Regulation and Bonding: The Sarbanes-Oxley Act and the Flow of International Listings

In this paper, we examine the economic impact of the Sarbanes-Oxley Act (SOX) by analyzing foreign listing behavior onto U.S. and U.K. stock exchanges before and after the enactment of the Act in 2002. Using a sample of all listing events onto U.S. and U.K. exchanges from 1995-2006, we develop an exchange choice model that captures firm-level, industry-level, exchange-level and country-level listing incentives, and test whether these listing preferences changed following the enactment of the Act. After controlling for firm characteristics and other economic determinants of these firms' exchange choice, we find that the listing preferences of large foreign firms choosing between U.S. exchanges and the LSE's Main Market did not change following the enactment of Sarbanes-Oxley. In contrast, we find that the likelihood of a U.S. listing among small foreign firms choosing between the Nasdaq and LSE's Alternative Investment Market decreased following the enactment of Sarbanes-Oxley. The negative effect among small firms is consistent with these marginal companies being less able to absorb the incremental costs associated with SOX compliance. The screening of smaller firms with weaker governance attributes from U.S. exchanges is consistent with the heightened governance costs imposed by the Act increasing the bonding-related benefits of a U.S. listing

Capital Allocation and Timely Accounting Recognition of Economic Losses

This paper explores direct relations between corporate investment behavior and the timeliness of accounting recognition of economic losses (TLR) reflected in a country’s accounting regime. We explicitly investigate the extent to which TLR plays a role in disciplining the investment decisions of firm managers. Building on the idea that asymmetric verification standards underpin TLR, we hypothesize that TLR has an asymmetric impact on investment behavior that depends on whether a firm is facing a decrease or an increase in investment opportunities. Specifically, we hypothesize that the sensitivity of investment to a decline in investment opportunities is increasing in country-level TLR, consistent with more timely loss recognition disciplining managers to avoid negative net present value projects. On the other hand, we hypothesize that TLR will not influence the sensitivity of investment responses to increasing investment opportunities. Using firm-level investment decisions spanning twenty five countries, we find that investment responses to declining opportunities increases with TLR, while we find no evidence that TLR influences the sensitivity of investment to increasing investment opportunities. Our results are robust to alternative estimates of TLR, alternative estimates of investment responses to changing investment opportunities, and to controls for important country-level, industry-level, and firm-level variables that may impact firms’ investment decisions

Toward a construct of dynamic capabilities malfunction: Insights from failed Chinese entrepreneurs

This paper explores the processes and mechanisms of business failure in emerging economies. Drawing from the experiences of 50 failed entrepreneurs in China, we developed the concept of dynamic capabilities malfunction (DCM) to explain how business failure can stem from maladaptive, misallocation of attention and internal deficiencies. Our phase model explicates how exogenous and endogenous factors can interplay to contribute to DCM that ultimately led to the business closures. Another unexpected finding was that the failure occurred during the process of business transition. The implications for business failure research in emerging markets are discussed

The impact of discretionary segment reporting behavior on investor beliefs and stock prices.

This dissertation examines the determinants of and the informational and valuation consequences of discretionary segment reporting behavior. Using a simultaneous framework to control for effects of endogeneity, the first essay in this dissertation (1) identifies factors associated with variation in time-series and cross-sectional segment reporting choices and (2) investigates the effect of segment reporting choices on the precision of investor beliefs. Time-series evidence suggests that information asymmetry and poor relative valuation are factors associated with the decision to increase the number of segments reported, while cross-sectional tests document that segment reporting choices reflect a trade-off between proprietary cost-related factors and valuation-based benefits of disclosure. Using two-stage generalized least squares to control for endogeneity, a discretionary expansion of segment reporting fineness is associated with a ten percent improvement in analyst forecast accuracy and a seven percent reduction in forecast dispersion. Cross-sectional tests show that segment reporting choices have a positive (negative) influence on analyst forecast accuracy (dispersion) after controlling for other factors in the firm's information environment. The second essay examines whether a discretionary expansion of segment reporting communicates value-relevant information and, given the decision to improve disclosure, yields the positive valuation revisions hypothesized by existing disclosure models. Existing theoretical research shows that firms will improve disclosure when the benefits exceed the costs; therefore, firms that choose to improve reporting practices should experience positive valuation revisions. Consistent with extant theory, firms that choose to voluntarily expand the number of segments reported experience positive earnings forecast revisions and market-adjusted stock returns in the period surrounding the reporting increase. These positive returns reflect both the improvement in consolidated earnings expectations as well as the incremental earnings contribution of the newly reported segment. After controlling for this mean disclosure effect, the improvement in investor precision that accompanies these reporting changes also has a significant impact on stock prices. Finally, price-earnings regressions document that a dollar of expected earnings is being capitalized at a higher valuation multiple after the reporting change. The results suggest that firms with an incentive to expand disclosure garner the valuation benefits predicted by existing disclosure models.Ph.D.AccountingFinanceSocial SciencesUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/131974/2/9938511.pd

Which U.S. Market Interactions Affect CEO Pay? Evidence from UK Companies

This paper examines how different types of interactions with U.S. markets by non-U.S. firms are associated with higher level of CEO pay, greater emphasis on incentive-based compensation, and smaller pay gap with U.S. firms. Using a sample of CEOs of UK firms and using both broad cross-sectional and narrow event-window tests, we find that capital market relationship in the form of an U.S. exchange listing is related to higher UK CEO pay; however, the effect is similar when UK firms have a listing in any foreign country implying a foreign listing effect not unique to the U.S. Product market relationships measured by the extent of sales in the U.S. by UK companies are associated with higher pay, greater use of U.S.-style pay arrangements, and a reduction in the U.S.-UK pay gap. The product market effect is incremental to the effect of a U.S. exchange listing, the extent of the firm's non-U.S. foreign market interactions, and the characteristics of the executive. The U.S-UK CEO pay gap reduces in UK firms that make U.S. acquisitions. Further, the firm's use of a U.S. compensation consultant increases the sensitivity of UK pay practices to U.S. product market relationships

Globalization and Executive Compensation: An Analysis of Pay Practices in U.K. Companies *

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