Corporate disclosure is critical for the functioning of an efficient capital market. Firms provide disclosure through regulated financial reports, including the financial statements, footnotes, management discussion and analysis, and other regulatory filings. In addition, some firms engage in voluntary communication, such as management forecasts, analysts? presentations and conference calls, press releases, internet sites, and other corporate reports. Finally, there are disclosures about firms by information intermediaries, such as financial analysts, industry experts, and the financial press.

Information Asymmetry, Corporate Disclosure and the Capital Markets: A Review of the Empirical Disclosure Literature

http://lib.cufe.edu.cn/upload_files/other/4_20140516025625_19.pdf

Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature $

https://faculty.fuqua.duke.edu/~charvey/Research/Working_Papers/W73_The_economic_implications.pdf

The economic implications of corporate financial reporting

. This study investigates firms subject to accounting enforcement actions by the Securities and Exchange Commission for alleged violations of Generally Accepted Accounting Principles. We investigate: (i) the extent to which the alleged earnings manipulations can be explained by extant earnings management hypotheses; (ii) the relation between earnings manipulations and weaknesses in firms' internal governance structures; and (iii) the capital market consequences experienced by firms when the alleged earnings manipulations are made public. We find that an important motivation for earnings manipulation is the desire to attract external financing at low cost. We show that this motivation remains significant after controlling for contracting motives proposed in the academic literature. We also find that firms manipulating earnings are: (i) more likely to have boards of directors dominated by management; (ii) more likely to have a Chief Executive Officer who simultaneously serves as Chairman of the Board; (iii) more likely to have a Chief Executive Officer who is also the firm's founder, (iv) less likely to have an audit committee; and (v) less likely to have an outside blockholder. Finally, we document that firms manipulating earnings experience significant increases in their costs of capital when the manipulations are made public.

Resume. Les auteurs analysent les entreprises assujetties aux mesures d'execution prises par la Securities and Exchange Commission dans les cas de presomption de transgression des principes comptables generalement reconnus. Ils s'interessent aux aspects suivants de la question: i) la mesure dans laquelle les presomptions de manipulations des benefices peuvent etre expliquees par les hypotheses existantes de gestion des benefices; ii) la relation entre les manipulations de benefices et les faiblesses des structures de regie interne des entreprises; et iii) la reaction du marche financier a l'endroit des entreprises au sujet desquelles les presomptions de manipulation des benefices sont rendues publiques. Les auteurs constatent qu'un incitatif majeur a la manipulation des benefices est le desir d'obtenir du financement externe a moindre cout. Ils demontrent que cet incitatif demeure important meme apres le controle des motifs contractuels que mettent de l'avant les travaux theoriques. Ils constatent egalement que les entreprises qui manipulent les benefices sont: i) davantage susceptibles d'avoir des conseils d'administration domines par la direction; ii) davantage susceptibles d'avoir un chef de la direction qui joue simultanement le role de president du conseil; iii) davantage susceptibles d'avoir un chef de la direction qui est egalement le fondateur de l'entreprise; iv) moins susceptibles d'avoir un comite de verification; et v) moins susceptibles d'avoir un bloc de titres detenus par un actionnaire exterieur. Enfin, les auteurs etablissent le fait que le cout du capital, pour les entreprises qui manipulent les benefices, enregistre des hausses appreciables lorsque ces manipulations sont rendues publiques.

/pdf/causes-and-consequences-of-earnings-manipulation-an-analysis-356ezw8q95.pdf

Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC*

Earnings management and investor protection: an international comparison

I discuss the analysis in Piotroski and Srinivasan (2008) and how it helps to disentangle the effects of Sarbanes Oxley on observed listing patterns. Since the paper is quite thorough and reflects the comments from many workshop participants, I focus on broader issues. Further, I attempt to incorporate the gist of comments from the Journal of Accounting Research conference participants. I conclude that, while the paper provides important descriptive evidence, inherent design and measurement hurdles limit one’s ability to draw strong causal inferences about the effects of SOX on cross listing decisions.

The Effect of Sarbanes Oxley on Cross Listing: A Discussion of Piotroski and Srinivasan (2008)

Bowen, Chen and Cheng (2008) document a negative association between analyst following and the discount at issuance of seasoned equity offerings which, they argue, provides evidence of a direct link between analyst following, information asymmetry and cost of capital. While the empirical setting is novel and the analysis is careful, I argue that the causal links are less clear. In particular, I consider whether the evidence demonstrates that (a) analyst following causes a reduction in information asymmetry, (b) a reduction in information asymmetry causes the lower discount at equity issuance, and (c) the lower discount at equity issuance implies a lower cost of capital. In particular, prior literature suggests that analysts are attracted to firms with less information asymmetry, potentially reversing the causality between analyst following and information asymmetry. Further, the discount at issuance behaves much like price pressure, suggesting that analyst following may reflect investor attention rather than a reduction of information asymmetry. Finally, the discount is only one component of the cost of capital. To the extent that analyst following reduces the previously-documented mispricing at equity issuance it may actually increase overall cost of capital.

Analyst Following, Information Asymmetry and Cost of Capital: A Discussion of Bowen, Chen and Cheng (2008)

A Review of the Accounting Literature on Innovation

We investigate Chinese firms’ use of variable interest entities (VIEs) to evade Chinese regulation on foreign ownership and list in the US. Since VIEs are explicitly designed to circumvent the intent of Chinese law on restricting foreign control, they potentially increase the risk of government intervention and agency conflicts within the firm. The use of VIEs among Chinese firms listed in the US is widespread, growing, and associated with valuation discounts of approximately 25% relative to Chinese non-VIE firms listed in the US. The discount varies predictably with events that change VIE risks and is tempered by better oversight (large auditor and institutional investment) and factors that lower regulatory risk (politically connected directors and high media visibility). To remediate investor concerns, VIE firms are more likely to have these characteristics. Finally, the risk of intervention disciplines VIE managers to curry government favor by funding disaster relief and hiring excess employees.

The Rise of VIEs in China Balancing State Control and Access to Foreign Capital

Recent accounting scandals have led some to argue that US reporting is fundamentally flawed and that other systems might be preferable. However, the arguments are often based on anecdotes and conjecture. In this paper, my goal is to bring insights from empirical research to bear on the issue of the relative effectiveness of US reporting. I argue that research evidence on cross country differences in accounting suggests that US reporting compares well with other countries’ and that evidence on cross listing indicates that US accounting has a level of credibility not enjoyed by most other systems. Further, there is relatively little systematic evidence of deterioration in US accounting over time. Subject to the natural caveats with empirical research, the evidence suggests that US accounting has performed relatively well historically. While there are important lessons to be learned from experience with recent scandals, I argue that the empirical evidence supports the conclusion that changes should be incremental rather than wholesale. Further, the ongoing response to the scandals may actually strengthen the US system relative to other countries. * Thomas W. Hudson, Jr./Deloitte and Touche L.L.P. Distinguished Professor, Kenan-Flagler Bus. School, Univ. of North Carolina, Chapel Hill, NC 27599-3490, (919) 962-1644, Mark_Lang@unc.edu. This paper was prepared for the N.C. Journal of International Law & Commercial Regulation conference on International Accounting Standards in the Wake of Enron, and benefited from the comments of conference participants and of Jana Raedy, Allison Evans, Laura Knudson and Wendy Wilson.

/pdf/international-accounting-in-light-of-enron-evidence-from-1skb62k9qb.pdf

Mark H. Lang

Papers

The Effect of Sarbanes Oxley on Cross Listing: A Discussion of Piotroski and Srinivasan (2008)

Analyst Following, Information Asymmetry and Cost of Capital: A Discussion of Bowen, Chen and Cheng (2008)

A Review of the Accounting Literature on Innovation

The Rise of VIEs in China Balancing State Control and Access to Foreign Capital

International Accounting in Light of Enron: Evidence from Empirical Research