Warren Buffett with Berkshire Hathaway, Inc. and Jeff Bezos with Amazon.com Inc. have each developed their respective companies into successful multibillion dollar corporate enterprises. Their personal wealth based on stock ownership in the companies they founded positions these men as two of the wealthiest individuals in the world. As CEOs whose outlooks, comments and actions have the power to move markets, Buffett and Bezos command the attention of shareholders, investors, business leaders, politicians and other market makers from around the world. A perusal and interpretation of their shareholder letters will certainly provide some insight into the workings of two of the greatest business minds ever. Unlike annual reports, which rely on historical financial data in formats mandated by the SEC, no requirements exist regarding style, content and structure of a shareholder letter.
{"title":"Review and Analysis of All Shareholder Letters from Warren Buffett and Jeff Bezos","authors":"Jiaan Mooers","doi":"10.2139/ssrn.3584336","DOIUrl":"https://doi.org/10.2139/ssrn.3584336","url":null,"abstract":"Warren Buffett with Berkshire Hathaway, Inc. and Jeff Bezos with Amazon.com Inc. have each developed their respective companies into successful multibillion dollar corporate enterprises. Their personal wealth based on stock ownership in the companies they founded positions these men as two of the wealthiest individuals in the world. As CEOs whose outlooks, comments and actions have the power to move markets, Buffett and Bezos command the attention of shareholders, investors, business leaders, politicians and other market makers from around the world. A perusal and interpretation of their shareholder letters will certainly provide some insight into the workings of two of the greatest business minds ever. Unlike annual reports, which rely on historical financial data in formats mandated by the SEC, no requirements exist regarding style, content and structure of a shareholder letter.","PeriodicalId":204440,"journal":{"name":"Corporate Governance & Finance eJournal","volume":"19 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-04-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123521716","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using a sample of 814 transcripts from 2011 to 2018, we examine information within merger and acquisition conference calls. Textual analysis reveals significant differences between the content of M&A call transcripts and both contemporaneous corporate press releases and earnings conference calls. We find participation of target executive types in M&A calls is related to payment choice and consistent with managerial incentives. Appearances of target executives are associated with a negative market reaction which is attributed to retention of these executives. We also identify a negative relation between textual sentiment and market reaction consistent with a response to higher levels of information asymmetry. Greater quantitative information, however, is positively related to the market reaction of M&A calls. We develop an M&A motive dictionary to identify financial and strategic content within call transcripts. Consistent with prior literature on merger motivation, deals with more finance (strategy) oriented words have a higher (lower) market reaction. Overall, our results show that deal-related textual analysis explains a highly significant and economically important component of gains/losses to acquirers.
{"title":"What’s Really in a Deal? Evidence from Textual Analysis of M&A Conference Calls","authors":"Wenyao Hu, Thomas D. Shohfi, Runzu Wang","doi":"10.2139/ssrn.3292343","DOIUrl":"https://doi.org/10.2139/ssrn.3292343","url":null,"abstract":"Using a sample of 814 transcripts from 2011 to 2018, we examine information within merger and acquisition conference calls. Textual analysis reveals significant differences between the content of M&A call transcripts and both contemporaneous corporate press releases and earnings conference calls. We find participation of target executive types in M&A calls is related to payment choice and consistent with managerial incentives. Appearances of target executives are associated with a negative market reaction which is attributed to retention of these executives. We also identify a negative relation between textual sentiment and market reaction consistent with a response to higher levels of information asymmetry. Greater quantitative information, however, is positively related to the market reaction of M&A calls. We develop an M&A motive dictionary to identify financial and strategic content within call transcripts. Consistent with prior literature on merger motivation, deals with more finance (strategy) oriented words have a higher (lower) market reaction. Overall, our results show that deal-related textual analysis explains a highly significant and economically important component of gains/losses to acquirers.","PeriodicalId":204440,"journal":{"name":"Corporate Governance & Finance eJournal","volume":"16 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-04-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126639910","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We investigate the impact CSR on the shareholder wealth effects of FDI announcements during 2003-2014 using a sample of 2,488 firms from 48 home countries investing into 121 host countries. We find that firms with superior CSR performance do not experience a significant stock market reaction to FDI announcements. Hence, we do not find empirical support for either the stakeholder value maximization view or the shareholder expense view of CSR. We propose explanations for the lack of a significant share price reaction.
{"title":"Corporate Social Responsibility, Foreign Direct Investment, and Shareholder Value","authors":"Mei Liu, A. Marshall, Patrick McColgan","doi":"10.2139/ssrn.3576213","DOIUrl":"https://doi.org/10.2139/ssrn.3576213","url":null,"abstract":"We investigate the impact CSR on the shareholder wealth effects of FDI announcements during 2003-2014 using a sample of 2,488 firms from 48 home countries investing into 121 host countries. We find that firms with superior CSR performance do not experience a significant stock market reaction to FDI announcements. Hence, we do not find empirical support for either the stakeholder value maximization view or the shareholder expense view of CSR. We propose explanations for the lack of a significant share price reaction.","PeriodicalId":204440,"journal":{"name":"Corporate Governance & Finance eJournal","volume":"33 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-04-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121181707","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We find that shareholder turnout at the general meeting of Norwegian public firms varies between 11% and 95%, being 59% on average. This turnout behavior implies that majority control requires less than one third of the average firm’s shares, and that attending shareholders vote for 1.7 times the shares they own. Turnout is higher when the largest shareholder is foreign, the firm is small, the debt is low, and option compensation is on the agenda. This evidence suggests that shareholders consider the general meeting a more important monitoring device the more serious the potential conflicts of interest in the firm.
{"title":"The Effect of Shareholder Turnout on Voting Rights and Separation","authors":"Øyvind Bøhren, S. Christophersen, Simen Lerfaldet","doi":"10.2139/ssrn.3555404","DOIUrl":"https://doi.org/10.2139/ssrn.3555404","url":null,"abstract":"We find that shareholder turnout at the general meeting of Norwegian public firms varies between 11% and 95%, being 59% on average. This turnout behavior implies that majority control requires less than one third of the average firm’s shares, and that attending shareholders vote for 1.7 times the shares they own. Turnout is higher when the largest shareholder is foreign, the firm is small, the debt is low, and option compensation is on the agenda. This evidence suggests that shareholders consider the general meeting a more important monitoring device the more serious the potential conflicts of interest in the firm.","PeriodicalId":204440,"journal":{"name":"Corporate Governance & Finance eJournal","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-03-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129729022","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Steven Crawford, Karen K. Nelson, Brian R. Rountree
We examine whether the ratio of CEO to employee pay (the pay ratio) informs shareholder say-on-pay (SOP) votes for a broad panel of U.S. commercial banks. For the vast majority of the sample, pay ratios are substantially lower than the levels criticized in the policy debate and financial press. Nevertheless, voting dissent on SOP proposals is significantly higher for banks in the top pay ratio decile, particularly when there is high institutional ownership. Results are robust to controlling for a number of other determinants of voting dissent, including proxy advisor recommendations and information about executive compensation already disclosed in proxy statements.
{"title":"Mind the Gap: CEO-Employee Pay Ratios and Shareholder Say-on-Pay Votes","authors":"Steven Crawford, Karen K. Nelson, Brian R. Rountree","doi":"10.2139/ssrn.3088052","DOIUrl":"https://doi.org/10.2139/ssrn.3088052","url":null,"abstract":"We examine whether the ratio of CEO to employee pay (the pay ratio) informs shareholder say-on-pay (SOP) votes for a broad panel of U.S. commercial banks. For the vast majority of the sample, pay ratios are substantially lower than the levels criticized in the policy debate and financial press. Nevertheless, voting dissent on SOP proposals is significantly higher for banks in the top pay ratio decile, particularly when there is high institutional ownership. Results are robust to controlling for a number of other determinants of voting dissent, including proxy advisor recommendations and information about executive compensation already disclosed in proxy statements.","PeriodicalId":204440,"journal":{"name":"Corporate Governance & Finance eJournal","volume":"39 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-03-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134077752","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
DuckKi Cho, Lyungmae Choi, M. Hertzel, Jessie Jiaxu Wang
We show that the social capital embedded in employees’ networks contributes to firm performance. Using novel, individual-level network data, we measure a firm’s social capital derived from employees’ connections with external stakeholders. Our directed network data allow for differentiating those connections that know the employee and those that the employee knows. Results show that firms with more employee social capital perform better; the positive effect stems primarily from employees being known by others. We provide causal evidence exploiting the enactment of a government regulation that imparted a negative shock to networking with specific sectors and provide evidence on the mechanisms.
{"title":"It’s Not Who You Know — It’s Who Knows You: Employee Social Capital and Firm Performance","authors":"DuckKi Cho, Lyungmae Choi, M. Hertzel, Jessie Jiaxu Wang","doi":"10.2139/ssrn.3752197","DOIUrl":"https://doi.org/10.2139/ssrn.3752197","url":null,"abstract":"We show that the social capital embedded in employees’ networks contributes to firm performance. Using novel, individual-level network data, we measure a firm’s social capital derived from employees’ connections with external stakeholders. Our directed network data allow for differentiating those connections that know the employee and those that the employee knows. Results show that firms with more employee social capital perform better; the positive effect stems primarily from employees being known by others. We provide causal evidence exploiting the enactment of a government regulation that imparted a negative shock to networking with specific sectors and provide evidence on the mechanisms.","PeriodicalId":204440,"journal":{"name":"Corporate Governance & Finance eJournal","volume":"535 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-03-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122903183","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using a large dataset of 82,818 investments in start-up firms from December 1965 through August 2019, we document detailed descriptive statistics. The biggest group of investors are venture capital firms (about 79% of all observations). The number of all venture investments were few in the 60’s and 70’s, but peaked in the 90’s. The majority of in-state investments are found clustered in California (with the San Francisco VC Hub), Massachusetts (with the Boston VC Hub) and New York. Out-of-state investments are more widely spread-out. Returns generated from early round investing to late round decreases generally: early investors get a higher return than late stage investors, and IPO exits entail the highest return. We find that geographical proximity is significantly and positively associated with cumulative returns or annualized returns. This result holds whether we use actual distance (in km) between the VC investment firm HQ and portfolio firm HQ, or a cross-region indicator variable when the portfolio firm HQ is out-of-state as compared to VC investment firm HQ. Using both univariate as well as multivariate tests that control for other possible determinants of returns, we find that cross-region variable is a strong indicator of returns, being negative and statistically significant across all exits or only successful exits, across VC investor types, across entry timing – whether early stage or late stage, whether the VC firm HQ location is in a previously-documented VC hub or not, and whether the investment is to a previously-documented favored VC industry or not. The relation between investment proximity and returns continues to be robust even when we include additional portfolio company variables, and in a matched-sample analysis where we pair each proximate investment with a matched distant investment. We find that VC Director and other outside directors as a proportion of all Directors on the boards on portfolio companies is significantly higher, on average, for in-state and shorter distance investments as compared to out-of-state or longer distance investments, indicating better involvement by VCs in their more proximate investments. The percentage of VC-appointed and other outside directors in a portfolio company is also significantly and positively associated with both cumulative and annualized returns, indicating better governance, and better monitoring by VCs in their more proximate investments.
{"title":"Investment Proximity and Venture Capital Returns","authors":"C. Krishnan, Daniel X. Nguyen","doi":"10.2139/ssrn.3535961","DOIUrl":"https://doi.org/10.2139/ssrn.3535961","url":null,"abstract":"Using a large dataset of 82,818 investments in start-up firms from December 1965 through August 2019, we document detailed descriptive statistics. The biggest group of investors are venture capital firms (about 79% of all observations). The number of all venture investments were few in the 60’s and 70’s, but peaked in the 90’s. The majority of in-state investments are found clustered in California (with the San Francisco VC Hub), Massachusetts (with the Boston VC Hub) and New York. Out-of-state investments are more widely spread-out. Returns generated from early round investing to late round decreases generally: early investors get a higher return than late stage investors, and IPO exits entail the highest return. We find that geographical proximity is significantly and positively associated with cumulative returns or annualized returns. This result holds whether we use actual distance (in km) between the VC investment firm HQ and portfolio firm HQ, or a cross-region indicator variable when the portfolio firm HQ is out-of-state as compared to VC investment firm HQ. Using both univariate as well as multivariate tests that control for other possible determinants of returns, we find that cross-region variable is a strong indicator of returns, being negative and statistically significant across all exits or only successful exits, across VC investor types, across entry timing – whether early stage or late stage, whether the VC firm HQ location is in a previously-documented VC hub or not, and whether the investment is to a previously-documented favored VC industry or not. The relation between investment proximity and returns continues to be robust even when we include additional portfolio company variables, and in a matched-sample analysis where we pair each proximate investment with a matched distant investment. We find that VC Director and other outside directors as a proportion of all Directors on the boards on portfolio companies is significantly higher, on average, for in-state and shorter distance investments as compared to out-of-state or longer distance investments, indicating better involvement by VCs in their more proximate investments. The percentage of VC-appointed and other outside directors in a portfolio company is also significantly and positively associated with both cumulative and annualized returns, indicating better governance, and better monitoring by VCs in their more proximate investments.","PeriodicalId":204440,"journal":{"name":"Corporate Governance & Finance eJournal","volume":"280 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-03-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126616681","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper studies the cost of capital effect of a major regulatory technology, or RegTech, event: the staggered implementation of the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system of the Securities and Exchange Commission in the period from 1993 to 1996. This event represents a largely exogenous shock to corporate information dissemination technologies, resulting in a considerable reduction in information acquisition costs for investors. Using a difference-in-differences research design, we show that the cost of equity capital declines substantially after a firm switches from paper filing to mandatory electronic filing in EDGAR. The effect is stronger for small firms and firms with low analyst coverage and low institutional ownership. We identify three channels through which EDGAR affects a firm’s cost of capital: the liquidity, risk-taking, and corporate governance channels. EDGAR implementation also improves a firm’s investment efficiency significantly. We find evidence that the marginal value of a firm’s capital investment and cash is higher during the post-EDGAR period. This paper was accepted by Suraj Srinivasan, accounting. Funding: C. Lin acknowledges financial support from the National Science Foundation of China [Grant 72192841] and the Research Grants Council of the Hong Kong Special Administration Region, China [Project HKU R7054-18 and T35/710/20R]. S. Lai acknowledges financial support from the Ministry of Science and Technology, Taiwan [Grants 107-2410-H-002-038-MY3 and 110-2410-H-002-079-MY2] and the E. Sun Academic Award. X. Ma acknowledges research support from the University of Macau [Grants SRG2019-00158-FBA and MYRG2020-00259-FBA]. Supplemental Material: Data are available at https://doi.org/10.1287/mnsc.2022.4660 .
{"title":"Regtech Adoption and the Cost of Capital","authors":"Sandy Lai, Chen Lin, Xiaorong Ma","doi":"10.2139/ssrn.3683046","DOIUrl":"https://doi.org/10.2139/ssrn.3683046","url":null,"abstract":"This paper studies the cost of capital effect of a major regulatory technology, or RegTech, event: the staggered implementation of the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system of the Securities and Exchange Commission in the period from 1993 to 1996. This event represents a largely exogenous shock to corporate information dissemination technologies, resulting in a considerable reduction in information acquisition costs for investors. Using a difference-in-differences research design, we show that the cost of equity capital declines substantially after a firm switches from paper filing to mandatory electronic filing in EDGAR. The effect is stronger for small firms and firms with low analyst coverage and low institutional ownership. We identify three channels through which EDGAR affects a firm’s cost of capital: the liquidity, risk-taking, and corporate governance channels. EDGAR implementation also improves a firm’s investment efficiency significantly. We find evidence that the marginal value of a firm’s capital investment and cash is higher during the post-EDGAR period. This paper was accepted by Suraj Srinivasan, accounting. Funding: C. Lin acknowledges financial support from the National Science Foundation of China [Grant 72192841] and the Research Grants Council of the Hong Kong Special Administration Region, China [Project HKU R7054-18 and T35/710/20R]. S. Lai acknowledges financial support from the Ministry of Science and Technology, Taiwan [Grants 107-2410-H-002-038-MY3 and 110-2410-H-002-079-MY2] and the E. Sun Academic Award. X. Ma acknowledges research support from the University of Macau [Grants SRG2019-00158-FBA and MYRG2020-00259-FBA]. Supplemental Material: Data are available at https://doi.org/10.1287/mnsc.2022.4660 .","PeriodicalId":204440,"journal":{"name":"Corporate Governance & Finance eJournal","volume":"87 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-03-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117275455","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We develop a model in which feedback effects from equity markets to firms' access to external finance allow uninformed traders to profit by short selling a firm's stock while going long on its competitors. Because this strategy distorts the investment incentives of the firm targeted by short selling to the benefit of its rivals, we label it predatory stock price manipulation. Our model shows that predatory stock price manipulation leads to inefficient market concentration. Our analysis further unveils product market competition as a channel through which buy orders increase manipulation profits, providing new insights into the regulation of short sales.
{"title":"Predatory Stock Price Manipulation","authors":"R. Matta, Sergio H. Rocha, Paulo Vaz","doi":"10.2139/ssrn.3551282","DOIUrl":"https://doi.org/10.2139/ssrn.3551282","url":null,"abstract":"We develop a model in which feedback effects from equity markets to firms' access to external finance allow uninformed traders to profit by short selling a firm's stock while going long on its competitors. Because this strategy distorts the investment incentives of the firm targeted by short selling to the benefit of its rivals, we label it predatory stock price manipulation. Our model shows that predatory stock price manipulation leads to inefficient market concentration. Our analysis further unveils product market competition as a channel through which buy orders increase manipulation profits, providing new insights into the regulation of short sales.","PeriodicalId":204440,"journal":{"name":"Corporate Governance & Finance eJournal","volume":"49 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-03-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126683609","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The stated goal of the 2011 SEC Whistleblower (WB) Program introduced as part of the Dodd-Frank Act was to strengthen investor protection through greater deterrence of securities law violations and more effective regulatory enforcement. While the SEC has articulated the success of the program for detecting and prosecuting violations, there is no evidence on the effect of the program in deterring violations. In this paper, we consider the deterrent effect by examining the impact of the Program on aggressive financial reporting by U.S. firms. Despite ongoing challenges, including the high number of tips received, efforts by some managers to circumvent the new rules by muzzling whistleblowers, and potential unintended consequences of the incentives provided, we document a significant reduction in abnormal accruals following the introduction of the regulation. We observe reductions for both positive and negative abnormal accruals as well as for extreme abnormal accruals. We also predict that firms with weaker internal compliance and reporting program quality are more likely to change their reporting behavior as employees of these firms are more likely to report irregularities directly to the SEC rather than internally. Using two different proxies for the quality of a firm’s internal compliance and reporting program – ratings of a firm’s program as described in its Code of Ethics, and estimated program quality based on disclosures of ineffective whistleblower program controls under Sarbanes Oxley – we find that reductions in aggressive reporting are greater for firms with weaker internal programs. Collectively, these findings provide important large-sample evidence of significant benefits of the SEC WB Program of Dodd-Frank Act for deterring financial reporting fraud, and of the efficacy of bounty-type whistleblower programs, more generally.
{"title":"Do the SEC Whistleblower Provisions of Dodd Frank Deter Aggressive Financial Reporting?","authors":"Christine I Wiedman, Chunmei Zhu","doi":"10.2139/ssrn.3105521","DOIUrl":"https://doi.org/10.2139/ssrn.3105521","url":null,"abstract":"The stated goal of the 2011 SEC Whistleblower (WB) Program introduced as part of the Dodd-Frank Act was to strengthen investor protection through greater deterrence of securities law violations and more effective regulatory enforcement. While the SEC has articulated the success of the program for detecting and prosecuting violations, there is no evidence on the effect of the program in deterring violations. In this paper, we consider the deterrent effect by examining the impact of the Program on aggressive financial reporting by U.S. firms. Despite ongoing challenges, including the high number of tips received, efforts by some managers to circumvent the new rules by muzzling whistleblowers, and potential unintended consequences of the incentives provided, we document a significant reduction in abnormal accruals following the introduction of the regulation. We observe reductions for both positive and negative abnormal accruals as well as for extreme abnormal accruals. We also predict that firms with weaker internal compliance and reporting program quality are more likely to change their reporting behavior as employees of these firms are more likely to report irregularities directly to the SEC rather than internally. Using two different proxies for the quality of a firm’s internal compliance and reporting program – ratings of a firm’s program as described in its Code of Ethics, and estimated program quality based on disclosures of ineffective whistleblower program controls under Sarbanes Oxley – we find that reductions in aggressive reporting are greater for firms with weaker internal programs. Collectively, these findings provide important large-sample evidence of significant benefits of the SEC WB Program of Dodd-Frank Act for deterring financial reporting fraud, and of the efficacy of bounty-type whistleblower programs, more generally.","PeriodicalId":204440,"journal":{"name":"Corporate Governance & Finance eJournal","volume":"3 2","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-02-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132513138","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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