Increased Disclosure Requirements Research Articles

Policy Forum: Transparency—An Essential Condition for Ethical Behaviour in Tax Planning

Ethics play a significant role in a critical assessment of tax practice, but ethical standards on their own have a rather limited influence on tax-planning decisions; therefore, transparency is a necessary tool. Tax planning has traditionally been driven by cost-benefit analysis and by a risk-management perspective. However, closer public scrutiny of corporate tax affairs and increased disclosure requirements have put pressure on tax-planning decisions, thus adding an ethical dimension to the risk-management perspective. Transparency is certainly essential in limiting the aggressiveness of tax planning, but its impact on ethics may be broader in providing an occasion to change the "moral meanings" in relation to tax-planning activities for those involved.

Do Mandatory Disclosure Requirements for Private Firms Increase the Propensity of Going Public?

ABSTRACTThis paper investigates the effect of mandatory disclosure requirements for private firms on their decision to go public. Using detailed project‐level data for biopharmaceutical firms, we explore the effects of a legal reform that exogenously required firms to publicly disclose information regarding clinical trials. Exploiting cross‐sectional heterogeneity in firms' exposure to the regulation based on their internal development portfolios, we find that affected firms are significantly more likely to transition to public equity markets following the reform. Moreover, firms that go public because of the increased disclosure requirements subsequently reduce the size of their project portfolios while shifting to safer investments acquired externally. We provide additional evidence for the main hypothesis using a second setting: a 2006 German reform which enhanced the enforcement of mandatory disclosure requirements for private firms. The results suggest that private firms' general information environment and disclosure requirements influence the propensity of going public.

IMPROVING COMMUNICATION THROUGH FINANCIAL STATEMENTS: SOME EFFECTS OF АPPLYING THE INTERNATIONAL ACCOUNTING STANDARDS BOARD INITIATIVE

The purpose of this paper is to analyze the effects of the IASB Initiative on Improving Communication through Financial Statements and the resulting changes to IAS 1, IAS 7 and IAS 27. The most debatable issues related to presentation, disclosure and over-disclosure are analyzed, as well as the search for reasonable solutions to optimize the volume and usefulness of the information disclosed in financial statements. Two samples of Bulgarian enterprises from different industries, listed on the large taxpayers and insurers list, were studied: the first covers 12 enterprises applying IAS/IFRS and the second - 6 companies which switched back to the National Accounting Standards (NAS) in the 2015-2018 period. Our results suggest that the problem of the complexity of IFRS, which is combined with increasing disclosure requirements, is one of the leading reasons for some Bulgarian companies to move back to the National Accounting Standards.

The Value Relevance of Fair Value Levels: Time Trends under IFRS and U.S. GAAP

ABSTRACT The IASB's post-implementation review of IFRS 13 Fair Value Measurement motivates our analysis of the evolution of the value relevance of fair value (FV) levels over time on banks that report under IFRS and U.S. GAAP. For both sets of standards, results provide evidence that is consistent with (1) an increase in value relevance across all three FV levels over time, and (2) a convergence of the value relevance of the three FV levels over time. However, FV levels exhibit systematically higher value relevance under U.S. GAAP compared to IFRS. Such gap has closed to some extent since the enactment of IFRS 13. This evolution is likely due to learning about FV accounting and changes in financial reporting regulations that increased disclosure requirements. These findings confirm the IASB's conclusions that FV levels’ disclosure is useful to users of financial statements, but also emphasizes preparers and investors’ learning over time.

The Value Relevance of Fair Value Levels: Time Trends under IFRS and U.S. GAAP

The IASB’s post-implementation review of IFRS 13 Fair Value Measurement motivates our analysis of the evolution of the value relevance of fair value (FV) levels over time on banks that report under IFRS and U.S. GAAP. For both sets of standards, results provide evidence that is consistent with (1) an increase in value relevance across all three FV levels over time, and (2) a convergence of the value relevance of the three FV levels over time. However, FV levels exhibit systematically higher value relevance under U.S. GAAP compared to IFRS. Such gap has closed to some extent since the enactment of IFRS 13. This evolution is likely due to learning about FV accounting and changes in financial reporting regulations that increased disclosure requirements. These findings confirm the IASB’s conclusions that FV levels’ disclosure is useful to users of financial statements, but also emphasizes preparers and investors’ learning over time.

The Stock Market and Discrimination in Mortgage Lending

Comparing private banks that went public through mergers and acquisitions with similar private banks, we find that going public reduces the mortgage denial rates for African American borrowers by 6.1-6.3 percentage points, which reduces the racial disparity in mortgage approval rates by a third. Our results are not driven by changes in borrower risk characteristics, lender risk preferences, securitization, or increased disclosure requirements. The effect is more pronounced in areas suffering stronger racial biases. Our results suggest that the dispersed ownership can mitigate non-economically motived prejudice of concentrated private ownership and thereby alleviates taste-based discrimination in mortgage lending.

Do Mandatory Disclosure Requirements for Private Firms Increase the Propensity of Going Public?

This paper investigates the effect of mandatory disclosure requirements for private firms on their decision to go public. Using detailed project-level data for biopharmaceutical firms, we explore the effects of a legal reform---the Food and Drug Administration Amendments Act (FDAAA)---which exogenously required that firms publicly disclose information regarding clinical trials. Exploiting cross-sectional heterogeneity in firms' exposure to the regulation based on their internal development portfolios, we find that affected firms are significantly more likely to transition to public equity markets following the reform. We also find that firms that go public due to the increased disclosure requirements subsequently reduce the size of their project portfolios while shifting to safer investments acquired externally. The results suggest that private firms' general information environment and disclosure requirements influence the propensity of going public, and the nature of their subsequent project decisions.

\u201cAlways read the small print\u201d: a case study of commercial research funding, disclosure and agreements with Coca-Cola

Concerns about conflicts of interest in commercially funded research have generated increasing disclosure requirements, but are these enough to assess influence? Using the Coca-Cola Company as an example, we explore its research agreements to understand influence. Freedom of Information requests identified 87,013 pages of documents, including five agreements between Coca-Cola and public institutions in the United States, and Canada. We assess whether they allowed Coca-Cola to exercise control or influence. Provisions gave Coca-Cola the right to review research in advance of publication as well as control over (1) study data, (2) disclosure of results and (3) acknowledgement of Coca-Cola funding. Some agreements specified that Coca-Cola has the ultimate decision about any publication of peer-reviewed papers prior to its approval of the researchers’ final report. If so desired, Coca-Cola can thus prevent publication of unfavourable research, but we found no evidence of this to date in the emails we received. The documents also reveal researchers can negotiate with funders successfully to remove restrictive clauses on their research. We recommend journals supplement funding disclosures and conflict-of-interest statements by requiring authors to attach funder agreements.

Disclosure practices of foreign and domestic firms in Australia

Even while straddling the global economy, multinational corporations (MNCs) need to adapt to different institutional regimes in host country markets in which they operate. This research examines the extent to which MNC-subsidiaries are embedded in their local institutional context in terms of how they pursue local legitimacy and respond to local laws and standards of disclosure of executive remuneration in the host country. Drawing attention to key socio-economic influences on foreign MNC-subsidiaries, we examine whether global MNCs respond to disclosure requirements in a host country and address a higher level of information asymmetry associated with multinational operations. The analysis of disclosure levels of MNC-subsidiaries vis-à-vis domestic firms suggests that, other things being equal, MNCs are more responsive to increased disclosure requirements than their local counterparts if they have substantial economic interactions with domestic product-markets. These results demonstrate that MNCs are willing to incur the marginal cost of increasing disclosure if commensurate benefits justify it. Another interesting finding relates to the negative association between legal system type (common law) of MNC's parent country and disclosure level of director and executive remuneration. It highlights that MNC-subsidiaries with higher regulatory (institutional) distance disclose better level of remuneration to gain external legitimacy and reduce their liability of foreignness.

Industry Collaboration and Primary Guest Authorship of High-Impact Randomized Clinical Trials: A Cross-Sectional Study.

Journals have increased disclosure requirements in recent years, in part to deter guest authorship. The prevalence of guest authorship among primary authors (first and last) in the current era of increased disclosure requirements is unknown. Our aim was to examine the self-reported prevalence of guest authorship among primary authors from a sample of randomized clinical trials with and without industry funding and industry collaboration in the design, analysis or reporting of trials. Cross-sectional analysis of randomized, drug/device clinical trials with published details on the "Role of the Funding Source/Sponsor" published in high-impact biomedical journals between 1 December 2011 and 31 November 2012. Phase 1 or 2 trials, secondary trial analyses, and trials that were not listed on ClinicalTrials.gov were excluded. Primary guest authorship was defined, based on International Committee of Medical Journal Editors (ICMJE) criteria, when neither the first nor last author contributed to either of the following: 1) the design of the trial or the analysis/interpretation of data; or 2) drafting part or all of the manuscript. One hundred and sixty-eight randomized clinical trials that met inclusion criteria were included. We measured differences in the prevalence of guest authorship between trials with neither industry funding nor collaboration and 1) trials with industry funding without collaboration, and 2) trials with industry funding with collaboration. The overall prevalence of primary guest authorship was 6 % (10/168). Primary guest authorship was significantly more common in trials with industry funding with collaboration than in those with neither industry funding nor collaboration [13.2 % (10/76) vs. 0 % (0/39); p < 0.02]. Primary guest authorship did not differ between trials with industry funding without collaboration and trials with neither industry funding nor collaboration. Among a sample of randomized, drug/device clinical trials in high-impact biomedical journals, primary guest authorship was overall uncommon and occurred exclusively among trials with industry funding with collaboration.

The Development of Capital Markets of New EU Countries in the IFRS Era

Abstract From 2005, the EU listed companies are obliged to prepare their consolidated financial statements in conformity with IFRS, which are viewed as high-quality financial standards ( Leuz, 2003 ). To comply with the increased disclosure requirements, companies have to incur significant costs. However, the benefits from harmonised financial reporting are available only to those entities, which have serious incentives to report transparently ( Daske et al., 2013 ). The benefits and costs following the changeover to IFRS are therefore neither unfolded equally across companies, nor countries. Empirical research (e.g. Lee et al., 2008 , Christensen et al., 2013 ) reveals that the shortcomings in institutional setting may close off all potential benefits from harmonised accounting, which is pertinent mainly for the transition countries. The aim of this paper is to identify absolute and relative winners and losers among the new EU member states in terms of the progression of their capital market. The particular focus is put on the capital market size measured by a simple criterion “number of listed companies” and its changes in transitional and post-adoption period. The splitting of time-series into two subsets enables to eliminate the influence of different reporting incentives from the effects of change in reporting regime. As an unintended result, the paper's empirical findings raise some doubts about the appropriateness of certain research designs for assessing the economic consequences of mandatory IFRS adoption.

Political pressures and the evolution of disclosure regulation

This paper examines the process that drives the formation and evolution of disclosure regulations. In equilibrium, changes in the regulation depend on the status quo, standard-setters’ political accountability and underlying objectives, and the cost and benefits of disclosure to reporting entities. Excessive political accountability need not implement the regulation preferred by diversified investors. Political pressures slow standard-setting and, if the standard-setter prefers high levels of disclosure, induce regulatory cycles characterized by long phases of increasing disclosure requirements followed by a sudden deregulation.

The Role of Defined Benefit Pension Plans in Executive Compensation

Although defined benefit (DB) pension plans constitute a significant portion of both annual compensation and firm-related wealth for many CEOs, prior studies of CEO compensation contracts generally exclude these plans from their analyses due to lack of data. Taking advantage of recently increased disclosure requirements, we analyse the role of DB pension plans in these contracts. We find that firms with CEO DB pension plans grant the CEO annual compensation that is larger than predicted by economic determinants. We also find that more powerful CEOs, identified by their extraordinary pension benefits, receive higher total pay in addition to the pension benefits. We find no evidence that CEO pension benefits contribute to the pay-for-performance sensitivity of the annual pay.

The impact of increased disclosure requirements and the standardization of accounting practices on earnings management through the reserve for income taxes

We examine whether the regulatory changes required by the Sarbanes–Oxley Act of 2002 (SOX) and Financial Accounting Standards Board Interpretation No. (FIN) 48 reduced the propensity for earnings management through the reserve for income taxes. Given prior evidence that firms use this reserve to manage earnings to beat the consensus analyst forecast, the regulatory changes implemented by both SOX and FIN 48 allow us to study the effects of accounting regulation on earnings management. We find that neither SOX nor FIN 48 reduced earnings management through the reserve for income taxes. Thus, in contrast to research that examines whether SOX affected nontax, accrual-based earnings management, our results suggest managers continue to take advantage of their discretion over the accounting for income taxes to beat the consensus analyst forecast in both the post-SOX and post-FIN 48 periods.

Accounting Standards And Earnings Management Around The World

This study investigates the relation between accounting standards and earnings management around the world. I find that international accounting standards, accrual-based accounting standards, accounting standards with increased disclosure requirements, and separating tax and financial reporting all constrain earnings management. Following previous studies, I treat accounting standard measures as being endogenous, and use instrumental variables to re-estimate the model. I find consistent results. I conclude that accounting standard policy is an important institution in determining the quality of reported financial information. Different from prior international earnings management studies, I directly test whether international firms are managing earnings using the distribution method. I find evidence that firms are managing reported earnings around the world. I also document that high-quality accounting standards decrease analyst forecast error.

Compliance with Basel Norms by Banks in Finland

The underlying aim of Basel is to promote safety and soundness in the financial system by allocating capital in organisations to reflect risk more accurately. This can be attained only by the combination of effective bank-level management, market discipline and supervision. Basel will impact the entire spectrum of banking, including corporate finance, retail banking, asset management, payments and settlements, commercial banking, trading and sales, retail brokerage and agency and custody services. The Banking Sector in the developed economies as well as in the emerging market economies may face unique problems in the absence of well developed credit rating systems. The mechanism of robust data collection, lack of proper analytic attitude, inappropriate capital assessment methods, non-transparent systems and other infrastructure related problems can disturb the financial system of a country Basel Accord for capital adequacy provides a sound framework for addressing increasingly complex risks faced by banks with an objective to foster a secure and reliable banking sector. Basel norms have been adopted by Indian commercial banks as per RBI guidelines to build up a more transparent and risk free financial base. The present study attempts to examine the Indian commercial banks’ response to implement Basel II framework as per Reserve bank guidelines. An effort has been made to find out whether the commercial banks in Finland complies the Basel III norms. Basel is a city in Switzerland which is also the headquarters of Bureau of International Settlement (BIS). BIS fosters co-operation among central banks with a common goal of financial stability and common standards of banking regulations. Currently there are 27 member nations in the committee. Basel guidelines refer to broad supervisory standards formulated by this group of central banks called the Basel Committee on Banking Supervision (BCBS). The set of agreement by the BCBS, which mainly focuses on risks to banks and the financial system are called Basel accord. The purpose of the accord is to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses. India has accepted Basel accords for the banking system. Around 10 public sector banks (PSBs) will get a total capital infusion of Rs 12,517 crore from the government before this financial year ends. This is to enable a step-up of lending at this time of slowing economic growth, as well as meeting the capital adequacy norms. In the light of this development here is a short primer on Basel banking norms. Basel I - In 1988, BCBS introduced capital measurement system called Basel capital accord, also called Basel 1. It focused almost entirely on credit risk. It defined capital and structure of risk weights for banks. The minimum capital requirement was fixed at 8% of risk weighted assets (RWA). RWA means assets with different risk profiles. For example, an asset backed by collateral would carry lesser risks as compared to personal loans, which have no collateral. India adopted Basel 1 guidelines in 1999. Basel II - In 2004, Basel II guidelines were published by BCBS, which were considered to be the refined and reformed versions of Basel I accord. The guidelines were based on three parameters. Banks should maintain a minimum capital adequacy requirement of 8% of risk assets, banks were needed to develop and use better risk management techniques in monitoring and managing all the three types of risks that is credit and increased disclosure requirements. Banks need to mandatorily disclose their risk exposure, etc to the central bank. Basel II norms in India and overseas are yet to be fully implemented. Basel III - In 2010, Basel III guidelines were released. These guidelines were introduced in response to the financial crisis of 2008. A need was felt to further strengthen the system as banks in the developed economies were under-capitalized, over-leveraged and had a greater reliance on short-term funding. Also the quantity and quality of capital under Basel II were deemed insufficient to contain any further risk. Basel III norms aim at making most banking activities such as their trading book activities more capital-intensive. The guidelines aim to promote a more resilient banking system by focusing on four vital banking parameters viz. capital, leverage, funding and liquidity.

Disclosure, venture capital and entrepreneurial spawning

Venture capital (VC) funds have been facing increasing regulatory scrutiny since the 2007 financial crisis, particularly with respect to calls for increased disclosure requirements. In this paper, we examine the effect of more stringent securities regulation on the supply and performance of VC, as well as on new business creation (i.e., entrepreneurial spawning). Using country-level and investment-level data from 34 countries over the years 2000–2008, we find that more stringent securities regulation is positively associated with the supply and performance of VC around the world. More stringent securities regulation is also positively associated with entrepreneurial spawning induced by VC. Among different forms of securities regulation, disclosure stands out as having the most economically meaningful impact, which casts doubt on the oft-repeated objections to disclosure in VC – that it would stifle the VC industry, because secrets would have to be revealed to competitors and the public. These findings are robust to numerous robustness checks for endogeneity. The policy implications are clear, however, regardless of endogeneity concerns: VC and entrepreneurship markets are enabled, not curtailed, in countries with better disclosure standards, when one compares the existing differences in disclosure around the world and changes thereto over the 2000–2008 period.

Disclosure, Venture Capital and Entrepreneurial Spawning

Venture capital funds have been facing increasing regulatory scrutiny since the 2007 financial crisis, particularly with respect to calls for increased disclosure requirements. In this paper we examine the effect of more stringent securities regulation on the supply and performance of venture capital as well as new business creation (i.e., entrepreneurial spawning). Using country- and investment-level data from 34 countries over the years 2000-2008, we find that more stringent securities regulation is positively associated with the supply and performance of venture capital around the world. More stringent securities regulation is also positively associated with entrepreneurial spawning induced by venture capital. Among different forms of securities regulation, disclosure stands out as having the most economically meaningful impact, which casts doubt on the oft repeated objections to disclosure in VC – that it would stifle the VC industry because secrets would have to be revealed to competitors and the public. These findings are robust to numerous robustness checks for endogeneity. The policy implications are clear regardless of endogeneity concerns, however: VC and entrepreneurship markets are enabled, not curtailed, in countries with better disclosure standards when one compares the existing differences in disclosure around the world and changes thereto over the 2000-2008 period.

The Role of Defined Benefit Pension Plans in Executive Compensation

Although defined benefit pension plans constitute a significant portion of both annual compensation and firm-related wealth for many CEOs, prior studies of CEO compensation contracts generally exclude these plans from their analyses due to lack of data. Taking advantage of recently increased disclosure requirements, we analyze the role of defined benefit pension plans in these contracts. We find that firms with CEO defined benefit pension plans grant the CEO annual compensation that is larger than predicted by economic determinants. We also find that more powerful CEOs, identified by their extraordinary pension benefits, receive higher total pay in addition to the pension benefits. We find no evidence that CEO pension benefits contribute to the pay-for-performance sensitivity of the annual pay.

Increased Disclosure Requirements and Corporate Governance Decisions: Evidence from Chief Financial Officers in the Pre‐ and Post–Sarbanes‐Oxley Periods

ABSTRACTI study how increased internal control disclosure requirements mandated by the Sarbanes‐Oxley Act (SOX) affect annual corporate governance decisions regarding CFOs. Using non‐CEO, non‐COO executive officers as a control group, I find that CFOs of firms with weak internal controls receive lower compensation and experience higher forced turnover rates after the passage of SOX. In contrast, CFOs of firms with strong internal controls receive higher compensation and do not experience significant changes in forced turnover rates. These results are consistent with the “disclosure of type” hypothesis, which suggests that the mandatory internal control disclosures under SOX are a credible mechanism that effectively distinguishes good CFOs from bad ones by revealing the firm's internal control quality. The empirical evidence thus supports the notion that mandated increases in disclosure reduce information asymmetry in the executive labor market.