Securities And Exchange Commission Research Articles

Do Auditors Price Common Ownership?

SUMMARY Common ownership (i.e., financial institutions’ block holding stock in industry rivals) and its implications for investors are matters of current interest and debate (Securities and Exchange Commission (SEC) 2018). Motivated by this debate and the salience of common ownership, we investigate whether and how auditors price common ownership. Consistent with the notion that common ownership improves monitoring, we find common ownership is related to lower audit fees (about 6 percent lower). Further, we find that the reduction in audit fees is more pronounced for companies whose common owners (1) have stronger incentives to monitor and (2) have “scale” in monitoring. Using path analysis, we find common ownership contributes to lower audit fees through improved earnings quality. Collectively, our findings speak to the effect of monitoring mechanisms from common ownership and are of potential interest to investors and the SEC as they attempt to assess the broader implications of common ownership. Data Availability: All data used in the paper are publicly available from sources cited in the paper. JEL Classifications: M4; M42.

Performance of the Equities and Bond Markets in Nigeria: A Comparative Investigation

This work comparatively examined the performance of the Nigerian equities and bond markets vis-à-vis the output of the Nigerian economy from 1987 – 2019. Number of listed securities, number of deals, value of deals and market capitalization were the market performance indicators considered, while real GDP was used to measure output of the Nigerian economy. Data for the study were sourced from Central Bank of Nigeria (CBN) and Securities and Exchange Commission (SEC) Statistical bulletins. The data generated for the study were subjected to stationarity test using ADF criterion, co-integration test using bounds approach, and diagnostic tests which covered testing for the presence of serial correlation, heteroscedasticity and distribution of the error term. Stationarity test result revealed that all the variables were integrated of order zero or one. Co-integration test result showed that a long-run relationship exists between the variables. Diagnostic test results indicated that both models were not serially correlated while the variances of the random variables were not heteroscedastic. However, the errors of the models were not normally distributed. Nevertheless, the ARDL model for parameter estimation process revealed that lagged real GDP, number and value of deals in the equities market have positive relationships with current period real GDP; while number of listed securities and market capitalization has negative relationships with real GDP. Additionally, only number of listed securities and number of deals in the equities market were statistically significant. In the bond market, all the variables except number of listed securities have positive relationships with real GDP, but none of the considered market performance indicators was statistically significant in the market. Nonetheless, the equities market has about 67.58% influence on real GDP in Nigeria; while bond market has about 45.22% influence on the country’s real GDP within the per

Energy hedging and annual report readability

PurposeUsing a sample of oil and gas firms in the USA, the study examines the relation between the presence of hedging and annual report readability.Design/methodology/approachThe authors use regression analysis to examine the relation between the presence of hedging and annual report readability.FindingsThe authors find that annual reports of firms with the use of hedging are less readable (i.e. difficult to read and understand). The authors also find that the primary results are more pronounced for firms with a higher level of business volatility.Originality/valueThe study contributes to the finance literature on the use and value of hedging and to the accounting literature on the determinants of annual report readability. The Securities and Exchange Commission (SEC) has persistently asked companies to improve the readability of their disclosures to stakeholders (SEC, 1998; 2013, 2014). Hence, the study not only identifies a potential determinant (i.e. hedging) that may influence the level of readability but also supports the current regulatory policy by the SEC, which is encouraging companies to improve readability.

Credit Risk Modeling with Graph Machine Learning

Accurate credit ratings are an essential ingredient in the decision-making process for investors, rating agencies, bond portfolio managers, bankers, and policy makers, as well as an important input for risk management and regulation. Credit ratings are traditionally generated from models that use financial statement data and market data, which are tabular (numeric and categorical). Using machine learning methods, we construct a network of firms using U.S. Securities and Exchange Commission (SEC) filings (denoted CorpNet) to enhance the traditional tabular data set with a corporate graph. We show that this generates accurate rating predictions with comparable and better performance to tabular models. We ensemble graph convolutional networks with highly-performant ensembled machine learning models using AutoGluon. This paper demonstrates both transductive and inductive methodologies to extend credit scoring models based on tabular data, which have been used by the ratings industry for decades, to the class of machine learning models on networks. The methodology is extensible to other financial machine learning models that may be enhanced using a corporate graph. History: David Martens served as the senior editor for this article. Data Ethics & Reproducibility Note: No data ethics considerations are foreseen related to this article. The paper deals with corporate credit risk and not consumer credit, which usually entails issues around privacy and bias. The code capsule is available on Code Ocean at https://codeocean.com/capsule/5230264/tree/v2 and in the e-Companion to this article (available at https://doi.org/10.1287/ijds.2022.00018 ).

The crypto frontier: How US policymakers and investment advisers can address digital assets

This paper focuses on prominent issues surrounding digital assets. The lack of a comprehensive federal digital asset law has recently raised several issues for Securities and Exchange Commission (SEC)-registered investment advisers as they try to navigate new markets and new industry practices. As such, this paper addresses the current US regulatory landscape, provides a comparison of non-US approaches to digital assets and provides US policymakers with key principles they can consider for potential digital asset legislation and/or regulation. The paper also provides compliance considerations for investment advisers who currently manage digital assets, to address the evolving obligations under the US securities laws.

Impact of Strategy Implementation on Performance in Nigerian Stock and Insurance Markets: A Regulator and Supervisor Perspective

Purpose: The purpose of this research was to analyze how strategy implementation affects the performance of regulators and supervisors in the Nigerian stock and insurance markets. The specific goals were centered around exploring the relationship between strategic alignment, resource availability, organizational structure, and performance within the designated study area. Theoretical framework: The study centers on the RBV Model as the theoretical framework. Design/Methodology/Approach: Employing a descriptive research design, primary data was gathered from 145 carefully selected staff members of the Securities and Exchange Commission (SEC) and the National Insurance Commission (NAICOM). Findings: The results of the ordinary least squares (OLS) regression revealed that strategic alignment, resource availability, and organizational structure were positive, and significantly influence organizational performance at 5% level of significance. Practical implications: This implies that collaborative efforts can enhance the effectiveness of the regulatory approach and foster a conducive and well-functioning financial market environment. In conclusion, this research demonstrates that strategic alignment, resource availability, and organizational structure are pivotal factors influencing the performance of regulatory institutions in Nigerian stock and insurance markets. By addressing these factors, policymakers and regulators can enhance the overall stability and efficiency of the financial system, benefiting both investors and the broader economy. Original/Value: This study makes a significant contribution to knowledge by examining the relationship between strategy implementation and performance in the Nigerian stock and insurance markets from the perspective of regulators and supervisors. By shedding light on the identified factors and their impact on performance, the research provides valuable insights for both market participants and regulatory bodies, offering a basis for informed decision-making and potential policy interventions to enhance the overall performance and stability of these financial sectors in Nigeria.

All my rowdy friends: the effect of Super Bowl hosting on audit and financial reporting timeliness

PurposeThe purpose of this paper is to examine the impact hosting the Super Bowl has on audit completion and financial reporting timeliness for companies headquartered in Super Bowl hosting cities.Design/methodology/approachUsing 16 years of financial reporting data, this study uses the Super Bowl and related activities, combined with required filings during “busy season,” as a natural experiment to examine how audit firms navigate short-term, exogenously imposed but anticipated, audit team capacity constraints.FindingsCompanies headquartered in a city hosting the Super Bowl, during busy season, have longer audit report lags (by approximately three days, in comparison to non-hosting busy season audits) and less timely securities and exchange commission (SEC) (10-K) filings. The authors find no evidence that Super Bowl hosting affects audit fees or earnings announcement timeliness.Practical implicationsWhen confronted with anticipated capacity shocks, audit firms take longer to complete the audit, absorbing the financial costs of the delay and maintaining audit quality, resulting in less timely financial reporting.Originality/valueThis study demonstrates the costs of Super Bowl-related inefficiencies and contributes to our understanding of how auditors navigate capacity shocks. This study provides evidence that auditors can effectively manage business risk and continue to facilitate providing timely and accurate information to financial statement users in the face of a capacity shock.

Environmental Awareness of Enterprises through Their Disclosure Magnitude: UK and US Evidence

In the absence of a validly mandatory public policy and a meaningful conceptual framework, corporate environmental disclosure practices have been diverse (Matthews, 1993). In other words, the lack of a single generally accepted standard in which environmental reports can be developed, akin to that of financial reporting principles, is one of the reasons for this undoubted dissimilarity in environmental reporting practices. However, there are imperative requirements relating to environmental information disclosure in many developed countries, for example, environmental related information is required in the Business Review in accordance with s.417 of the Act (Great Britain. Companies Act 2006) in the UK and the US Securities and Exchange Commission (SEC) has developed rules governing disclosure of environmental liabilities, in relation to Items 101, 103, 303 and 503(c) in SEC Regulation S-K (SEC, 2008). The former is rather vague as it is not underpinned by a robust speculative structure, whereas the latter has only focussed on the disclosure of financial information that is environmentally related despite the non-financial nature of predominant environmental information. In response to these, the International Accounting Standards Board (IASB) and The International Sustainability Standards Board (ISSB) has very recently issued the foundational standards, which are IFRS S1 and IFRS S2, to steer corporate sustainability-related disclosures worldwide. The former inaugurally provide general conceptual foundations and the latter has primarily pointed on climate risks and opportunities. The other dimensions are forsaken to line up sometimes in the future. Keywords: Environmental Information Disclosure, Environmental Reporting, Disclosure Quantity, UK, US

Performance of ESG SPACs

PurposeThe authors examine one special focus of Special Purpose Acquisition Companies (SPACs), namely environmental, social and governance (ESG) related investments. The authors document the performance of SPACs with and without ESG focus.Design/methodology/approachThe authors collect data, from several sources, on 1,737 SPAC IPOs formed between 2003 and 2022. A SPAC's focus on ESG is classified based on declared focus in Securities and Exchange Commission (SEC) filings and in post-merger annual reports. The authors examine operational and financial performance of SPACs with and without ESG focus.FindingsIn the study's sample, only 50% of SPACs that announced an intention to acquire an ESG target ended up consummating a merger with an ESG private firm. ESG SPACs exhibit worse operating performance than non-ESG SPACs. Furthermore, they experience 11.6% lower 1-year post-merger excess returns than their non-ESG counterparts.Originality/valueThe study provides an examination of ESG firms that came to market via mergers with SPACs, which is an alternative method to traditional initial public offerings (IPOs). The study also provides a comparison of both operational and stock performance of ESG and non-ESG SPACs.

Effect of Ownership Concentration on Agency Cost of Industrial Firms Listed on the Nigerian Exchange Group

This study investigated the effect ownership concentration on agency cost of industrial firms listed on the Nigerian exchange group. The specific objectives were to examine the effect of government ownership, managerial ownership, institutional ownership and foreign ownership affects agency cost of firms listed on the Nigerian exchange group. Panel Least Squared (PLS) method of data analysis was used. Secondary sources of data were employed; the interested variables were sourced from the annual report of the quoted industrial firms. The variables were assets utilization as the dependent variables while government ownership, managerial ownership, institutional ownership and block ownership were the independent variable. The study employs descriptive statistics, correlation and regression analysis in the analysis. From the analysis result the study found that. Government ownership has no significant impact on agency cost of firms listed on the Nigerian exchange group (t-test 1.539283, p=0.1286). Managerial ownership has significant impact on agency cost of firms listed on the Nigerian exchange group (t-test 4.541870, p=0.0000). Institutional ownership has significant impact on agency cost of firms listed on the Nigerian exchange group (t-test -3.443344, p=0.0005). Foreign ownership has negative and insignificant effect on agency cost of firms listed on the Nigeria exchange group (t-test -0.336863, P= 0.7372). The researcher recommends that. Government ownership of sensitive firms should be minimized, as such ownership are usually inefficient and characterized by bureaucratic bottlenecks, which do not have clear incentives to improve asset. The study recommends that financial regulatory bodies in Nigeria such as the Central Bank of Nigeria (CBN), Nigeria Deposit Insurance Corporation (NDIC), and Securities and Exchange Commission (SEC) should ensure that a reasonable degree of managerial ownership is maintained by all banks due to its potential ben

Fragmented Securities Regulation, Information-Processing Costs, and Insider Trading

Using a unique setting where stand-alone banks submit filings to bank regulators instead of the U.S. Securities and Exchange Commission (SEC), we examine the consequences of fragmented securities regulation for information-processing costs and opportunistic insider trading. We find the market reaction to insider-trading filings on FDICconnect is less timely than to those on SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system, suggesting FDICconnect generates higher information-processing costs. We also find only large investors trade more on insider-trading filings on FDICconnect than on insider-trading filings on SEC EDGAR, thus extracting benefits from the delayed market reaction to insider-trading filings on FDICconnect. Finally, we find increased insider selling in stand-alone banks prior to negative earnings news, suggesting insiders’ opportunistic use of private information. These findings collectively suggest regulatory fragmentation undermines market efficiency and distorts the level playing field. This paper was accepted by Suraj Srinivasan, accounting. Funding: This work was supported by the Eugene Lang Junior Faculty Fellowship. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2023.4903 .

Demonstrating Retrieval of Financial Information in XBRL

The Securities and Exchange Commission (SEC) has upgraded the existing system of Electronic Data Gathering, Analysis, and Retrieval (EDGAR), to Interactive Data Electronic Applications (IDEA) platform, using eXtensible Business Reporting Language (XBRL). In January 2009, the SEC issued its final mandate for XBRL adoption and the conversion target dates for all firms. This conversion enables users to retrieve listed companies’ financial statement information at two levels, document and the data element, compared to the document level alone under the existing system of EDGAR. Beneficial to all users, this change is particularly important to resource-strapped entities such as small businesses, and universities. The result is user friendly for students researching information. With simply the industry standard tool of Microsoft Excel, without expensive proprietary XBRL modules, detailed information is now available, quickly, efficiently and at minimum cost. This paper explains the basic concept of XBRL and demonstrates the ease of the retrieval process in Microsoft Excel.

The SEC's September spike: Regulatory inconsistency within the fiscal year

We examine whether performance reporting leads to inconsistent enforcement at the Securities and Exchange Commission (SEC). In a sample of over 13,000 SEC enforcement actions, we show that SEC staff respond to performance-reporting pressures and file more enforcement actions in September, the final month of the SEC's fiscal year, than in any other month. The increase in case volume in September is not fully explained by staff filing more procedural cases or accelerating case filings. Instead, SEC staff pursue less complex cases and agree to more lenient financial and non-financial sanctions to increase case volume in September. We attempt to rule out alternative explanations for our results, including natural SEC workflow and resource constraints. Overall, our findings suggest that performance reporting creates agency conflicts that lead to regulatory inconsistency within the fiscal year.

US Prospectus Liability – An Overview and Critique

Abstract This article addresses prospectus liability in the United States. The key statutes and Securities and Exchange Commission (SEC) rules and regulations are examined in conjunction with analysis of the causes of action and defenses that are applicable. While the US prospectus framework is thorough, substantial gaps exist that should be remedied. The article accordingly focuses on principal aspects of US prospectus liability exposure and proffers recommendations for improving the overall framework.

Stock Market Reaction to Accounting Information of Listed Pharmaceutical Companies in Nigeria

The aim of this study was to investigate the effect of accounting information on stock market reaction of quoted pharmaceutical companies in Nigeria by determining whether there is a significant relationship between accounting information and stock market reaction using 2009 to 2014 secondary data collected from the Nigeria Stock Exchange office in Port Harcourt, Rivers State, Nigeria. An ex post facto research design was appropriately adopted to address the objective of the study. Because of the research design adopted, a multiple regression analysis was employed to test the hypothesis raised in the study. The independent variable, which is accounting information, is measured as earnings per share (EPS) and book value per share (BVS), while the dependent variable, which is stock market reaction, is measured as stock price. The results obtained suggest that there is no statistically significant relationship between accounting information and stock market reaction; drawing on this finding, we concluded that accounting information has no significant effect on stock market reaction. Based on this finding, we recommend that sound and specific guidelines on accounting information should be issued by the Financial Reporting Council of Nigeria (FRCN) and the Security and Exchange Commission (SEC) so as to increase the relevance of accounting information of quoted companies.

Incorporating an Unsupervised Text Mining Approach into Studying Logistics Risk Management: Insights from Corporate Annual Reports and Topic Modeling

This study examined the Security and Exchange Commission (SEC) annual reports of selected logistics firms over the period from 2006 through 2021 for risk management terms. The purpose was to identify which risks are considered most important in supply chain logistics operations. Section 1A of the SEC reports includes risk factors. The COVID-19 pandemic has had a heavy impact on global supply chains. We also know that trucking firms have long had difficulties recruiting drivers. Fuel price has always been a major risk for airlines but also can impact shipping, trucking, and railroads. We were especially interested in pandemic, personnel, and fuel risks. We applied topic modeling, enabling us to identify some of the capabilities of unsupervised text mining as applied to SEC reports. We demonstrate the identification of terms, the time dimension, and correlation across topics by the topic model. Our analysis confirmed expectations about COVID-19’s impact, personnel shortages, and fuel. It also revealed common themes regarding the risks involved in international trade and perceived regulatory risks. We conclude with the supply chain management risks identified and discuss means of mitigation.

Delivering the precision oncology paradigm: reduced R&D costs and greater return on investment through a companion diagnostic informed precision oncology medicines approach

BackgroundPrecision oncology medicines represent a paradigm shift compared to non-precision oncology medicines in cancer therapy, in some situations delivering more clinical benefit, and potentially lowering healthcare costs. We determined whether employing a companion diagnostic (CDx) approach during oncology medicines development delivers effective therapies that are within the cost constraints of current health systems. R&D costs of developing a medicine are subject to debate, with average estimates ranging from $765 million (m) to $4.6 billion (b). Our aim was to determine whether precision oncology medicines are cheaper to bring from R&D to market; a secondary goal was to determine whether precision oncology medicines have a greater return on investment (ROI).MethodData on oncology medicines approved between 1997 and 2020 by the US Food and Drug Administration (FDA) were analysed from the Securities and Exchange Commission (SEC) filings. Data were compiled from 10-K, 10-Q, and 20-F financial performance filings on medicines’ development costs through their R&D lifetime. Clinical trial data were split into clinical trial phases 1–3 and probability of success (POS) of trials was calculated, along with preclinical costs. Cost-of-capital (CoC) approach was applied and, if appropriate, a tax rebate was subtracted from the total.ResultsData on 42 precision and 29 non-precision oncology medicines from 56 companies listed by the National Cancer Institute which had complete data available were analysed. Estimated mean cost to deliver a new oncology medicine was $4.4b (95% CI, $3.6–5.2b). Costs to bring a precision oncology medicine to market were $1.1b less ($3.5b; 95% CI, $2.7–4.5b) compared to non-precision oncology medicines ($4.6b; 95% CI, $3.5–6.1b). The key driver of costs was POS of clinical trials, accounting for a difference of $591.3 m. Additional data analysis illustrated that there was a 27% increase in return on investment (ROI) of precision oncology medicines over non-precision oncology medicines.ConclusionOur results provide an accurate estimate of the R&D spend required to bring an oncology medicine to market. Deployment of a CDx at the earliest stage substantially lowers the cost associated with oncology medicines development, potentially making them available to more patients, while staying within the cost constraints of cancer health systems.

Money market reforms:The effect on the commercial paper market

This study examines the effects of the 2016 Securities and Exchange Commission (SEC) reforms of Money Market Funds (MMFs) on the commercial paper market. By exploiting the differential time effect, we document a rise in the commercial paper (CP) rates. The rise in CP rates is more pronounced when the shadow floating NAV period starts and is similar across different types of commercial paper. Our cross-sectional analysis finds support for relationship-based lending in both commercial paper holdings and rates. We find that big issuers experienced a decrease and small issuers observed an increase in commercial paper outstanding from MMFs in the post-period. We find no evidence that rates vary across the size of the issuer in the post-period. Finally, financial institutions pay higher rates in the post-period than non-financial institutions.

Green Funds in a Gray Area


 
 
 Environmental, Social, and Governance (ESG) funds face tremendous skepticism regarding their impact relative to investor perceptions. In fact, several figures, including media commentators and asset management leaders, have sounded the alarm on ESG investing. They believe investors, especially retail investors, are being misled by funds’ names and largely unhelpful disclosures, and that some fund managers are exaggerating their ESG practices in the name of attracting investors’ money. The Securities and Exchange Commission (SEC) has documented evidence of misleading statements regarding ESG investing processes and has brought enforcement actions against companies for making false claims in their disclosures. In an effort to address the lack of standardization and clarity in the ESG fund industry, the SEC proposed two rules in May 2022 that would change the naming and disclosure requirements for ESG funds.
 To examine how ESG funds are naming themselves and disclosing key ESG information, this Note aggregates data collected from the twenty largest ESG mutual funds and exchange-traded funds (ETFs). Based on an analysis of this data—which simulates an investor’s experience attempting to identify which ESG funds best align with their objectives—this Note derives quantitative and qualitative takeaways. The main conclusion is that ESG fund names are often vague and misleading, and neither their names nor their accompanying disclosures describe the funds’ investment strategies in a manner retail investors can meaningfully understand and use to make fully informed investment decisions. This Note calls this phenomenon the “ESG fund labeling problem.”
 
 
 
 In addition to analyzing the ESG fund labeling problem and its impact on retail investors, this Note considers whether the SEC’s two proposed rules from May 2022 will be successful in abating the ESG fund labeling problem. Ultimately, this Note concludes that the proposed rules fall short of meeting investors’ needs in key areas and proposes modifications the SEC can employ to further resolve the ESG fund labeling problem and reduce investor confusion.
 
 
 
 
 

Financial Health of Private Equity-Backed Groups: Perspectives From Eye Care.

In private equity (PE) buyouts of medical practices, it is common for the PE firm to raise significant levels of debt in order to finance the purchase. This debt is subsequently shouldered by the acquired practice(s). There remains a scarcity of literature quantifying the effect of PE acquisition on the subsequent financial performance of eye care practices. We aim to identify and characterize debt valuations of ophthalmology and optometry private equity-backed group (OPEG) practices, which serve as an indicator of practice financial performance. A cross-sectional study from March 2017 to March 2022 was conducted using business development company (BDC) quarterly/annual filings to the Securities and Exchange Commission (SEC). The 2021 BDC Report was used to identify all BDCs actively filing annual reports (Form 10-Ks) and quarterly reports (Form 10-Qs) in the United States in 2021. The public filings of BDCs lending to OPEGs were searched from the inception of the OPEG's debt instrument in a BDC's portfolio and the amortized cost and fair value of each debt instrument were tabulated. A panel linear regression was used to evaluate temporal changes in OPEG valuations. A total of 2,997 practice locations affiliated with 14 unique OPEGs and 17 BDCs were identified over the study period. Debt valuations of OPEGs decreased by 0.46% per quarter over the study period (95% CI: -0.88 to -0.03, P = 0.036). In the COVID-19 pre-vaccine period (March 2020 to December 2020), there was an excess (additional) 4.93% decrease in debt valuations (95% CI: -8.63 to -1.24, P = 0.010) when compared to pre-pandemic debt valuations (March 2017 to December 2019). Effects of COVID-19 on valuations stabilized during the pandemic post-vaccine period (February 2021 to March 2022), with no change in excess debt valuation compared to pre-pandemic baseline (0.60, 95% CI: -4.59 to 5.78, P = 0.822). There was an increase in practices that reported average discounted debt valuations from 20 practices (1.6%) associated with one OPEG to 1,213 practices (40.5%) associated with nine OPEGs (including 100% of newly acquired practices), despite the stabilization of COVID-19-related excess (additional) debt. Debt valuations of eye care practices have declined significantly post-PE investment from March 2017 to March 2022, suggesting that the financial health of these groups is volatile and vulnerable to economic contractions such as the COVID-19 pandemic. Eye care practice owners must consider long-term financial risks and impacts of subsequent patient care when selling their practice to a private equity group. Future research should assess the impact of secondary transactions of OPEGs on the financial health of practices, practitioner lifestyle, and patient outcomes.