Concurrent Enforcement Research Articles

Corporate moral hazard and ESG performance: Unveiling the influence of gross enforcement actions and ownership dynamics in US multinational corporations

AbstractExisting research often highlights the impact of several categories of corporate enforcement action on corporate performance, thus overlooking the impossibility of isolating the impacts of other concurrent enforcement actions. The current study employed the gross value and volume of corporate enforcement actions to examine the influence of corporate moral hazard (CMH) on environmental, social, and governance performance (ESGP) along with ownership dynamics. The S&P data from 2018 to 2022 were analyzed, covering 1925 observations of US multinational corporations (MNCs) based on various aspects of corporate governance (CG). Institutional, insider, and family ownership were applied as proxies for ownership structure. CSRHub ratings represented ESGP, while Sustainalytics ratings were used for robustness. The analysis involved various econometric models, including the feasible generalized least squares model (FGLSM). Resultantly, CMH negatively affected ESGP, whereas CG mechanisms revealed a positive influence. Contrary to existing literature, the size of corporate law cases is a stronger proxy for CMH than the amount of enforcement actions. Although institutional owners decrease the number of enforcement actions, they encounter substantial penalties. Above‐average insiders reduce lawsuits and exert significant control over penalties, while below‐average insiders result in heavier penalties and lawsuits to an extent. Families are the most positively influential owners; having more family owners increases penalties and ESGP but reduces lawsuit size, particularly when ownership exceeds the mean percentage.

Enforcing the Digital Markets Act: institutional choices, compliance, and antitrust

Abstract This article discusses how the European Commission can achieve the goal of effectively implementing the Digital Markets Act. Based on legal and economic reasoning, we highlight the important role of the gatekeeper’s compliance report, and discuss how to incentivize gatekeepers to write useful reports. In addition, we develop recommendations regarding the internal organization of the Commission, the prioritization of cases, and how to effectively use the concurrent enforcement powers of the Digital Markets Act and Article 102 of the TFEU. We illustrate the principles we develop using four different EU antitrust cases. Furthermore, we discuss coordination between the Commission and National Competition Authorities and the need to already develop an independent evaluation process for the Digital Markets Act.

Asset Reclassifications and Bank Recapitalization During the Financial Crisis

Regulators frequently relax accounting rules during a financial crisis as a means of regulatory forbearance. The new accounting options provide banks with an opportunity for an accrual-based increase in their regulatory capital. The use of such an accounting option helps reduce the costs of government interventions such as bailouts and avoid the dilution of existing shareholders’ ownership rights. We examine the introduction of the reclassification option for financial assets during the 2008 financial crisis and study the position of accrual-based options in the pecking order of banks’ recapitalization measures. The findings suggest that the accrual-based increase in regulatory capital is temporary and does not provide permanent relief. Consistent with the long-term costs of accrual-based measures, investors perceive the accounting choice as a negative signal. If banks do not complement their use of the accounting option by other corrective actions that result in a real capital increase and a liquidity injection, they continue to suffer from low capitalization and financial difficulties in the following years. Ultimately, government interventions in accounting regulation are unlikely to offer a sustainable solution to capital shortfalls in the banking sector if they are not supported by the concurrent enforcement of real corrective actions. This paper was accepted by Brian Bushee, accounting. Funding: The authors acknowledge financial support from Deutsche Forschungsgemeinschaft (Project-ID 403041268-TRR 266) as well as from IAAER and KPMG under the “Research Informing the IASB Standard Setting” grant. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2022.4364 .

Mandatory IFRS adoption and management forecasts: The impact of enforcement changes

We examine how concurrent enforcement changes affect the positive relationship between mandatory IFRS adoption and firms’ voluntary disclosure. We show that the increase in the issuance of management forecasts after IFRS adoption is smaller for firms from IFRS-mandating countries with concurrent enforcement changes than for those from countries without such changes. We find no difference in the increase of forecast informativeness between firms from IFRS-mandating countries without concurrent enforcement changes and firms from non-IFRS-mandating countries; however, firms domiciled in IFRS-mandating countries with concurrent enforcement changes exhibit a significantly smaller increase in forecast informativeness. Our findings suggest that better IFRS enforcement distinctly weakens (strengthens) the positive effect of IFRS adoption on voluntary (mandatory) disclosure.

UK: The Concurrent Enforcement by Regulators of Competition Law and Sector-Specific Regulation: Table 1:

The UK has a unique model where competition law is enforced concurrently by the Competition and Markets Authority (CMA) and the sector regulators. A major reform was implemented by the Enterprise and Regulatory Reform Act 2013, extending concurrent powers to the financial services sector and the National Health Service. The reform led to more enforcement activity as well as to greater contacts, seemingly more information flows, greater understanding, and perhaps more trust between the agencies.

Financial Statement-Based Forecasts and Analyst Forecasts of Profitability: The Effect of Mandatory IFRS Adoption

This study examines whether mandatory IFRS adoption is associated with an increase in the accuracy of financial statement-based models for forecasting profitability out-of-sample. The study also examines the relation between analyst forecast accuracy and financial statement-based forecast accuracy around mandatory IFRS adoption. We find significant improvement in financial statement-based forecast accuracy around mandatory IFRS adoption. We find significant improvement in analyst forecast accuracy around mandatory IFRS adoption only in countries that concurrently made substantial improvements to financial reporting enforcement. We also show that the improvement in analyst forecast accuracy is associated with the improvement in financial statement-based forecast accuracy and that analysts place more weight on financial statement-based forecasts after mandatory IFRS adoption in countries with concurrent changes in enforcement, while they place the same weight on financial statement-based forecasts after mandatory IFRS adoption in countries without concurrent enforcement changes. Finally, we document that financial statement-based forecasts provide incremental information over analyst forecasts for explaining year-ahead profitability for firms in countries that did not bundle mandatory IFRS adoption with concurrent changes in enforcement. These findings are important for understanding the impact of mandatory IFRS adoption on the predictive ability of financial statements and for understanding analysts’ use of financial statements around mandatory IFRS adoption.

Recasting Competition Concurrency under the Enterprise and Regulatory Reform Act 2013

The concurrent enforcement power granted to certain sector economic regulators is one of the more remarkable features of UK competition law. In practice, regulators have tended to under‐enforce their competition powers, preferring to resolve market difficulties through regulatory interventions. Recent amendments to the concurrency framework, introduced by sections 51 to 53 of the Enterprise and Regulatory Reform Act 2013, seek both to strengthen the priority of competition enforcement and to provide plausible sanctions – including, ultimately, the removal of competition jurisdiction from regulators – for continued underuse. This article assesses these reforms in light of the history and (limited) application of the concurrent competition powers of regulators to date. It argues that the absence of an overarching policy rationale for this curious example of UK antitrust ‘exceptionalism’ complicates the determination of whether the reforms, which ostensibly seek to reinforce but potentially also undermine concurrency, are likely to have a positive market impact in practice.

Credit Reform and the States: The Vital Role of Attorneys General after Dodd-Frank (Practitioner Version)

Congress employed multiple strategies in the wake of the Great Recession to provide greater protections for consumers in the financial marketplace. One strategy harnessed the forces of federalism, empowering state attorneys general to enforce federal law. The role of attorneys general has received little attention to this point in time. This Article seeks to fill that void. I begin by placing this dual enforcement scheme within the context of recent history and the evolving infrastructure for consumer financial protection in the United States. I next consider several interpretive issues to account for the substantive, procedural, and remedial powers Congress placed in the hands of state attorneys general. Recognizing that the success of this concurrent enforcement regime will depend in part on early coordination, I then identify several implementation priorities necessary to create a scheme that is both effective and efficient.

Credit Reform and the States: The Vital Role of Attorneys General after Dodd-Frank

Congress employed multiple strategies in the wake of the Great Recession to provide greater protections for consumers in the financial marketplace. One strategy aimed at agency design and resulted in creation of the Consumer Financial Protection Bureau. Another strategy created new substantive prohibitions and corresponding rulemaking powers. A third strategy channeled the forces of federalism, placing a limit on agency preemption and empowering state attorneys general to enforce federal law. Scholars have focused on the first two strategies, plus the new constraints on preemption, but so far have not given sustained attention to the role of states as co-enforcers of federal consumer financial protection law. This Article seeks to fill that void, focusing on implementation and charting a path for normative assessment.I begin by placing this dual enforcement scheme within the context of recent history and the evolving infrastructure for consumer financial protection in the United States. I then consider several interpretive issues to account for the substantive, procedural, and remedial powers Congress placed in the hands of state attorneys general. Recognizing that the success of this concurrent enforcement regime will depend in part on early coordination, I next identify several implementation priorities necessary to create a scheme that is both effective and efficient. Finally, I identify key questions and offer preliminary observations toward a normative assessment of this scheme and its implications both for consumer finance and American federalism.

The Effect of IFRS on Cross-Border Acquisitions

We examine whether the 2005 mandatory adoption of IFRS is followed by an increase in cross-border acquisitions into the adopting countries and whether the association is driven by IFRS per se or by concurrent enforcement changes. Using the exogeneity of a firm’s listing status to identify the effect of IFRS, we document a significant increase in cross-border acquisitions of listed targets from the adopting countries. We find no evidence that the IFRS effect is driven by those countries that apparently bundled the IFRS adoption with enforcement changes. The evidence also suggests that the IFRS effect is likely due to the fact that many different countries use a common reporting system, as opposed to improvement in reporting quality at individual firms. In particular, we find that the increase in investment flow into the IFRS adopting countries comes mainly from other adopting countries and is significantly stronger when the increase in reporting uniformity associated with IFRS is higher. We also find no evidence that firms that voluntarily adopted IFRS prior to the mandatory adoption were more likely to become cross-border acquisition targets.

State Enforcement of National Policy: A Contextual Approach (with Evidence from the Securities Realm)

This Article addresses a topic of contemporary public policy significance: the optimal allocation of law enforcement authority in our federalist system. Proponents of “competitive federalism” have long argued that assigning concurrent enforcement authority to states and the federal government can lead to redundant expense, policy distortion, and a loss of democratic accountability. A growing literature responds to these claims, trumpeting the benefits of concurrent state-federal enforcement — most notably the potential for state regulators to remedy under-enforcement by captured federal agencies. Both bodies of scholarship are right, but also incomplete. What is missing from this rather polarized debate is a deep appreciation for how context matters. This Article moves beyond the abstract case for or against concurrent state-federal enforcement, and provides a systematic account of the variables that will influence its desirability in disparate regulatory settings. To illustrate the significance of these variables, the Article also provides an empirically-grounded case study of one of the most contentious areas of concurrent state-federal authority — securities fraud enforcement against nationally traded firms.

The King is Dead; Long Live the King — Overcoming the Structural, Political, and Legal Barriers to Effective Campaign Finance Enforcement: Surveying the Landscape and Looking Beyond the Federal Election Commission

The FEC is broken, both in form and operation. This comment focuses on those limitations and the various calls for reform, and assesses their viability in light of the dynamics of the campaign finance realm. The central thesis of this comment is that, not only is the FEC broken, that any attempt at reform is found wanting after close examination because all attempts at reform focus exclusively on administrative restructuring. They fail to address the systemic pressures of the campaign finance landscape. This comment proposes that a model of concurrent enforcement — with both private and public enforcement of campaign finance laws — remedies these problems. By appending a common law siphon, instead relying only on an administrative dam, the pressures and problems of campaign finance can be better managed. In Section I, this comment examines the inbuilt sources of the FEC’s weaknesses. Beginning with structural issues, the comment notes the inherent faults created by the FEC’s statute. Specifically, the statute demands an even number of commissioners, split equally between both parties, which results in a Commission that stalemates on the most salient issues. Further, the statute lacks a means of effectively guaranteeing merit selection which reifies partisan stolidity by ensuing appointees are political insiders instead of neutral law enforcement professionals. Next, the combination of a mechanically dilatory enforcement mechanism and the FEC’s exclusive civil enforcement power delays and neuters attempts to enforce Federal election law. Finally, the combination of political pressure — which may never be fully insulated against — and the rapidly shifting sands of campaign finance jurisprudence leaves the weak and sclerotic FEC in a highly dynamic and fluid environment. Thus, the FEC is a rigid enforcer of a highly liquid arena; the FEC’s structure is inappropriate for its environment. In Section II, this comment introduces and analyses the various structural reform proposals. The many reform proposals — from both libertarian and progressive perspectives — share one element: a unstated premise that reform of the agency is all that is needed. These proposals, taken together, build a single administrator agency, with a merit based and tenured administrator, with administrative law judge adjudications, and a budget which is protected from capricious Congressional adjustment. Yet, the unstated premise is the undoing of these proposals. Because of it, they do not readjust the environmental pressures of campaign finance and, in effect, build a stronger dam that fails to address the growing onrush of campaign finance hydraulics. A strong dam may help, but it can always be overwhelmed. In Section III, this comment explains why any reform effort must address the complex nature of the campaign finance landscape by applying complexity theory to the problem. It explains complexity theory in general and the specific importance of the concepts of emergence, complex adaptivity, and the dangers of non-complex remedies for complex problems. It then describes the administrative fitness landscape in general and the campaign finance fitness landscape in particular, with emphasis on the impulses toward inaction and inefficiency. In Section IV, this comment lays out the need for an adaptive management system and searches for new models of enforcement. It uses lessons from securities regulation and environmental regulation to note the potential remedial effects of a concurrent private-public enforcement system. It traces the need for an explicit, congressionally mandated cause of action, and then notes the benefits and burdens of such a system. Such a concurrent system would present its own problems, but they are problems the judiciary is well used to addressing and which could be solved by analogy to the securities regulation model.

Evaluation of Spatial and Temporal Speed Limit Compliance in Highway Work Zones

Typically, speed limits are reduced in work zones to safely accommodate construction activities and motorists on the roadway. This paper presents a methodology to evaluate the temporal and spatial effects of techniques designed to encourage compliance with work zone speed limits. The evaluations were performed over short and long segments within and adjacent to an Interstate construction work zone in suburban Indianapolis, Indiana, with the use of vehicle probe data. Space mean speed was measured by using 13 Bluetooth probe data acquisition stations, which provided a random sample of unique identifiers for approximately 11% of the passing vehicles. These space mean speed data were used to compute a series of comparisons between a day with no enforcement activity and a day with exceptionally high enforcement. During enforcement, the space mean speed decreased by approximately 5 mph throughout the 12.2-mi study segment. Within 30 min after the enforcement detail ended, however, space mean speeds increased, and there was no statistically significant residual impact on the space mean speed. Even at the absolute peak of enforcement, 75% of the probe vehicles exceeded the speed limit in all but one of the segments that had a posted speed limit of 45 mph. In addition, 25% of the probe vehicles exceeded the posted limit by more than 5 mph in all 45-mph segments during peak enforcement. The study is perhaps the largest ever conducted with respect to concurrent enforcement and extensive space mean measurement. The data represent an upper bound on the impact of enforcement activity on work zone speeds and should be of interest to public agencies as they consider compliance techniques.

Prepared Statement of Patricia A. McCoy Before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, Hearing on 'Consumer Protections in Financial Services,' March 3, 2009

The testimony proposes transferring consumer protection responsibilities for consumer credit from federal banking regulators to a single, dedicated agency whose sole mission is consumer protection. During the housing bubble, the U.S. system of fragmented regulation drove lenders to shop for the easiest legal regime. The ability of lenders to switch charters put pressure on banking regulators - both state and federal - to relax credit standards. The result was regulatory failure, in which federal banking regulators sacrificed prudent lending standards and consumer protection for the short-term profitability of banks. Creating one, dedicated consumer credit regulator charged with consumer protection would establish uniform standards and enforcement for all lenders and help prevent another collapse in credit underwriting. The testimony closes by proposing vesting states with concurrent enforcement authority.