Disclosure Rules Research Articles

The Influence of Liquidity Information on Liquidity Holdings in the Banking System

I study how liquidity information influences banks' liquidity holdings using the disclosure of liquidity coverage ratio (LCR) mandated for a group of large US banks. While the disclosure rule aims to increase liquidity in the banking system, non-disclosing banks responded by reducing liquidity holdings. Using bank network relationships to measure how much a bank learns from LCR disclosures, I find that banks learning more cut their liquidity significantly more. In the aggregate, liquidity in the banking system declined and systemic risk increased after the disclosure rule adoption. My findings highlight an important, and potentially unanticipated, effect of liquidity disclosure.

Does Increased Visibility to the IRS Cause Public Firms to Go Private? Evidence from FIN 48

This study investigates whether the introduction of a mandatory disclosure requirement (FIN 48), which had the effect of increasing public firms’ visibility to the tax authority, incentivized going-private transactions. Building on analytical work suggesting that disclosures required under FIN 48 act as a signal to the government regarding the uncertainty of the taxpayer’s position (Mills, Robinson, and Sansing 2010), I hypothesize and find evidence of an increased propensity to go private among aggressive tax planning firms following the enactment of the new disclosure rule but prior to its adoption. The effect is concentrated in firms with high CEO ownership, consistent with CEOs of tax aggressive firms viewing the mandated disclosures as damaging to the firm’s prospects and seeking to escape the anticipated effects to their personal wealth. Furthermore, I find that the spike in going-private transactions among tax aggressive firms is driven primarily by private equity-led buyouts. Overall, my findings suggest that mandatory disclosures giving rise to increased visibility to the tax authority may have the unintended consequence of discouraging some firms from operating as public entities.

The Secret Behind The Tortoise and the Hare: Information Design in Contests

I analyze the optimal information disclosure problem under commitment of a in a class of binary action contests with incomplete information about the abilities of the players. If the contest designer wants to incentivize the players to play in equilibrium a particular strategy profile, she can design an information disclosure rule, formally a stochastic communication mechanism, to which she will commit and then use to talk with the players. The main tool to carry out the analysis is the concept of Bayes Correlated Equilibrium recently introduced in the literature. I find that the optimal information disclosure rules involves private information revelation (manipulation), which is also cost-effective for the designer. Furthermore, the optimal disclosure rule involves asymmetric and in most cases correlated signals that convey only partial information about the abilities of the players.

Regulatory Costs of Being Public: Evidence from Bunching Estimation

The increased burden of disclosure and governance regulations is often cited as a key reason for the significant decline in the number of publicly-listed companies in the U.S. We explore the connection between regulatory costs and the number of listed firms by exploiting a regulatory quirk: many rules trigger when a firm’s public float exceeds a threshold. Consistent with firms seeking to avoid costly regulation, we document significant bunching around multiple regulatory thresholds introduced from 1992 to 2012. We present a revealed preference estimation strategy that uses this behavior to quantify regulatory costs. Our estimates show that various disclosure and internal governance rules lead to a total compliance cost of 4.1% of the market capitalization for a median U.S. public firm. Regulatory costs have a greater impact on private firms' IPO decisions than on public firms’ going private decisions. However, heightened regulatory costs only explain a small fraction of the decline in the number of public firms.

Predisposed opportunities: incentives for earnings forecasts revision by management under the Japanese 'Timely Disclosure Rules'

This study investigates the incentives on revisions of management earnings forecasts in Japan, where the disclosure of forecasts is effectively mandatory in quarterly financial reporting, but their revisions are required only when a certain threshold is exceeded. Under this unique Japanese system, which is different from the US-style voluntary disclosure, we hypothesise that predisposed opportunities provided in each quarterly financial reporting will encourage management to make voluntary disclosures. Our analysis shows that earnings forecasts revisions by management are lower on the earnings announcement date than during the course of a quarterly period. Our results also suggest that slight revisions made on the earnings announcement date contribute to increasing the frequency of revisions. In addition, our evidence shows relatively small errors when forecasts have been revised by narrow margins. These findings imply that the Japanese 'Timely Disclosure Rule' promotes the disclosure of timely revisions of forecasts and has the effect of disciplining management to monitor profit prospects more accurately. Our findings are also consistent with the Japanese management belief that forecast information is important, and timely disclosures should be voluntary rather than required by regulation.

Estimating Peer Effects in Corporate Innovation: Evidence from Compensation Peer Groups

This paper uses compensation peer groups to measure peer effects in corporate innovation. This approach provides a true peer group and better leader-follower link and thus can mitigate the reflection problem suggested by Manski (1993). We find that the average innovation activity of the compensation peers is a significant and first-order predictor for corporate innovation. Further analyses show that (1) the peer effect is stronger when peer companies experience higher innovation competition and are closer to the median peer company in the peer group, (2) the results are not likely to be attributed to the knowledge spillover mechanism but rather are more consistent with the peer pressure mechanism, and (3) the SEC’s 2006 executive compensation disclosure rules can generate the peer effects. Overall, the results suggest that corporate innovation decisions are responses to innovation activities and, to a lesser extent, the characteristics of the compensation peer groups.

Observational Learning and Information Disclosure in Search Markets

This paper studies the role of observational learning in search markets where buyers do not take the list price as a take-it-or-leave-it offer. Using a unique data from the Beijing housing market, we estimate a structural model in which buyers infer a seller’s reservation value from the home’s list price, time-on-market, and records of in-person home viewings by prior prospective buyers, after which they decide whether to view the home and how much to offer. We use the estimated model to quantify the welfare impact of different information disclosure rules. We find that buyer surplus is reduced, and seller surplus is increased on average if time-on-market information is disclosed. However, disclosing home-viewing information in addition to time-on-market information affects individual homes differently. We find that due to the disclosure of this additional information, buyers are slightly better off while sellers are slightly worse off on average.

Are required SEC proxy disclosures about the board’s role in risk oversight substantive?

The U.S. Securities and Exchange Commission (SEC) requires companies it regulates to include disclosures about the board’s role in risk oversight in the annual proxy statement to shareholders. The SEC does not mandate specific content or actions that boards should perform as part of their risk oversight responsibilities, leaving the nature of activities and extent of those disclosures to the discretion of the reporting entity. This study examines whether these disclosures contain substantive information reflective of the effectiveness of the organization’s risk oversight. We find that organizations disclosing more specific information (but not simply more information) about board risk oversight practices are associated with firms independently assessed as having the strongest management and governance processes. These findings suggest that these firms use the discretion provided by the SEC’s disclosure rule to provide substantive and potentially value-relevant information for stakeholders about the entity’s risk management processes and board risk oversight activities.

How Do Investors Value the Publication of Tax Information? Evidence From the European Public Country-By-Country Reporting

We examine the capital market reaction to the announcement of the European Union (EU) to introduce a public tax country-by-country reporting (CbCR) regime. By employing an event study methodology, we find a significant cumulative average abnormal return (CAAR) of -0.699%, which translates into a monetary value drop of approximately EUR 65 billion. We conclude that investors evaluate reputational risks arising from public scrutiny and competitive disadvantages to outweigh potential benefits of an extended information environment or more sustainable corporate tax strategies. In cross-sectional tests, we find that the average investor reaction is more pronounced for firms with low effective book tax rates, indicating that reputational concerns play a significant role in the marginal investor's investment behavior. Furthermore, our cross-sectional results indicate that the market reaction is stronger for firms operating in industries with high growth in market participants, providing an initial indication for the role of the competitive environment as an additional channel. Our inferences are of particular importance in light of the current ongoing debates on similar disclosure rules (particularly in the United States; cf. Disclosure of Tax Havens and Offshoring Act) as well as for sustainability standard setters.

Obowiązek raportowania schematów podatkowych przez korzystających wobec wolności od samooskarżania w kontekście wyroku Europejskiego Trybunału Praw Człowieka J.B. przeciwko Szwajcarii

Przedmiot badań: Orzeczenie J.B. przeciwko Szwajcarii wydane przez ETPCz jest jednym z wy­znaczników standardu ochrony wolności od samooskarżenia. Zgodnie z treścią tego orzeczenia, jednostka powinna być chroniona przed przymusem składania dokumentów, które dostarczyłyby informacji mogących stanowić dowód przeciwko niej. Przepisy MDR (Mandatory Disclosure Rules – raportowanie schematów podatkowych), zawarte w rozdziale 11a Ordynacji podatkowej, nakładają na korzystających obowiązek raportowania do Szefa Krajowej Informacji Skarbowej każdej działalności prawnej mającej skutki w prawie podatkowym.
 Cel badawczy: Celem niniejszego artykułu jest przeprowadzenie analizy prawno-porównawczej regulacji MDR z wyrokiem w sprawie J.B. przeciwko Szwajcarii i wykazanie możliwych analogii z regulacją MDR, które mogą pomóc rozpoznać możliwe naruszenia zakazu zmuszania do samo­oskarżania, wywodzonego z art. 6 Europejskiej Konwencji Praw Człowieka. Celem artykułu jest także sprawdzenie, na ile MDR stanowi obowiązek autodonosu.
 Metoda badawcza: W artykule zastosowano komparatystyczną analizę orzeczeń Europejskiego Trybunału Praw Człowieka i Trybunału Sprawiedliwości Unii Europejskiej. Analiza została też wsparta analizą dogmatyczno-prawną obowiązku raportowania schematów podatkowych. Wyko­rzystano głównie orzeczenie ETPCz J.B. przeciwko Szwajcarii w zakresie prawa do zachowania milczenia. Porównano też standard ochrony wolności od samooskarżania odtworzony na przykła­dzie J.B. z normami MDR.
 Wyniki: Przepisy MDR mogą stanowić ciche zbieranie dowodów na potrzeby innych po­stępowań i są niezgodne z prawem do milczenia, szczególnie w przypadku osób fizycznych, a postępowanie podatkowe może mieć charakter karny. Nie ma znaczenia formalne rozdziele­nie postępowań. W tym zakresie stanowisko ETPCz podziela też TSUE.

Private Meetings Between Firm Managers and Outside Investors: The European Paradigm

Institutional ownership of listed companies has grown significantly, leading to an increase in ownership concentration in the European Union. Under the current context of re-concentrated ownership, institutional shareholders are expected, also in Europe, to play a more active role in corporate governance and to exert influence on the company’s strategies. Within such a corporate governance landscape institutional investor engagement is becoming a distinctive feature of corporate governance of European listed companies. In particular, board-shareholder dialogue is a key engagement tool and is essential in order to enable institutional investors to fulfil their stewardship functions. Board-shareholder dialogue is also core to listed companies’ communication strategies, since the growing demand for engagement by institutional investors has rendered traditional investor relations insufficient. Nevertheless, private meetings between directors and institutional investors raise concerns with respect to the financial markets law framework in the EU. In particular, the EU market abuse regime and the related principle of equal treatment for shareholders seem to hinder dialogue between directors and key shareholders. Against this background this Article shows that legal constraints deriving from EU financial markets law do not hamper institutional investor engagement. Furthermore, based on recommendations from corporate governance and stewardship codes as well as good practice standards drafted by corporate governance experts and institutions, it outlines an innovative practical framework that reduces the risk of violating disclosure rules and fosters board-shareholder engagement. In doing so, the Article provides theoretical and practical insights that can help to make institutional investor engagement more effective also in non-European countries.

Regulatory Interventions in Response to Non-Compliance with Mandatory Derivatives Disclosure Rules

Regulatory Interventions in Response to Non-Compliance with Mandatory Derivatives Disclosure Rules

Schematy podatkowe a tajemnica zawodowa wybranych zawodów zaufania publicznego

The institution of Mandatory Disclosure Rules was regulated in polish Tax Code in 2019. This implementation was made due to Council Directive 2018/822. Although these polish legal norms have clearly been problematic. It is claimed that professional secrecy of profession like for example: lawyers, legal advisors, tax advisors can be affected by the obligation to report some kind of tax schemes even without getting exemption from professional secrecy by client. The aim of this paper is to show that these regulations can be not constitutional in term of art. 17 of Polish Constitution.

The SEC and Climate Risk

The time has never been better for the Securities and Exchange Commission (SEC) to regulate climate change disclosures. However, the agency has a poor track record in mandating climate and other specialized disclosures from public corporations. Its 2010 guidance on climate-related disclosures was sparsely enforced. Its 2012 conflict minerals rule was partially invalidated by the courts, and in 2019 and 2020 the agency failed to include climate disclosures when modernizing rules and guidelines on corporate disclosures. These past failures were due to agency inertia, which was facilitated by a combination of lack of political feasibility, strong business resistance to specialized disclosures, and rising judicial hostility to the SEC. These past failures should not dictate agency approaches to climate disclosures moving forward. Regulating climate change is high on the agenda of the Biden Administration. Investors are demanding that public corporations be more transparent about climate-related risks. The SEC is starting to act, issuing a call for public input on climate-related disclosures and enhancing its focus on climate-related disclosure in public company filings. These political, investor, and agency shifts are primarily due to the rising awareness of the potential systemic nature of the risks of climate change to financial systems both in the U.S. and internationally. This article assesses the policy feasibility of climate-related disclosure rules. It argues that past SEC failures can and should inform SEC rulemaking on climate change disclosures moving forward. Regulating climate disclosures benefits not only investors and capital markets, but also companies, due to the systemic nature of climate risk. This article argues that robust cost-benefit analysis, and a flexible but firm regulatory approach which is industry-specific, will improve policy feasibility.

Predisposed opportunities: incentives for earnings forecasts revision by management under the Japanese Timely Disclosure Rules

This study investigates the incentives on revisions of management earnings forecasts in Japan, where the disclosure of forecasts is effectively mandatory in quarterly financial reporting, but their revisions are required only when a certain threshold is exceeded. Under this unique Japanese system, which is different from the US-style voluntary disclosure, we hypothesise that predisposed opportunities provided in each quarterly financial reporting will encourage management to make voluntary disclosures. Our analysis shows that earnings forecasts revisions by management are lower on the earnings announcement date than during the course of a quarterly period. Our results also suggest that slight revisions made on the earnings announcement date contribute to increasing the frequency of revisions. In addition, our evidence shows relatively small errors when forecasts have been revised by narrow margins. These findings imply that the Japanese 'Timely Disclosure Rule' promotes the disclosure of timely revisions of forecasts and has the effect of disciplining management to monitor profit prospects more accurately. Our findings are also consistent with the Japanese management belief that forecast information is important, and timely disclosures should be voluntary rather than required by regulation.

Mind the gap: CEO–employee pay ratios and shareholder say‐on‐pay votes

AbstractWe examine the Securities and Exchange Commission's assertion in the pay ratio disclosure rule that the ratio of Chief Executive Officer to employee pay is useful to shareholders for say‐on‐pay (SOP) voting decisions. Using an estimated pay ratio for a broad panel of commercial banks from 2010 to 2017, we find that voting dissent on SOP proposals is significantly higher in the top pay ratio decile, particularly when institutional ownership is high. Results are robust to controlling for a number of other determinants of voting dissent, including proxy advisor recommendations and executive compensation. Additionally, inferences using the first year of disclosed pay ratios in 2017 for S&P 1500 firms are consistent. However, we do not find similar results in the other deciles of the pay ratio in either sample, calling into question whether a cost‐benefit analysis would support the disclosure requirement imposed by Dodd‐Frank and implemented by the SEC.

Are on-time performance statistics worthless? An empirical study of the flight scheduling strategies of Brazilian airlines

Airlines may manage their on-time performance by lengthening schedules with engineered increases in planned flight times. We develop an econometric model of high dimensional sparse (HDS) regression to decompose the extra schedule block times into operational and strategic factors. We estimate the impact of extra times on flight delays, allowing for the moderation effects of runway congestion, slots, and propagated delay. We test the hypothesis of the existence and effectiveness of schedule padding practices. We find that a 2012 on-time disclosure rule may have induced carriers’ padding behavior. In contrast, slot regulation may prevent the formation of extra block times.

Reconsidering the Evolutionary Erosion Account of Corporate Fiduciary Law

This Article reconsiders the dominant account of corporate law’s duty of loyalty, which asserts that the courts have steadily relaxed standards of fiduciary scrutiny applied to self-dealing by corporate managers across more than a century of history—to the great detriment of the shareholder interest. The account originated in Harold Marsh, Jr.’s foundational article, Are Directors Trustees? Conflicts of Interest and Corporate Morality, published in The Business Lawyer in 1966. Marsh’s showing of historical lassitude has been successfully challenged in a recent book by Professor David Kershaw. This Article takes Professor Kershaw’s critique a step further, asking whether the evolutionary erosion account continues to exert normative power in today’s corporate governance context. The answer is that it does not, a result that obtains even though erosion of the standards that courts apply to management self-dealing has continued unabated ever since Marsh published in 1966, and even though there is no reason to think that management self-dealing benefits the shareholder interest. The result follows from the operation of the corporate governance system, which has assimilated and redeployed the erosion account’s motivating insight that officer and director self-dealing transactions do not make cost-benefit sense from the shareholder point of view. Regulation backs up the norm of aversion. Disclosure rules make self-dealing transparent to shareholders, who have no reason to like self-dealing and who now stand ready and able to register their preferences regarding such matters in corporate boardrooms. At the same time, the requirement of a majority independent board makes self-dealing transactions by board members highly inconvenient, because self-dealing undercuts independence. The practice reflects all of this, as shown by reference to hand-collected datasets of self-dealing transactions at publicly-traded companies and of litigation in respect of self-dealing transactions in the Delaware Chancery Court. The classic self-dealing transaction, although still a focal point of academic discourse on corporate fiduciary law, does not matter all that much in real world companies with dispersed shareholders. It is no longer an unsolved problem stemming from separated ownership and control.

Required CEO stock ownership: Consequences for risk-taking and compensation

In response to corporate governance concerns, SEC disclosure rules, and pressure from Institutional Shareholder Services, most large U.S. public firms have adopted executive stock ownership requirements (‘SORs’) in recent years. Compared to CEOs already in compliance, CEOs who have not yet fulfilled the requirement at adoption subsequently increase stockholdings, exposing themselves to more company-specific risk, potentially providing risk-reduction incentives and diminishing their subjective valuation of firm equity. We find that these CEOs on average subsequently reduce firm risk through diversifying M&A, less financial leverage, and smaller R&D investment. They experience a deterioration in firm performance and valuation, each associated with firms that do reduce risk, but receive significantly increased stock grants. Our evidence suggests that boards should exercise judgment when adopting this popular governance initiative.

Mandatory Disclosure Rules Applicable to Reportable Arrangements: Portuguese Implementation of DAC6

In this article, the author discusses the origins of the mandatory disclosure rules in Portugal and implementation of the DAC6 in that Member State. In particular, he discusses the Portuguese approach to the transposition of the DAC6 and his interpretation of the Implementing Law.