2001)

Litigation risk and voluntary disclosure are negatively associated.

Johnson, Nelson, and Pritchard (2007)

Litigation risk and accounting restatements are positively associated.

Kasznik and Lev (1995) Firms are more likely to pre-empt large negative earnings surprises than large positive earnings surprises. Kothari, Shu, and Wysocki (2009)

Managers appear to delay disclosure of bad news relative to good news.

Rogers and Van Buskirk (2009) Find no evidence that firms respond to litigation by increasing disclosure. Rather, firms reduce disclosure post-litigation. Skinner (1994) Firms preempt large negative earnings surprises with disclosure to decrease expected litigation costs. Skinner (1997) Timely disclosure of bad news is an attempt to reduce litigation costs. More timely disclosure is associated with lower

settlement amounts.

Table 3.5: Studies on the Association between Corporate Disclosure and Reporting Activities and Market-Wide Outcomes

This table summarizes key empirical findings from (selected) studies examining the association between corporate disclosure and reporting activities and market-wide outcomes. Selected studies are listed by outcome and then in alphabetical order, delineating key findings. Additional studies on market-wide effects (related to regulatory changes) are discussed in Tables 4.5 and 5.3.

Intra-industry information transfers References Empirical evidence Badertscher, Shroff, and White (2013)

Greater public firm presence in an industry is associated with a higher investment sensitivity to growth shocks for private firms.

Baginski (1987) Voluntary earnings forecast by one firm is associated with stock returns of other firms in same industry. Clinch and Sinclair (1987) Earnings announcement by one firm is associated with stock returns of other firms in the same industry, consistent with intra-

industry information transfers. Foster (1981) Earnings announcement by one firm is associated with stock returns of other firms in the same industry, consistent with intra-

industry information transfers. Freeman and Tse (1992) Earnings announcement by one firm is associated with stock returns of other firms in the same industry, consistent with intra-

industry information transfers. Han and Wild (1990) Earnings announcement by one firm is associated with stock returns of other firms in the same industry, consistent with intra-

industry information transfers. Han, Wild, Ramesh (1989) Earnings announcement by one firm is associated with stock returns of other firms in the same industry, consistent with

intra-industry information transfers. Olsen and Dietrich (1985) Earnings announcement by one firm is associated with stock returns of other firms in the same industry, consistent with intra-

industry information transfers. Accounting misstatements or restatements References Empirical evidence Gleason, Jenkins, and Johnson (2008)

Share price declines for restating firms are positively associated with declines at the restating firm’s competitors.

Silvers (2015) SEC enforcement actions towards foreign firms cross-listed in the U.S. are associated with positive returns of other, non-target foreign firms that are cross-listed in the U.S.

Xu, Najand, and Ziegenfuss (2006)

Share price declines for restating firms are positively associated with declines at the restating firm’s competitors.

Spillover effects of financial fraud or accounting misstatements on corporate investments References Empirical evidence Beatty, Liao, and Yu (2013) Firms’ fraudulent reports are positively with peer firms’ investment during fraud periods. Durnev and Mangen (2009) Changes in competitors’ investments following restatement announcements are associated with the restating firm’s abnormal

returns at the restatement announcements, suggesting information transfer of restatements for competitors’ investments.

Table 4.1: Studies on the Introduction of U.S. Securities Regulation

This table lists key studies examining the initial imposition of disclosure regulation on U.S. firms via the Securities Act of 1933 and the Exchange Act of 1934. The table briefly summarizes research design and key empirical findings.

References Regulatory Act Research Design Main Results Benston (1969)

Benston (1973)

Securities Act, and Securities Exchange Act

Descriptive evidence on accounting frauds and voluntary disclosure prior to mandate

Little evidence of accounting frauds; documents widespread voluntary disclosures in the period prior to the Acts.

Stigler (1964)

Jarrell (1981)

Simon (1989)

Securities Act, and Securities Exchange Act

Pre-post comparison of market-adjusted returns and variance of market-adjusted returns on new stock issues

Little evidence that market-adjusted returns of unregistered stock issued before the Acts are different from the returns of registered issued after the Acts. Only firms making unseasoned equity offering on regional Stock Exchanges experience greater abnormal returns after the Act’s passage.

Evidence of a decrease in the variance of the market-adjusted returns after the passage of the Acts.

Evidence that firms shifted from public debt offerings to private debt placements.

Benston (1973) Securities Exchange Act

Pre-post comparison of firms’ betas and standard deviations of abnormal returns. NYSE voluntary disclosing firms used as control sample

Little evidence of a decrease in firms’ betas and in the standard deviations of abnormal returns after the passage of the Act.

Chow (1983) Securities Act, and Securities Exchange Act

Stock and bond market reactions to the key events leading to the passage of the Acts. OTC firms, not affected by the regulations, are used as control sample

Negative abnormal stock returns around the key events relating to the passage of the Securities Act. No evidence of a change in bond returns.

Mahoney and Mei (2006)

Securities Exchange Act

Abnormal return volatility and trading volume reactions to earnings announcements under the NYSE disclosure rules and to the first 10-K filing dates under the Act’s disclosure rules

No evidence that the first SEC filings under the Securities Exchange Act generate abnormal return volatility and abnormal trading volume for firms already subject to the NYSE disclosure rules.

Daines and Jones (2012)

Securities Exchange Act

Pre-post comparison of bid-ask spreads, using OTC firms, not affected by the Act, as control sample

Treated firms, especially on the Curb Exchange, experience a decrease in bid-ask spread relative to OTC firms that were not treated by the Act. Within the NYSE, the magnitude of the bid-ask spread decrease is larger among already disclosing firms.

Table 4.2: Studies on Subsequent Extensions of U.S. Disclosure Regulation in the OTC Markets

This table lists key studies examining subsequent extensions of U.S. disclosure regulation in the OTC market (in the order in which the amendments were passed). The Securities Act and the Securities Exchange Act, which introduced disclosure requirements for all exchange-traded firms, were extended to cover over-the-counter (OTC) traded stocks (i.e., the 1964 Securities Act Amendments and the 1999 Eligibility Rule on the OTC Bulletin Board). The table briefly summarizes research design and key empirical findings.

References Regulatory Act Research Design Main Results Greenstone, Oyer, and Vissing-Jorgensen (2006)

Securities Acts Amendments

Pre-post comparison of abnormal stock returns and operating performance using size and book-to-market matched NYSE/AMEX firms not affected by the disclosure regulation as control sample

OTC firms affected by the regulation experience positive abnormal stock returns from the time the regulation was proposed to the time it was adopted. Operating performance increased after the enactment of the regulation.

Ferrell (2007)


Pre-post comparison of stock returns and stock returns volatility, using firms already subject to the SEC disclosure requirements as control sample

OTC firms experience a reduction in stock returns volatility and positive abnormal returns after the passage of the regulation.

Battalio, Hatch, and Loughran (2011)


Pre-post comparison of short-term stock returns when firms announce the intention to list on the NYSE

No evidence of significant announcement return differences between the pre- and the post-period for firms announcing the intention to list on the NYSE.

Bushee and Leuz (2005)

“Eligibility Rule” in the OTC Bulletin Board (OTCBB)

Analyze stock market reactions to key regulatory events for already compliant, newly compliant, and non-compliant firms. Provide liquidity tests using bid-ask spreads and turnover around the staggered introduction of the Eligibility Rule. Tests employ NASDAQ Small Cap firms as control sample

Firms already subject to SEC regulation experience positive abnormal returns around key regulatory events as well as liquidity increases around the phase-in. Newly-compliant firms exhibit increases in liquidity (but negative abnormal returns to regulatory events). 76% of the OTCBB firms do not comply and leave for less regulated Pink Sheets market. These firms experience negative abnormal returns, and a decrease in liquidity.

Table 4.3: Studies on Major Changes in U.S. Disclosure Regulation

This table lists key studies on major changes in U.S. disclosure regulation, focusing on Regulation Fair Disclosure and Sarbanes-Oxley Act. The table briefly summarizes research design and key empirical findings. The table is ordered by regulatory change and economic outcome. Studies analyzing more than one outcome can appear more than once.

References Regulatory Act Research Design Main Results Eleswarapu, Thompson, and Venkataraman (2004)

Chiyachantana, Jiang, Taechapiroon-tong, and Wood (2004)

Regulation Fair Disclosure

Pre-post comparison of the bid-ask spreads and trading volume for firms listed on the NYSE

Decrease in bid-ask spreads and increase in trading volume after Reg FD.

Sidhu, Smith, Whaley, and Willis (2008)


Pre-post comparison of the adverse selection component of the bid-ask spread for firms listed on the NASDAQ

Increase in the adverse selection component of the bid-ask spread after Reg FD.

Gomes, Gorton, and Madureira (2007)

Duarte, Han, Harford, and Young (2008)


Pre-post comparison of the cost of capital for treated firms

Little evidence that cost of capital changes on average. However, smaller firms exhibit increases in the cost of capital (consistent with other changes in the information environment).

Chen, Dhaliwal, and Xie (2010)


Pre-post comparison of the implied cost of capital for treated firms using ADR firms as control sample

Decrease in cost of capital for large and medium firms, little change for small firms

Bailey, Li, Mao, and Zhong (2003)


Pre-post comparison of return volatility and trading volume around earnings announcements for treated firms

Increase in the abnormal trading volume, but no significant change in return volatility.

Heflin, Subramanyam, and Zhang (2003)


Pre-post comparison of the absolute deviation between the pre- and post-earnings announcement stock prices for treated firms

Decrease in the absolute deviation between the price on any day prior to the earnings announcement and post-earnings announcement prices.

Francis, Nanda, and Wang (2006)


Pre-post comparison of return volatility, absolute cumulative abnormal returns, and analyst forecast properties around earnings announcements, using ADR firms as control sample

No evidence of significant changes in return volatility, absolute cumulative abnormal returns, analyst forecast dispersion and forecast accuracy for domestic firms relative to ADRs.

Gintschel and Markov (2004)


Pre-post comparison of the price impact of analyst earnings forecast for treated firms

Decline in the price impact of analyst earnings forecasts and recommendations. Heterogeneity in the decline related to the firms’ pre-regulation information environment. Little evidence of a change in analyst forecast accuracy and dispersion.

Bailey, Li, Mao, and Zhong (2003)

Heflin, Subramanyam, and Zhang (2003)

Agrawal, Chadha, and Chen (2006) Gomes, Gorton, and Madureira (2007)

Anantharaman and Zhang (2011)


Pre-post comparison of analyst following, forecast error, and dispersion for treated firms

Shift in analyst coverage from smaller to larger firms. Evidence of an increase in analyst forecast dispersion and forecast error, especially for small firms and early forecasts.

Heflin, Subramanyam, and Zhang (2003) Anantharaman and Zhang (2011)


Pre-post comparison of the probability to issue and the characteristics of earnings-related voluntary disclosure for treated firms

Increase in the probability to issue voluntary, forward-looking, earnings-related disclosures.

Bushee, Matsumoto and Miller (2004)


Pre-post comparison of the probability to provide closed vis-à-vis open conference call for treated firms

Evidence that firms switch from closed conference calls to open conference calls in the post-FD period.

Gomes, Gorton and Madureira (2007)


Pre-post comparison of the probability to issue pre-earnings announcement disclosure for treated firms

Increase in the frequency of pre-earnings announcement disclosures, but only for large and medium firms.

Kothari, Shu, Wysocki (2009)


Pre-post comparison of the market reaction to good versus bad news for treated firms

Decline in the asymmetry of the market reaction to good versus bad news after the passage of Reg FD.

Jorion, Liu and Shi (2005)


Pre-post comparison of the stock market reaction to bond rating changes for treated firms

Increase in the stock price reaction to bond rating changes after the passage of the Regulation.

Jain and Rezaee (2006)

Li, Pincus, and Rego (2008)

Sarbanes-Oxley Act

Market reactions to key events for treated firms Positive abnormal stock returns to events leading to the passage of SOX, especially among firms with larger abnormal accruals.

Akhigbe and Martin (2006)

Sarbanes-Oxley Act

Market reactions to key events for treated firms Firms with lower expected compliance costs with SOX experience larger abnormal returns around the events leading to the passage of SOX than firms with higher compliance costs.

Litvak (2007) Li (2014)

Sarbanes-Oxley Act

Market reactions to key events that subject foreign cross-listed firms to the regulation. Stock returns for treated cross-listed firms are benchmarked against those of cross-listed firms not subject to SOX and those of non-cross-listed foreign firms

Negative abnormal stock returns to key regulatory events pertaining to foreign firms.

Zhang (2007) Sarbanes-Oxley Act

Market reactions to key events, using stock returns of non-U.S.-traded foreign firms to estimate normal U.S. returns

Negative cumulative abnormal returns to the legislative events leading to the passage of SOX.

Chhaochharia and Grinstein (2007)

Sarbanes-Oxley Act

Market reactions to key events for treated firms Firms almost compliant with SOX provisions earn positive abnormal returns around key SOX events compared to firms that need to make more changes to be compliant.

Hochberg, Sapienza, Vissing-Jorgensen (2007)

Sarbanes-Oxley Act

Stock return comparison for propensity-score matched lobbying and non-lobbying firms over the passage of SOX

Firms whose insiders lobbied against a strict SOX implementation experience positive abnormal returns over passage of SOX, relative to firms that did not lobby.

Gao, Wu, and Zimmerman (2009)

Sarbanes-Oxley Act

Pre-post comparison of corporate actions of non-accelerated filers using accelerated filers as a control group to examine avoidance behavior with respect to the SOX accelerated filer threshold

Non-accelerated filers undertake fewer investments, make more cash payouts to shareholders, reduce the number of shares held by non-affiliates, make more bad news disclosures, and report lower earnings than accelerated filers.

Bargeron, Lehn, and Zutter (2010)

Sarbanes-Oxley Act

Pre-post comparison of corporate investment using firms from Canada, and U.K. as control sample

U.S. firms exhibit a decline in R&D expenditures and total investments, and an increase in cash holdings relative to the control group.

Kang, Liu, and Qi (2010)

Sarbanes-Oxley Act

Structural estimation; Analyze corporate investment for treatment firms using U.K. firms as benchmark

Decline in the investment-to-capital ratio for U.S. firms relative to U.K. firms.

Albuquerque and Zhu (2013)

Sarbanes-Oxley Act

Difference-in-differences analysis of corporate investment for firms above and below a public float of $75 million in 2002

Treated firms experience an increase in R&D expenditures and total investments, and a decrease in cash holdings relative to control firms.

Iliev (2010)

Sarbanes-Oxley Act

Analysis of audit fees, discretionary accruals and market value using a regression discontinuity design that exploits the float-based threshold in SOX Section 404; uses instrument for the threshold to avoidance behavior by firms

Increase in audit fees and decrease in discretionary accruals. Buy-and-hold returns of compliers were lower than those of firms below the threshold over the 2-year period starting with the announcement of the rule.

Lobo and Zhou (2006)

Cohen, Dey, and Lys (2008)

Koh, Matsumoto, and Rajgopal (2008)

Bartov and Cohen (2009)

Sarbanes-Oxley Act

Pre-post comparison of accrual-based as well as real- earnings management, conservatism, and propensity to meet/beat analyst forecasts for treated firms

Decline in accrual-based earnings management proxies, and in the propensity to meet or beat analyst forecasts. Increase in proxies for conservatism and real earnings management.

DeFond and Lennox (2011)

Sarbanes-Oxley Act

Cross-sectional analysis of the determinants of audit firm exits from the market for public companies around the introduction of SOX and the PCAOB

Increase in the likelihood of exists by small audit firms from the market for public company audits following SOX. Exiting auditors are less likely be compliant with PCAOB rules, have more negative peer reviews and inspection reports than those remaining in the market.

Dyck, Morse, and Zingales (2010)

Sarbanes-Oxley Act

Pre-post comparison of the likelihood that auditors detect frauds for treated firms

The proportion of frauds detected by auditors increases after the enactment of SOX.

Jain, Kim, and Rezaee (2008)

Sarbanes-Oxley Act

Pre-post comparison of long-run market liquidity changes around the accounting scandals and SOX for treated firms

Decline in market liquidity in the accounting scandals period, while persistent liquidity improvement after the enactment of SOX. Liquidity improvements are positively associated with a decline in total accruals.

Albuquerque and Zhu (2013)

Sarbanes-Oxley Act

Difference-in-differences analysis of market liquidity comparing firms above and below a public float of $75 million in 2002

Treated firms experience a decrease in the bid-ask spreads relative to control firms.

Doyle, Ge, McVay (2007)

Ashbaugh-Skaife, Collins, Kiney, and LaFond (2008)

Sarbanes-Oxley Act

Sample of firms with internal control deficiencies Internal control deficiencies are negatively associated with accruals quality proxies.

Firms that remediate previously reported internal control deficiencies exhibit an increase in earnings quality relative to firms that do not remediate.

Hammersley, Myers, and Shakespeare (2008)

Sarbanes-Oxley Act

Stock market reactions to the disclosure of internal control weaknesses under Section 302 of the SOX

Evidence of negative stock market reactions to the disclosure of material weaknesses.

Ashbaugh-Skaife, Collins, Kiney, and DaFond (2009)

Sarbanes-Oxley Act

Cross-sectional and intertemporal analysis of the association between disclosures of internal control deficiencies and idiosyncratic risk, systematic risk, and the implied cost of capital

Firms disclosing internal control deficiencies under SOX section 302 exhibit with higher idiosyncratic risk, systematic risk, and implied cost of capital. Firms those auditors confirm a change in the effectiveness of the internal control system under SOX section 404 experience a change in idiosyncratic risk, systematic risk, and implied cost of capital.

Feng, Li, and McVay (2009)

Sarbanes-Oxley Act

Cross-sectional analysis of the association between the disclosure of material weaknesses and the accuracy of managerial earnings guidance; use Heckman selection model

Firms disclosing material weakness are associated with less accurate earnings guidance.

Costello and Wittenberg-Moerman (2011)

Sarbanes-Oxley Act

Cross-sectional and intertemporal analysis of the association between internal control deficiencies and loan contractual terms

Decrease in the use of debt covenants, increase in the reliance on collateral, and increase in the loan interest rate after the disclosure of internal control deficiencies by borrowers.

Kim, Song, and Zhang (2011)

Sarbanes-Oxley Act

Cross-sectional analysis of the association between internal control deficiencies and loan contractual terms

Firms disclosing internal control deficiencies have with higher spreads, and tighter covenants than firms not disclosing internal control deficiencies do.

Engel, Hayes and Wang (2007)

Sarbanes-Oxley Act

Pre-post comparison of the likelihood of and market reactions to Rule 13e-3 transactions (as proxy for going private). Treatment and control firms are matched with respect to size and industry

Increase in Rule 13e-3 transactions after the passage of SOX. The announcement returns to these transactions are positive, especially among small firms.

Leuz, Triantis and Wang (2007)

Sarbanes-Oxley Act

Pre-post comparison of going private and going dark transactions around SOX events. Market reactions and liquidity tests around transactions’ announcements. Cross-sectional analysis of the determinants of the likelihood of going dark and going private using a control sample matched by size and number of owners

Evidence on the firm characteristics of going dark and going private firms. Going dark, but not going private increases after SOX and is positively associated with SOX events. Evidence of negative market reactions and liquidity declines after going dark announcements; positive returns to going private announcements

Marosi and Massoud (2008)

Sarbanes-Oxley Act

Cross-sectional analysis of the determinants of going dark transactions using a size, industry, and trading venue matched control sample

Going dark firms have fewer growth opportunities, greater insider ownership, lower institutional ownership, higher leverage, and lower market momentum than the matched control sample.

Kamar, Karaca-Mandic, Talley (2008)

Sarbanes-Oxley Act

Pre-post analysis of the probability that a U.S. public target firm is acquired by a public versus a private firm, using foreign deals as control group

Increase in acquisitions of public targets by private firms after the enactment of SOX, especially among small firms.

Hostak, Karaoglu, Lys and Yang (2007)

Sarbanes-Oxley Act

Stock market reactions to SOX related events and deregistration decisions for ADR firms, using ADR firms that did not exit U.S. markets, and firms that voluntarily delisted from the LSE as control sample.

Delisting firms have weaker corporate governance, and experience less negative stock market reactions around SOX related events than ADRs that do not exit the U.S. market. Evidence of stock price declines around deregistration announcements.

Piotroski and Srinivasan (2008)

Sarbanes-Oxley Act

Cross-sectional analysis of cross-listing choices in the U.S. versus the U.K around the adoption of SOX

No evidence that SOX adoption affects foreign firms’ listing choices between U.S. and the U.K. Evidence of a decline in the probability to list on NASDAQ relative to the LSE Alternative Investment Market for small foreign firms after SOX.

Doidge, Karolyi, Stulz (2009)

Sarbanes-Oxley Act

Pre-post analysis of cross-listing decisions, determinants, and valuation consequences, using U.K. cross-listed firms as benchmark

Evidence that the decline in cross-listings in the U.S. and the U.K. is associated with a change in firms’ characteristics rather than SOX provisions. No evidence of a change in the average valuation differential between U.S. cross-listed and not cross-listed firms since the enactment of SOX.

Doidge, Karolyi, Stulz (2010)

Sarbanes-Oxley Act

Cross-sectional analysis of the determinants of cross-listed firms de-registration transactions

De-registering firms have lower growth opportunities and needs for external finance than firms that do not deregister. Little evidence that the enactment of SOX affects ADRs deregistration transactions.

Gao (2011) Sarbanes-Oxley Act

Pre-post comparison of the likelihood that foreign firms issue bonds in the U.S. and in other countries

Foreign firms are less likely to issue Yankee bonds compared to Eurobonds after the adoption of SOX. Some evidence that more transparent foreign firms are more likely to issue bonds in the U.S. in the post-SOX period relative to the pre-SOX period

Table 4.4: International Evidence on Costs and Benefits of Disclosure Regulation

This table lists key studies exploiting international variation in disclosure regulation. It includes cross-sectional studies as well as studies that combine cross-sectional and time-series variation, including regulatory changes. The table summarizes research design and key empirical findings. The table is ordered by the regulatory variables of interest and economic outcome.

References Variable of Interest Research Design Results Glaeser, Johnson and Shleifer (2001)

Securities regulation and enforcement in Poland and Czech Republic

Descriptive evidence on the association between enforcement, securities regulation and stock market development

Strict enforcement of securities laws and highly motivated regulators are associated with stock market development.

Leuz, Nanda, Wysocki (2003)

Securities regulation, disclosure requirements, and enforcement around the world

Cross-sectional analysis of the association between the characteristics of the country institutional framework and earnings management practices around the world

Stricter and better enforced securities laws and investor rights are associated with less earnings management (and also higher disclosure scores).

La Porta, Lopez-de-Silanes, Shleifer (2006)


Cross-sectional analysis of the association between the institutional variables and capital market development around the world

Stricter and better enforced securities laws and investor rights are associated with higher financial market development.

Hail and Leuz (2006)


Cross-sectional analysis of the association between the institutional variables and countries’ implied cost of capital

Stricter and better enforced securities laws and investor rights are associated with lower cost of capital. The negative association between the strictness of securities regulation and cost of capital is weaker when capital markets are more globally integrated.

Frost, Gordon, Hayes (2006)

Stock Exchange disclosure requirements and their enforcement around the world

Cross-sectional analysis of the association between stock exchange disclosure requirements, their enforcement, and capital market development around the world

More extensive and better enforced stock exchange disclosure requirements are positively associated with capital market development.

Bhattacharya and Daouk (2002)

Adoption of insider trading laws, and their enforcement around the world

Analysis of the staggered adoption and first-time enforcement of insider trading laws on liquidity, returns, and cost of capital using regressions with country fixed effects

The adoption of insider trading laws has little impact on cost of capital, while the first-time enforcement is associated with declines in the cost of capital.

Cumming, Johan, and Li (2011)

Stock exchange trading rules for market manipulation, insider trading, and broker–agency conflict; MiFID

Panel analyses of exchange rule indices and market liquidity; Difference-in-differences analysis of the effect of the MiFID on market liquidity

Market liquidity is positively associated with more detailed exchange rules on insider trading and market manipulation. Liquidity is not statistically associated with rules pertaining to broker–agency conflict. Significantly positive increase in liquidity after the introduction of MiFID.

Christensen, Hail, and Leuz (2016)

Implementation of the Market Abuse and Transparency Directives in the European Union

Analysis of the staggered implementation of the EU Directives on market liquidity using regressions with quarter-year, industry, and country fixed effects. Additional analyses are based on within-country tests using firms in unregulated markets as control

Increase in market liquidity after the adoption of the directives. Substantial heterogeneity in the treatment effect associated with prior institutional characteristics and the strictness of the directives’ implementation and enforcement. No evidence for a liquidity effect around the introduction of MiFID.

Hope (2003) Financial disclosure practices and their enforcement around the world

Cross-sectional analysis of the association between the proxies for financial disclosures, their enforcement, and analyst forecast accuracy

Positive association between the level of disclosure, enforcement, and analyst forecast accuracy. The positive association between disclosure and accuracy is larger when analyst following is low. Enforcement matters most when accounting standards provide more discretion to firms.

Bushman, Piotroski, Smith (2004)

Corporate governance and financial transparency around the world

Cross-sectional analysis of the determinants of governance transparency and financial transparency

Financial transparency is primarily associated with countries’ institutional and judicial system, while governance transparency is associated with the political regime.

Francis, Khurana, and Pereira (2005)

Voluntary financial disclosure practices around the world

Cross-sectional analysis of the association between firm-level voluntary disclosure and cost of capital

Firm voluntary disclosure and country-level regulations are (independently) associated with a lower cost of capital.

Guedhami and Pittman (2006)

Disclosure standards and auditor choices around the world

Cross-sectional analysis of the association between disclosure standards, auditor choices, and ownership concentration

Evidence that extensive disclosure standards or higher quality auditors are associated with lower ownership concentration. In countries where auditors face a higher litigation risk, ownership concentration is lower.

Eleswarapu and Venkataraman (2006)

Judicial efficiency, accounting standards, and political stability around the world

Cross-sectional analysis of the association between market liquidity and country-level institutions using a sample of ADR firms

Bid-ask spreads and price impact of trades are lower for ADRs from countries with better disclosure regulation, higher judicial efficiency, and more political stability.

Chen, Chen, and Wei (2009)

Firm-level governance, voluntary disclosure, and country-level institutions around the word

Cross-sectional analysis of the association between firm-level disclosure, corporate governance, country-level institutions and implied cost of capital

Firm-level corporate governance and disclosure choices exhibit a stronger negative relation with cost of capital in countries where investor protection, disclosure standards, and enforcement are weak.

Bilinski, Lyssimachou, and Walker (2013)

Financial analyst characteristics and country-level institutions around the world

Cross-sectional analysis of the association between financial analyst, country-level institution and target price accuracy

Target price accuracy is higher in countries with more extensive disclosure standards

Aggarwal, Klapper and Wysocki (2005)

Countries’ institutional variables and firm-level characteristics

Cross-sectional analysis of the association between foreign firms’ country-level and firm-level characteristics and U.S. mutual funds’ allocation choices

U.S. mutual funds invest more in markets with tighter accounting standards, stronger shareholder rights, and stricter legal frameworks, and in firms with greater accounting transparency.

Gelos and Wei (2005)

Countries’ institutional variables

Cross-sectional analysis of the association between country-level transparency and international funds stock holdings

International funds invest less in less transparent countries.

Leuz, Lins, and Warnock (2007)


Cross-sectional analysis of the association between firm-level insider ownership structure and transparency, and U.S. institutional holdings

U.S. institutional investors hold fewer shares in foreign firms in which insiders have more control rights and in which earnings are more opaque. These associations are stronger for firms domiciled in countries with poor investor protection and weak disclosure standards.

Lang, Lins and Maffett (2012)


Cross-sectional analysis of the association between firm-level transparency, stock market liquidity, and firm value

Firms with better accounting standards, higher quality auditors, more analyst following, more accurate analyst forecasts, and less evidence of earnings management have greater liquidity. This relation is stronger when investor protection and disclosure requirements are poor, and ownership is more concentrated.

Maffett (2012) Countries’ institutional variables and firm-level characteristics

Cross-sectional analysis of the association between firm- and country-level transparency and informed trading by institutional investors

More opaque firms are associated with more privately informed trading by institutional investors. The association between firm- level opacity and informed trading is most pronounced where country-level disclosure infrastructures are less developed.

Reese and Weisbach (2002)

Cross-listing on U.S. Stock Exchanges

Cross-sectional analysis of the determinants of cross-listing in the U.S Stock Exchanges, and of the subsequent equity offerings

Capital raising increases after cross listing, both at home and abroad. Firms domiciled in countries with poor investor protection regimes experience the largest increases. Firms from code law countries are more likely to issue equity outside the U.S.

Lang, Lins and Miller (2003)


Cross-sectional analysis of the association between cross-listing in the U.S. Stock Exchanges and analyst forecast accuracy, analyst following, firm value using foreign not cross-listed firms as control sample and selection model to account for the endogenous cross-listing choice. Additional analyses employ first-difference models.

Forecast accuracy and analyst following is greater for cross-listed firms than for non-cross-listed firms. The increase in accuracy and following takes place after cross-listing. Cross-listed firms followed by more analysts and with higher forecast accuracy are valued more.

Lang, Raedy and Yetman (2003)


Cross-sectional analysis of the association between cross-listing on U.S. stock exchanges and earnings quality using a matched sample of foreign non-cross-listed firms as control sample

Cross-listed firms exhibit less earnings management, higher levels of conservatism, and higher earnings response coefficients compared to non-cross-listed firms.

Doidge, Karolyi, and Stulz, (2004)


Cross-sectional analysis of the association between cross-listing on U.S. stock exchanges and firm value using foreign non-cross-listed firms as control sample

Cross-listed firms have a higher Tobin’q ratio than their home country peers. The magnitude of the association between cross-listing and firm value (or q) depend on the level of the ADR.

Bailey Karolyi, and Salva (2006)


First difference model of absolute return and volume reactions to earnings announcements after cross-listing on U.S. stock exchanges

Cross-listed firms experience an increase in absolute return and volume reactions to earnings announcements after cross-listing in the U.S. The magnitudes are stronger for firms from developed countries and for over-the-counter listings or private placements.

Lang, Ready, and Wilson (2006)


Cross-sectional analysis of the association between cross-listing in the U.S. and the quality of reconciled earnings using a matched sample of U.S. firms as a control group

Cross-listed firms have higher levels of income smoothing, higher propensity to manage earnings towards a target, less conservatism, lower earnings response coefficients compared to matched U.S. firms.

Doidge, Karolyi, and Stulz, (2009)


Pre-post analysis of cross-listing decisions, determinants, and valuation consequences, using cross-listed firms in the U.K. as benchmark; provide within-firm analyses using fixed effects

Decline in cross-listing in the U.S. and the U.K. over time is associated with changes in the underlying firms’ characteristics rather than SOX provisions. The valuation differential between cross-listed firms and not cross-listed firms has not fallen since the enactment of SOX.

Hail and Leuz (2009)


Pre-post comparison of the effect of cross-listing on U.S stock exchanges on implied cost of capital using foreign non-cross-listed firms as control sample

Decline in the cost of capital around U.S. cross-listings. The magnitudes of the estimated associations are smaller for over-the-counter listings and for listings from countries with stronger legal institutions. Decomposing the valuation effect into a cash flow and cost of capital component shows that a substantial fraction of the overall valuation effect is attributable to revisions in growth expectations around cross-listings.

Ammer, Holland, Smith, and Warnock (2012)


Heckman selection model, difference-in-differences and propensity score estimator of the determinants of U.S. investment holdings in foreign firms

Cross-listing in the U.S and U.S. investments in foreign firms are positively associated.

Siegel (2005) Cross-listing on U.S. Stock Exchanges

Cross-sectional analysis of the behavior of insiders of cross-listed firms

Cross-listed firms from Mexico still engage in fraud and private benefit extractions, especially during economic downturns.

Table 4.5: Real-Effects and Other Studies on Disclosure Regulation

This table lists key studies on disclosure regulation focusing on real effects as defined in Leuz and Wysocki (2016). The first set of studies examines real effects of disclosure regulation on firms’ investment policies and corporate behavior. The second set of studies examine disclosure regulation outside the traditional accounting and finance settings. The table summarizes the setting, research design and key empirical findings. The table is ordered by setting and then chronologically.

More traditional settings in accounting and finance:

References Variable of interest Research Design Results Biddle and Hilary (2006)

Financial reporting quality

Cross-sectional analysis of the association between financial reporting quality and investment efficiency

Firms with higher financial reporting quality have higher levels of investment efficiency. This association is stronger in countries where financing is provided through arm’s length transactions.

Gao, Wu, and Zimmerman (2009)

Sarbanes-Oxley Section 404

Pre-post comparison of corporate avoidance behavior by non-accelerated filers, using accelerated filers as a control group

Non-accelerated filers undertake fewer investments, make more cash payouts to shareholders, reduce the number of shares held by non-affiliates, make more bad news disclosures, and report lower earnings than accelerated filers.

Francis, Huang, Khurana, and Pereria (2009)

Country-level corporate transparency

Cross-sectional analysis of the association between countries’ corporate transparency and the efficiency of resources allocation

Country pairs with greater corporate transparency show higher contemporaneous correlation in industry growth rates. These associations are stronger when country pairs are at similar levels of economic development.

Bushman, Piotroski, and Smith (2011)

Timely loss recognition

Cross-sectional analysis of association between timely loss recognition and investment around the world

Positive association between the sensitivity of investment to declines in growth opportunities and the level of timely loss recognition.

Chen, Hope, Li, and Wang (2011)

Financial reporting quality

Cross-sectional analysis of the association between financial reporting quality and investment efficiency of private firms in emerging economies

Financial reporting quality is positively associated with investment efficiency. This association is stronger for firms that rely on bank financing and lower for firms with more incentives to manage earnings for tax purposes.

Stango and Zinman (2011)

Enforcement Reform of the Truth-in-Lending Act of 1981

Analysis of the effect of the Truth-in-Lending Reform on lender ability to price discriminate with household-fixed effects

Weak enforcement of the disclosure mandate is positively associated with a gap between interest rates paid borrowers. Stricter enforcement is associated with higher interest rates.

Badertscher, Shroff, and White (2013)

Mandatory disclosure for public firms

Cross-sectional analysis of the association between public firms presence in an industry and private firms investment sensitivity to growth shocks

Greater public firm presence in an industry is associated with a higher investment sensitivity to growth shocks for private firms.

Cheng, Dhaliwal, and Zhang (2013)

Disclosure of internal control weaknesses

Difference-in-differences analysis (coupled with propensity score matching) for the impact of material control weakness disclosures on investment efficiency

Firms that disclose material weaknesses exhibit larger investment inefficiencies compared to propensity-matched firms without such internal control weaknesses.

Faulkender, and Yang (2013)

SEC rule of 2006 requiring firms to disclose peer firms for compensation purposes

Discrete-choice regression model of compensation peers

Firms include more firms with highly paid CEOs in their peer group and omit firms with lower paid CEOs after the introduction of the new disclosure regulation.

Granja (2014) Disclosure and supervision regulation in the banking system

Staggered adoption of mandatory disclosure and supervision regulation. Effects on state banks’ failure rates, equity capital ratios, average deposit rates, and the share of long-term deposits, using national banks as controls; state-year, banking system-year, and state-banking system fixed effects

Requirement to report financial statements in local newspapers is associated with lower state banks failure rates, higher equity capital ratios, a decline in the average deposit interest rates, and a substitution of short-term demand deposits for long-term saving deposits by state-bank depositors.

Shroff, Verdi, and Yu (2014)

Country-level corporate transparency

Cross-sectional analysis of the association between investment sensitivity to growth shocks and foreign subsidiaries country-industry transparency

Foreign subsidiaries operating in country-industries where the information environment is more transparent exhibit higher sensitivity to local growth shocks than those operating in country-industries where the information environment is more opaque

Cho (2015) Adoption of SFAS 131 Difference-in-difference analysis of the effect of improving segment disclosure transparency after the adoption of SFAS on capital allocation within internal capital markets

Diversified firms that improve segment disclosures by changing segment definitions upon adoption of SFAS 131 experience an improvement in capital allocation efficiency in internal capital markets after the adoption of SFAS 131

Christensen, Floyd, Liu, and Maffett (2015)

Dodd-Frank Act provision to disseminate mine safety records through their financial statements

Difference-in-difference analysis of the effect of the Dodd-Frank provision on mining related citations, injuries, and productivity using private firms as control group

Public firms treated by the regulation (i.e., for which information is disseminated via 10-K) experience a decrease in mining related citations, injuries, and productivity as compared to private firms.

Dyreng, Hoopes, and Wilde (2015)

Public pressure by institutional investors

Difference-in-differences design of the effect of a non-profit activist group public pressure to comply with a rule requiring U.K. firms to disclose the location of all of their subsidiaries on tax avoidance and subsidiaries location

Non-compliant firms subjected to the public pressure increase subsidiary disclosure, decrease tax avoidance, and reduce the use of subsidiaries in tax haven countries compared to other firms not affected by the public pressure

Mas (2016) California mandate requiring the public disclosure of municipal salaries

Difference-in-differences design of the effect of the disclosure regulation on compensation and quit rate using cities voluntary disclosing city managers’ salaries as control sample

Decrease in average compensation and increase in city manager quit rate after the disclosure mandate

Other settings (outside the traditional accounting and finance settings):

References Variable of interest Research Design Results Dranove, Kessler, McClellan, Satterthwaite, (2003)

Adoption of health care report cards in New York and Pennsylvania

Difference-in-differences estimator of the short-run effects of health report cards on hospital behaviors and healthcare outcomes in the population of all U.S. elderly heart attack patients and all elderly patients receiving coronary artery bypass graft (CABG)

Mandatory disclosure of report cards is associated with better matching of patients with hospitals, an increase in the quantity of CABG surgery, and a change in the CABG surgery incidence from sicker patients toward healthier patients

Jin and Leslie (2003)

Los Angeles County ordinance to display restaurant hygiene grade cards in restaurant windows

Restaurant fixed effects models of the effect of the staggered adoption of the ordinance to disclose hygiene quality grade cards in restaurant windows on restaurants’ hygiene investments

Grade card regulation is associated with an increase in hygiene scores, an increase in the consumer demand sensitivity to changes in restaurants’ hygiene quality, and a decrease in the number of foodborne illness hospitalizations. The improvement in hospitalizations is not fully explained by consumers substituting from poor hygiene restaurants to good hygiene restaurants.

Cutler, Huckman, and Landrum (2004)

New York’s bypass-surgery reporting program

Hospital and month fixed effects models of the effect the mandatory disclosure of health report cards on the matching of patients with hospitals, and on healthcare quality

Hospitals with high-mortality rates experience a decline of bypass-surgery patients per month, while no change is observed for hospitals with low-mortality rates. The drop in volume for hospitals with high-mortality rates is associated with a reduction in the number of low-severity patients.

Bennear and Olmstead (2008)

1996 Amendments to the Safe Drinking Water Act

Difference-in-differences estimator of the effect of the disclosure of confidence reports to consumers on water quality on violations of health-based drinking water regulations

Community drinking water suppliers required to mail annual confidence reports to customers experience a reduction in health-based drinking water regulation violations.

Lu (2012) Mandatory Adoption of the Nursing Home Quality Initiative disclosure policy (NHQI)

Difference-in-differences estimator of the effect of the random mandatory adoption of Nursing Home Quality Initiative disclosure policy in pilot states on a comprehensive set of service quality measures considered and not considered by the regulation, using non pilot states as counterfactual

The introduction of NHQI leads to an improvement in the NHQI-reported quality scores but to a decline in NHQI- unreported quality scores. Nursing homes do not decrease quality related inputs and increase their high skilled nursing hours per resident. The elasticity of consumer demand to disclosed quality measures increases

Kolstad (2013) Introduction of quality report cards for surgeons performing Coronary Artery Bypass Graft in PA

First difference model of the effect of the release of report cards on risk-adjusted mortality rates, and structural model to estimate consumer demand elasticity to disclosed quality

Risk-adjusted mortality rates decline after the release of surgeon performance report cards. No association with consumer demand. Structural estimation shows improved performance is related to intrinsic non-pecuniary incentives rather than to profit incentives.

Christensen. Floyd, and Maffett (2014)

State-level legislations aimed at increasing price transparency in the healthcare industry

State-year, hip replacement-state, and hospital fixed effects models of the effect of the staggered adoption of price transparency regulations on hip replacement charge prices using appendectomies charge prices, less affected by the regulations, as counterfactual

Price transparency regulations is associated with a reduction in charge prices for hip replacements. The magnitude of the charge price decline is larger where competition among hospitals is more intense and for hospitals which charged the highest prices before the regulation.

Table 5.1: Key Findings in IFRS Studies – Changes in Reporting Properties and Financial Disclosures

This table lists key studies examining reporting properties and financial disclosures around IFRS adoption. The table briefly summarizes key empirical findings. Studies are ordered chronologically.

References Outcome Empirical evidence Beuselinck, Joos and Van der Meulen (2007)

Earnings comparability Increase in earnings comparability after IFRS mandatory adoption.

Barth, Landsman, and Lang (2008)

Earnings quality Firms voluntarily applying IAS exhibit less earnings management, more timely loss recognition, and more value relevant accounting amounts than matched firms applying non-U.S. domestic standards.

Jeanjean and Stolowy (2008)

Earnings management Increase in earnings management and loss avoidance after IFRS mandatory adoption.

Beuselinck, Joos, Khurana, and Van der Meulen (2009)

Market-based measures of earnings quality IFRS mandatory adoption is associated with an increase in the stock price informativeness.

Aharony, Barniv and Falk (2010)

Earnings quality Increase in value relevance. The effect is larger among countries with greater differences between IFRS and local GAAP.

Gordon, Jorgensen, Linthicum (2010)

Earnings quality Earnings attributes of cross-listed firms preparing financial statements under IFRS are comparable with earnings attributes of the from 20-F reconciliations.

Lang, Maffett, and Owen (2010) Earnings comparability Little evidence of an increase in accounting comparability after IFRS mandatory adoption.

Atwood, Drake, Myers, and Myers (2011)

Earnings quality Earnings persistence is not different for firms reporting under IFRS and firms reporting under U.S. GAAP. Earnings reported under IFRS are less associated with future cash flows than earnings reported under U.S. GAAP.

Gebhardt and Novotny-Farkas (2011)

Earnings quality European banks switching to IFRS exhibit a decrease in income smoothing. The effect is less pronounced in countries where the regulatory regime is stricter

Barth, Landsman, and Williams (2012)

Earnings comparability Foreign firms switching to IFRS exhibit an increase in comparability with U.S. firms. The increase in comparability is associated with changes in earnings smoothing, accrual quality, and earnings timeliness.

Capukun, Collins, Jeanjean (2012)

Earnings management IFRS adoption is associated with greater earnings management and income smoothing in countries that do not allowed early IFRS adoption.

Landsman, Maydew, Thornock (2012)

Market-based measures of earnings quality IFRS adoption is associated with an increase in the information content of earnings announcements. The effect is driven by an increase in analyst following, a decrease in reporting lag, and an increase in foreign equity investments holdings

Yip and Young (2012) Earnings comparability Increase in comparability of accounting information after IFRS mandatory adoption.

Ahmed, Neel, and Wang (2013) Earnings management IFRS adoption is associated with an increase in income smoothing, income increasing earnings management, and a decrease in timely loss recognition.

Cascino and Gassen (2014) Earnings comparability Little evidence that IFRS mandatory adoption is associated with comparability increases. Only firms with higher compliance incentives experience an increase in comparability.

Wang (2014) Earnings comparability After IFRS adoption, competing firms exhibit higher stock price and trading volume reactions to earnings announcements. The effects are most pronounced in countries with stronger enforcement and reporting incentives.

Christensen, Lee, Walker, and Zeng (2015)

Earnings quality Only voluntary adopters experience improvements in earnings quality.

Bhat, Callen, and Segal (2016) Spread/maturity relation of CDS instruments CDS spreads are lower across maturities following the adoption of IFRS, and the slope and concavity of the CDS spread/maturity relation are higher.

Li and Yang (2016) Voluntary disclosure policies Increase in the likelihood and frequency of management earnings forecasts following mandatory IFRS adoption.

Table 5.2: Key Findings in IFRS Studies – Capital Market Outcomes

This table lists key studies examining capital market outcomes around mandatory IFRS adoption. The table briefly summarizes key empirical findings. Studies are ordered by economic outcome and then chronologically.

References Outcome Empirical evidence Christensen, Lee, and Walker (2007)

Market reaction to key events Substantial heterogeneity in the market reaction to key events. Heterogeneity is associated with proxies for firms’ expected costs and benefits

Armstrong, Barth, Jagolinzer, and Riedl (2010)

Market reaction to key events Positive stock market reactions to key events, especially for firms with high information asymmetries and low quality information in the pre-adoption period. Negative stock market reactions for firms incorporated in code law countries

Daske, Hail, Leuz, and Verdi (2008)

Liquidity and cost of capital Average increase in market liquidity, but subsequent analyses find that effects are stronger or even confined to certain countries, i.e., EU and countries with strong legal enforcement.

Li (2010) Liquidity and cost of capital Average decrease in cost of capital, but subsequent analyses find decline in cost of capital only in countries with strong enforcement and legal institutions.

Muller, Riedl and Sellhorn (2011)

Liquidity and cost of capital Increase in market liquidity for investment property firms around the adoption of fair value disclosures of investment properties

Christensen, Hail, and Leuz (2013)

Liquidity and cost of capital Only firms incorporated in countries with a substantial increase in enforcement around (or after) IFRS adoption experience an increase in market liquidity

Daske, Hail, Leuz, and Verdi (2013)

Liquidity and cost of capital Only firms experiencing shocks in their growth opportunities and capital needs around the time of IFRS adoption experience an increase in market liquidity

DeFond, Hung, Li, and Li (2014) Crash risk Decrease in crash risk after IFRS mandatory adoption DeFond, Hu, Hung, and Li (2008)

Investors’ portfolio choices Firms incorporated in countries that adopt IFRS and for which implementation is more credible and likely more uniform experience an increase in foreign mutual funds’ investment holdings.

Bruggerman, Daske, Homburg, and Pope (2011)

Investors’ portfolio choices Foreign IFRS stocks in the Open Market at the Frankfurt Stock Exchange experience an increase in trading volume after IFRS adoption.

Khurana and Michas (2011) Investors’ portfolio choices Decrease in U.S. home bias after firms mandatorily switch to IFRS. Shima and Gordon (2011) Investors’ portfolio choices IFRS adoption is associated with an increase in U.S. investment holdings, but

only in countries with strong legal institutions. Beneish, Miller, Lombardi Yohn (2012)

Investors’ portfolio choices IFRS adoption is more strongly associated with foreign debt than with foreign equity investments. The increase in foreign equity investment occurs only in countries with changes in their governance institutions, while the increase in debt inflows does not depend on a country institutional framework.

Florou and Pope (2012) Investors’ portfolio choices Institutional holdings increase after IFRS mandatory adoption. The effect is concentrated among value, active and growth investors, and for firms in countries with strong enforcement.

Hung, Li, and Wang (2015) Post earnings announcement drift IFRS mandatory adoption is associated with a decline in the post-earnings announcement drift

Byard, Li, and Yu (2011) Analyst information environment Decrease in forecast error and forecast dispersion around IFRS adoption. The effects are stronger for firms incorporated in countries with strong enforcement and large differences between local GAAP and IFRS. In countries with weak enforcement and large IFRS-local GAAP differences, only firms with strong reporting incentives exhibit a decrease in forecast error and dispersion.

Tan, Wang, and Welker (2011) Analyst information environment IFRS adoption is associated with an increase in analyst following by foreign analysts from countries switching to IFRS. Foreign analyst accuracy increases after IFRS adoption. Following by local analysts with IFRS expertise increases, but their forecast accuracy does not change.

Horton, Serafeim, and Serafeim (2013)

Analyst information environment Forecast accuracy increases for analysts following firms switching from multiple local GAAP to IFRS relative to analysts following firms switching from local GAAP to multiple GAAP.

Brown, Preitato, and Tarca (2015)

Analyst information environment No significant changes in the properties of analyst forecasts around mandatory IFRS adoption once changes in enforcement are controlled for.

Florou, Kosi, and Pope (2012) Credit relevance of financial statements IFRS mandatory adoption is associated with an increase in the credit relevance of financial statements.

Florou and Kosi (2014) Debt contractual terms Increase in the amount of bond financing and decrease in yield after IFRS adoption. The effects are stronger in countries with larger differences between IFRS and local GAAP.

Ball, Li, and Shivakumar (2015) Contractibility of financial statements and reliance of accounting-based covenants

Decline in the reliance of accounting-based debt covenants after IFRS mandatory adoption.

Brown (2014) Debt contractual terms Larger differences between the lender GAAP and borrower GAAP are associated with larger credit spreads and higher fees, more concentrated loan syndicates, and with lower reliance on debt covenants.

Loureiro and Taboada (2015)

Insiders’ learning from stock prices Increase in investment-to-price sensitivity following IFRS adoption. The relation between the market reaction to M&A deal announcements and the likelihood of deal completion becomes stronger following IFRS adoption. Increase in post-acquisition operating and stock return performance post-IFRS adoption.

Table 5.3: Key Findings in IFRS Studies – Beyond Capital Market Effects

This table lists key studies examining real and other effects around IFRS adoption. The table briefly summarizes key empirical findings. The table differentiates between studies that focus on effects around mandatory IFRS adoption and studies that use mandatory IFRS adoption as an event that provides reporting variation. Studies are ordered by economic outcome and chronologically.

Studies on IFRS adoption References Outcome Empirical evidence Wu and Zhang (2010) CEO turnover sensitivity based on relative

performance evaluation Firms switching to IFRS are more likely to rely on relative performance evaluation for CEO retention decisions using foreign peer information

Schleicher, Tahoun, and Walker (2010)

Investment efficiency IFRS mandatory adoption is associated with a decline in the investment-cash flow sensitivity. The effect is larger in insider economies.

Biddle, Callahan, Hong, and Knowles (2011)

Investment efficiency IFRS adoption is associated with an increase in capital investment efficiency. The effect is larger in countries with more opaque accounting information in the pre-adoption period.

Chen, Young, and Zhuang (2013) Investment efficiency IFRS mandatory adoption is associated with an increase in investment efficiency (via spillover effects).

Francis, Huang, and Khurana (2012)

Cross-border M&A activities Increase in M&A activities following IFRS adoption. The effect is stronger for country-pairs with larger pre-adoption differences in local GAAP

Ozkan, Singer, and You (2012) Pay-for-performance sensitivity Small increase in pay-for-performance sensitivity after IFRS adoption. Increase in the use of foreign firms as benchmarks.

Hong, Hung and Lobo (2014)

IPO activities Decrease in IPO underpricing and increase in the relative proceeds from foreign markets following mandatory IFRS adoption. The effect is stronger in countries with larger differences between IFRS and local GAAP and stronger legal regimes.

Kim, Liu, and Zheng (2012) Audit fees Increase in audit fees following IFRS adoption. De George, Ferguson, and Spear (2013)

Audit fees Increase in audit fees following IFRS adoption.

Studies that exploit IFRS adoption as a source of reporting variation Shroff, Verdi, and Yu (2012) Investment efficiency Subsidiaries incorporated in countries that adopt IFRS experience an increase in

the sensitivity of investment to growth opportunities. Hail, Tahoun, and Wang (2014) Dividend payouts Firms are less likely to pay (increase) dividends after IFRS adoption and more

likely to cut (stop) such payments Bloomfield, Brüggemann, Christensen, and Leuz (2016)

Cross-border labor mobility of accounting professionals

Accounting regulatory harmonization, including IFRS adoption, increases cross-border migration of accounting professionals relative to matched other professionals

online appendix the economics of disclosure and financial...

Documents