SEC Regulation Fair Disclosure, Information, and the Cost of Capital

Gomes, Armando; Gorton, Gary; Madureira, Leonardo

doi:10.3386/w10567

Cited by 25 publications

(11 citation statements)

References 12 publications

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“…Similarly, Gomes, Gorton, and Madureira [] and Duarte et al. [] find no significant changes in the cost of capital for NYSE firms, but an increase in the cost of capital for smaller firms and NASDAQ firms, respectively.…”

Section: Evidence On the Economic Effects Of Disclosure Regulationmentioning

confidence: 93%

The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research

Leuz

Wysocki

2016

J of Accounting Research

1,340

382

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This paper discusses the empirical literature on the economic consequences of disclosure and financial reporting regulation, drawing on U.S. and international evidence. Given the policy relevance of research on regulation, we highlight the challenges with (1) quantifying regulatory costs and benefits, (2) measuring disclosure and reporting outcomes, and (3) drawing causal inferences from regulatory studies. Next, we discuss empirical studies that link disclosure and reporting activities to firm-specific and market-wide economic outcomes. Understanding these links is important when evaluating regulation. We then synthesize the empirical evidence on the economic effects of disclosure regulation and reporting standards, including the evidence on International Financial Reporting Standards (IFRS) adoption. Several important conclusions emerge. We generally lack evidence on market-wide effects and externalities from regulation, yet such evidence is central to the

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Section: Evidence On the Economic Effects Of Disclosure Regulationmentioning

confidence: 93%

The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research

Leuz

Wysocki

2016

J of Accounting Research

1,340

382

View full text Add to dashboard Cite

show abstract

“…On one hand, Eleswarapu et al (2004), Chiyachantana, Jiang, Taechapiroontong, and Wood (2004), and Ahmed and Schneible (2007) documented evidence consistent with an improvement after Regulation FD. On the other hand, Sidhu, Smith, Whaley, and Willis (2008) and Gomes, Gorton, and Madureira (2007) reported evidence suggesting an increase in information asymmetry. Finally, Charoenrook andLewis (2009) andCollver (2007) found no change in information asymmetry.…”

Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

Analysts’ Recommendation Revisions and Subsequent Earnings Surprises

Palmon

Yezegel

2011

Journal of Accounting, Auditing & Finance

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This study examines the extent to which analyst recommendations were useful in identifying earnings surprises during the pre-and post-Regulation Fair Disclosure (FD) periods. A comparative analysis of the association between recommendation revisions and subsequent earnings surprises suggests a significant decline in the predictive value of analysts' recommendations after Regulation FD took effect. Recommendation revisions are roughly 55% less useful in predicting earnings surprises in the post-Regulation FD period. Furthermore, the average abnormal return earned by investors following analysts' advice to exploit earnings surprises is approximately 70% lower in the post-Regulation FD period. Overall, this article's findings are consistent with Regulation FD having considerably reduced analysts' comparative advantage in identifying earnings surprises. KeywordRegulation FD, analyst recommendations, earnings surprises, portfolio analysis 1 Rutgers

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“…Several studies examining the impact of SOX use this before/after examination, for example, Bargeron, Lehn, and Zutter (2010), Piotroski and Srinivasan (2008), and Gordon et al (2006). In addition, this approach is followed by papers examining the impact of other regulatory interventions in the capital markets, such as Reg FD (Cook and Tang 2010;Gomes, Gorton, and Madureira 2007).…”

Section: Univariate Analysismentioning

confidence: 99%

Firm innovation and institutional investment: the role of the Sarbanes–Oxley Act

Abdioğlu

Khurshed

Stathopoulos

2013

The European Journal of Finance

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This paper investigates the effect of the Sarbanes-Oxley Act (SOX) on the relation between institutional ownership (IO) and firm innovation. We find that US firms investing in innovation attract more institutional capital post-SOX. Prior literature identifies two SOX effects on the average US firm that could drive this relation, that is, a decreased level of information asymmetry (direct effect) and the consequent increased market liquidity (indirect effect). Our findings overwhelmingly support the direct effect. In particular, we find that the positive relation between IO and innovation post-SOX is mainly driven by passive and dedicated institutional investors. These investors benefit greatly from a reduction in the firm's information asymmetry but receive little gain from improvements in market liquidity, given their long-term trading horizon. Our results are robust to different model specifications, including difference-in-differences tests, which alleviate concerns about the impact of confounding effects on our conclusions. Taken together, our findings indicate an important policy effect of SOX, namely, the strengthening of institutional investor support for firm innovation. Downloaded by [University of Otago] at 23:54 15 July 2015 72 N. Abdioglu et al. (Bushee 1998;Lang and McNichols 1997;Porter 1992), as far as we are aware none of the existing studies has examined the SOX effect on the relation between IO and firm innovation. We contribute to the literature by examining whether a policy, specifically the SOX enactment, has altered institutional investors' investment preferences regarding firm innovation. Specifically, our main research question is the following: Have highly innovative firms attracted more institutional investment since the enactment of SOX? We predict that the reduced information asymmetry and/or increased liquidity in the US market will strengthen the relation between IO and innovation. In other words, we expect highly innovative firms to attract more institutional investment post-SOX.Consistent with our prediction, we find that highly innovative firms do attract more institutional investment post-SOX. Both our univariate and multivariate analyses highlight a strong SOX effect. In order to investigate which of the two effects, that is, the reduced information asymmetry or the increased market liquidity, drives our results, we conduct the following analyses: First, we separate institutional investors into active and passive groups and investigate their investment preferences separately. 1 Passive institutional investors typically avoid investing in firms with high information asymmetry since the cost of monitoring is too high for them, compared to the cost for active investors. A reduction in the value of private information post-SOX would favour the passive investors greatly, since their competitive disadvantage (compared to active investors) would be lower. So, given the SOX-led reduction in information asymmetry levels, highly innovative firms should be able to attract more passive inst...

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SEC Regulation Fair Disclosure, Information, and the Cost of Capital

Cited by 25 publications

References 12 publications

The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research

The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research

Analysts’ Recommendation Revisions and Subsequent Earnings Surprises

Firm innovation and institutional investment: the role of the Sarbanes–Oxley Act

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