Disclosure Regulation Research Articles

Internalizing Externalities: Disclosure Regulation for Hydraulic Fracturing, Drilling Activity and Water Quality

Internalizing Externalities: Disclosure Regulation for Hydraulic Fracturing, Drilling Activity and Water Quality

Limits of Disclosure Regulation in the Municipal Bond Market

Limits of Disclosure Regulation in the Municipal Bond Market

Addressing low-value insurance products with improved consumer information: the case of ancillary health products

The sale of financial services products is rife with information asymmetry favoring sellers and leads to the marketing of insurance products offering low value to consumers. Exemplifying this problem is the current market for ancillary health insurance products such as short-term health insurance and supplemental insurance. One policy option for state insurance regulators is to mandate a robust regime of disclosures and labeling, described here as comparative disclosures. This article reviews comparative disclosure regulations previously implemented in the U.S. and proposals for reforms. It then outlines a possible policy solution for the lack of value in ancillary health insurance products: expanding consumer information to facilitate shopping.

Transmission Effects of ESG Disclosure Regulations through Bank Lending Networks

Transmission Effects of ESG Disclosure Regulations through Bank Lending Networks

Theories of Causal Nexus in Rule 10b-5 Claims: A Critical Reassessment

Abstract Investors are entitled to assume that issuers comply with regulatory disclosure requirements and have therefore purchased or sold a security at a price expected to have been set without being affected by untrue statements or omissions. That is, investor reliance should be presumed in a regulated market in which the issuer statements in SEC filings are truthful and at least not seriously misleading. This article argues that the source of reliance lies in the credibility of the regulators committed to promoting market integrity and investor protection. In this regard, the basic presumption per se remains valid but needs some revision. Furthermore, in assessing claims of causation of loss and damages, it should be taken into account whether any significant price distortion occurred at the precise moment when defrauded investors made investment decisions, not at a later date. Such ex-ante analysis is theoretically sound and consistent with legislative intent.

Competition Links and Stock Returns

Abstract This paper demonstrates that value-relevant information about a firm appearing in regulatory disclosures of other firms is overlooked by investors. Firms highly mentioned in the 10-K competition section of other firms tend to outperform with risk-adjusted returns of up to 9$\%$ annually. Outperformance is concentrated in firms whose competition references are made in the context of targeting rather than admiration. Consistent with investor inattention, abnormal returns stem from cross-sector competition mentions as well as firms with low-analyst coverage. Moreover, highly mentioned firms exhibit improved fundamentals in subsequent years, further signifying they are underpriced.

Measuring Risk Information

ABSTRACTWe develop a measure of how information events impact investors' expectations of risk. The measure is broadly applicable and simple to implement. We derive it from an option‐pricing model, where investors anticipate an announcement that simultaneously conveys information on the announcer's expected future cash flows and risk profile. We empirically implement the measure using firms' earnings announcements, showing that it closely aligns with our model's predictions and offers strong forecasting power for firms' risk profiles, costs of capital, and future investments. We further highlight pitfalls of using simple changes in option‐implied volatilities to study information gleaned from earnings announcements. Finally, we apply our measure to study disclosure regulation, the efficacy of text‐based proxies, and market‐wide events, which we use to illustrate our measure's uses, and illuminate its potential limitations.

Banks’ climate commitments and credit to carbon-intensive industries: new evidence for France

ABSTRACT I investigate whether and how banks align green words, in terms of their commitments to tackle climate change, with deeds in terms of credit allocation across carbon-intensive industries in France. I use data on bank credit exposures to large versus small firms across 49 industries for the main banking groups operating in France, which I merge with information on industries’ greenhouse gas emission intensities and a score for banks’ self-reported climate-related commitments over 2010–2017. I find evidence that higher levels of self-reported climate commitments by banks are associated with a slower growth of lending to large firms in the five most carbon-intensive industries. However, lending to small and medium-sized enterprises across more or less carbon-intensive industries remains unrelated to banks’ commitments to green their business. These findings suggest that devising an appropriate carbon reporting framework for small firms is likely to enhance the decarbonization of bank lending. Key policy insights Over 2010–2017, in France, banking groups that self-report to CDP as being more committed to climate change adaptation and mitigation tend to cut their lending relatively faster to domestic firms in the five most carbon-intensive industries. This pattern is entirely driven by the dynamics of banks’ credit to large corporations, which in France are legally bound to regular carbon reporting. In contrast, banks’ climate commitments do not seem to affect their lending to domestic small and medium-sized enterprises(SMEs) in carbon-intensive industries. Overall, the results support recent calls for an extension of mandatory carbon disclosure regulations to SMEs.

On the advent of environmental, social and governance reporting and its intersection with privacy

An emerging area of regulation in the form of environmental, social and governance (ESG) reporting is aimed at long-term sustainability and addressing the challenges of climate change and social inequality. This paper explores how ESG reporting intersects in interesting ways with well-established privacy principles under the European Union (EU) General Data Protection Regulation. The paper analyses these privacy implications in the context of the first formal ESG law of comprehensive scope — the EU Sustainable Finance Disclosure Regulation — as well as existing global ESG disclosure standards. In particular the ‘S’ of ESG encompasses issues in the employment context relating to gender equality and diversity and inclusion (D&I), thereby implicating sensitive personal data and complicating the collection of such data. In addition, the paper looks towards the question of whether there is, or should be, a ‘P’ of privacy incorporated in ESG and considers the potential development of measurable privacy metrics for this purpose.

Fracking Disclosure, Collateral Value, and the Mortgage Market

ABSTRACT This paper examines whether laws requiring oil and gas firms to disclose the chemicals used in their fracking operations affect the mortgage lending activity for properties located in nearby areas. I hypothesize and find that the disclosure mandate reduces uncertainty about the value of housing collateral and subsequently increases (1) the probability of obtaining a mortgage by 2.5 percentage points (pp), and (2) loan-to-value by 2.2 pp. My main analyses exploit the variation in the location of properties relative to fracking wells. Cross-sectional tests that exploit heterogeneity in drinking water sources and the content of firm disclosures further substantiate my inferences and mitigate endogeneity concerns. These findings suggest that disclosure regulation for oil and gas firms affects housing collateral values, thereby impacting the mortgage market. JEL Classifications: G14; G21; G32; G38; K22; L71; M41; M48.

The Perception of Risk Disclosure Characteristics on the Credit Default Swap Market—An Automated Analysis

SYNOPSIS This paper evaluates the associations between credit default swap (CDS) spreads and risk disclosure characteristics, especially the expected qualitative and the expected quantitative impacts of risks on companies' future performance and information on risk management. We find that CDS investors can benefit from information on expected risk impacts and from information on risk management, which is important for the current discussion of the Securities and Exchange Commission (SEC) on risk disclosure regulation. However, for companies, the disclosure of such information can be either beneficial or costly, depending on the initial risk perception of CDS investors prior to the publication of risk disclosures and on the disclosed risk factors. Furthermore, we expand the literature by automatically measuring the mentioned risk disclosure characteristics using dictionary-based approaches.

Business Sustainability: The Trend of Human Resource Disclosure Based on Malaysian Evidence

This paper aims to investigate the trend of human resource disclosure (HRD) quality based on publicly disclosed annual reports of 235 Malaysian listed companies. The data was collected through content analysis method using HRD index. The results reveal that there is an increasing trend of HRD quality from 2010 to 2014. However the significant increase is only between 2012 and 2013. This study provides empirical support for Institutional theory’s coercive isomorphism, through its findings on quality of HRD. This is because, the related disclosure regulations and the Malaysian government policy through Malaysia Plan may have significantly influenced firms to increase HRD quality in their annual reports.

A language-based approach to measuring creative exploration

• Using textual analysis, we develop a new language-based indicator of firm exploration. • The exploration indicator covers all firms in all industries and spans a wide range of exploratory activities. • The exploration indicator predicts future R&D spending and patent and trademark applications and grants. • Exploration declines after periods of high R&D spending and as the firm matures. • Exploration correlates positively with firm risk. • Exploration exhibits a distinct positive impact on firm value. We propose a new measure of the exploratory activities of companies based on the idea that experimentation with new courses of action and the need to describe them entails the adoption of new words in firm regulatory disclosures. Unlike traditional indicators, such as R&D spending, the proposed exploration indicator is available for all publicly traded firms across all industries. The exploration indicator predicts firm knowledge accumulation, as measured by future patenting and trademarking activities. It further shows that firm exploration declines after periods of high R&D spending and over time. The exploration indicator correlates positively with firm risk and exhibits a distinct positive impact on firm value unexplained by traditional innovation indicators. Our language-based approach can be applied to measure creative contributions in other domains, such as government grant applications and academic publications.

Algorithmic disclosure rules

During the past decade, a small but rapidly growing number of Law&Tech scholars have been applying algorithmic methods in their legal research. This Article does it too, for the sake of saving disclosure regulation failure: a normative strategy that has long been considered dead by legal scholars, but conspicuously abused by rule-makers. Existing proposals to revive disclosure duties, however, either focus on the industry policies (e.g. seeking to reduce consumers’ costs of reading) or on rulemaking (e.g. by simplifying linguistic intricacies). But failure may well depend on both. Therefore, this Article develops a `comprehensive approach', suggesting to use computational tools to cope with linguistic and behavioral failures at both the enactment and implementation phases of disclosure duties, thus filling a void in the Law & Tech scholarship. Specifically, it outlines how algorithmic tools can be used in a holistic manner to address the many failures of disclosures from the rulemaking in parliament to consumer screens. It suggests a multi-layered design where lawmakers deploy three tools in order to produce optimal disclosure rules: machine learning, natural language processing, and behavioral experimentation through regulatory sandboxes. To clarify how and why these tasks should be performed, disclosures in the contexts of online contract terms and privacy online are taken as examples. Because algorithmic rulemaking is frequently met with well-justified skepticism, problems of its compatibility with legitimacy, efficacy and proportionality are also discussed.

Tobacco Control Strategies Enrich the National Strategic Plan on Prevention and Control of Cancer in Sri Lanka.

The National Cancer Control Programme Sri Lanka is the main government organization and focal point for coordinating the national response to prevention and control of cancer activities. Present National strategic plan on Cancer Prevention and Control (2020-2024) was developed by multi-sectoral expert groups. The present strategy derives its mandate from the overarching National policy documents including the NATA Act. Strategic objectives one and two of the National Strategic Plan identified the tobacco control measures. Several databases were searched to find out the relevant literature relevant to tobacco control strategies in Sri Lanka and the rest was collected from the university libraries, experts, and key persons in the field from the legal, and health sectors. It was identified more than 200 documents relevant to tobacco control. Strong legal legislations are available for measures to reduce the demand for tobacco products. Those are Protection from exposure to tobacco smoke, regulation of the contents of tobacco products, regulation of tobacco product disclosures, packaging and labeling of tobacco products, tobacco advertising, promotion and sponsorship, licit trade in tobacco products, sales to under 21, Provision of support for economically viable alternative activities. These legislations are covering by the NATA act. New formula for tobacco taxation was submitted to the Ministry of Health. Conclusion: Strong tobacco controlling laws and legislations are available in Sri Lanka that supports achieving one and two of the strategic objectives of the National strategic plan on cancer prevention and control in Sri Lanka. Policies are needed to regularize the increased tax rates to adjust for inflation and Gross Domestic Product. WHO has categorized Sri Lanka as one of the countries which can likely achieve a decrease in tobacco smoking prevalence (30%) by 2025.

The Real Effects of Mandatory Nonfinancial Disclosure: Evidence from Supply Chain Transparency

ABSTRACT This paper studies whether and how mandatory nonfinancial disclosure affects firms' real decisions. I exploit a disclosure regulation enacted in California, which mandates that firms disclose how they conduct due diligence to address their suppliers' human rights abuses. I find that treated firms increase their supply chain due diligence, and their suppliers' human rights performance improves following the regulation. The effects are stronger when firms face greater pressure from non-governmental organizations (NGOs) and socially conscious shareholders, when customers have greater incentives to use the newly disclosed information, and when the regulation leads to a larger increase in information comparability. Collectively, the results suggest that mandatory nonfinancial disclosure can affect firms' real decisions through market mechanisms and that stakeholder responses play a key role. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G14; G18; G38; J80; K22; K31; K38; L23; M41; M48.

A Tale of Two Supervisors: Compliance with Risk Disclosure Regulation in the Banking Sector*

ABSTRACTWe examine how the presence of multiple supervisory agencies affects firm‐level compliance in form and substance with disclosure regulations. This analysis is important because coordination problems among regulators are frequently present in practice but often overlooked in academic research. We exploit that banks are subject to equivalent risk disclosure rules under securities laws (IFRS 7) and banking regulation (Pillar 3 of the Basel II Accord) but that different regulators start enforcing the rules at different points in time. We find that banks substantially increase their formal risk disclosures upon the adoption of Pillar 3 even if they already had to comply with the same requirements under IFRS 7. The effects are stronger if the central bank is responsible for bank supervision and bank regulators are equipped with more supervisory resources, but are less pronounced if the securities market regulator is an independent entity. In turn, banks facing more market pressures are more compliant with the rules. We further find persistent liquidity benefits of the increased risk disclosures but only after Pillar 3 became effective and its compliance was enforced by the banking regulator. Our results suggest that formal and material compliance with risk disclosure regulation are a function of both the resources of the supervisory agency and its incentive alignment with the regulated firms. In our setting, the banking regulator seems more effective in fulfilling this role.

Opaque auditor dismissal disclosures: What does timing reveal that disclosures do not?

Auditor resignations provide a clear signal of accounting problems or heightened audit risk; however, registrants label the vast majority of auditor changes as dismissals, which carry more ambiguity. Motivated by the opacity of current dismissal disclosures, this study explores the usefulness of these disclosures compared to an alternative signal – the timing of the dismissal within the reporting year – for inferring the causes and implications of dismissals. Dividing the reporting year into key periods, we find that the probabilities of future restatements, material weaknesses, and delistings following a dismissal generally increase within the reporting year while negative circumstances disclosed do not. Analyses suggest that the timing patterns are caused by burgeoning, yet undisclosed, conflicts between the client and the outgoing auditor, rather than by transition difficulties involving the new auditor (as prior literature claims). The timing patterns strongly persist after controlling for negative circumstances that registrants disclose in the dismissal filing, suggesting that the disclosures are not fully revealing. In fact, disclosed negative circumstances have no incremental predictive power for future restatements and delistings. Our results suggest a severe lack of informativeness of current disclosures and support previous calls for improvement of dismissal disclosure regulation.

Performance and (non) mandatory disclosure: the moderating role of the Directive 2014/95/EU

PurposeThis paper investigates whether and how Directive 2014/95/EU affects financial performance as well as its moderation effect on the relationship between financial and non-financial performance, involving different stakeholders' perspectives.Design/methodology/approachWe adopted the panel data approach to perform random effects regression analysis on a sample of 435 European listed non-financial companies, considering a timeframe of six years. Furthermore, the moderation effect of the Directive 2014/95/EU on the relationship between financial and non-financial performance has been tested.FindingsNFD regulation negatively affects firms' operating profitability and shareholder value while produces no effects on debtholders' returns. Nevertheless, the Directive 2014/95/EU has general positive moderating effects on the relationship between non-financial and financial performance, mitigating the direct costs induced by pursuing non-financial performance.Research limitations/implicationsShifting from mimetic to coercive isomorphism caused a strengthening of the complementarity between financial and non-financial performance dimensions, extending the concept of performance itself. The analysis carried out is limited to a short-term timeframe and on non-financial companies subject to the Directive 2014/95/EU.Practical implicationsThe paper highlights trade-offs between the costs induced by non-financial activities and the benefits of being compliant with the non-financial disclosure (NFD) regulation, supporting managers in allocating business resources.Originality/valueThis paper is among the first that investigates the impact of mandatory NFD on the relationship between non-financial and financial performance. It is also one of the earliest in finding some pieces of evidence on the direct impact of Directive 2014/95/EU on EU companies' financial performance.

Financial analysts' reaction to voluntary integrated reporting: cross-sectional variation in institutional enforcement contexts

PurposeEuropean countries are likely to increasingly adopt integrated reporting (IR) voluntarily, after the 2014/95/EU Directive is revised and other initiatives are implemented. Therefore, the present study provides insights on the relevance of IR in voluntary contexts by exploring analysts' reactions to the release of integrated reports in diverse institutional settings.Design/methodology/approachDrawing on voluntary disclosure theory, a quantitative empirical research method is used to explore the moderating role of country-level institutional characteristics on the associations between voluntary IR release and analyst forecast accuracy and dispersion.FindingsIR informativeness is not uniform in the voluntary context and institutional settings play a moderating role. IR release is associated with increased consensus among analyst forecasts. However, in countries with weak institutional enforcement, a reverse association is detected, indicating that analysts rely largely on IR where the institutional setting strongly protects investors. Although a strong institutional setting boosts the IR release usefulness in terms of accuracy, it creates noise in analyst consensus.Research limitations/implicationsAcademics can appreciate the usefulness of voluntary IR across the institutional enforcement contexts.Practical implicationsManagers can use these findings to understand opportunities offered by IR voluntary release. The study recommends that policymakers, standard setters and regulators strengthen the institutional enforcement of sustainability disclosure.Originality/valueThis study is a unique contribution to recent calls for research on the effects of nonfinancial disclosure regulation and on IR “impacts”. It shows on the international scale that IR usefulness for analysts is moderated by institutional patterns, not country-level institutional characteristics.