Transparency, financial accounting information, and corporate governance

Audited financial statements along with supporting disclosures form the foundation of the firm-specific information set available to investors and regulators. In this article, the authors discuss economics-based research focused on the properties of accounting systems and the surrounding institutional environment important to effective governance of firms. They provide a framework for understanding the operation of accounting information in an economy, discuss a broad range of important research findings, present a conceptual framework for characterizing and measuring corporate transparency at the country level, and isolate a number of future research possibilities.Corporations - Accounting ; Stockholders ; Corporate governance

Probabilistic performance model for evaluation of a smart work zone deployment

A safe and efficient highway infrastructure is a critical component and a valuable asset in terms of its monetary value, as well as supporting the way of life and economic activities of the people it serves. In North America, performing maintenance, repair, and expansion of an aging highway infrastructure to a target level of performance while dealing with ever-increasing traffic demands creates a significant challenge in terms of road user safety and mobility. Much of the current highway infrastructure was built several decades ago and it is therefore requiring increasing levels of maintenance and rehabilitation. The cost of delays resulting from traffic congestion induced by work zones is estimated to be more than $6 billion per year. Work zone related traffic fatalities exceed more than 1000 lost lives per year in North America. Work zone related fatalities account for approximately 2.8 percent of highway fatalities in United States and 1.3 percent in Canada. While overall fatal crash rates have been steadily decreasing in both Canada and United States, work zone related fatalities have not been decreasing. Smart Work Zones are an emerging technology designed to improve the safety and mobility within work zones on highways. Smart Work Zones employ various technologies to monitor current traffic conditions and provide relevant information to road managers and road users on current traffic flow conditions and automatically provide guidance to motorists for safer and more efficient navigation of the work zone. This research examined the effects of a Smart Work Zone deployment by modeling traffic flow with and without a Smart Work Zone at the case study site in North Carolina to provide inputs into a performance analysis framework. The quantification of benefits and costs related to the deployment of a Smart Work Zone was developed in a probabilistic analysis framework model. The performance was quantified in economic terms of expected benefit cost ratio and net value realized from the deployment of a Smart Work Zone. The model considers the cost of deployment and potential savings in terms of motorist safety (fatal and injury crash reduction) as well as improvements in traveler mobility including reductions in user delays, vehicle operating costs, and emissions.The model output is a risk profile that provides a range of expected values and associated probabilities of occurrence to quantify the expected benefits while also taking into consideration the uncertainty of the most sensitive input variables. The uncertainty of input variables determined to be the most sensitive were those associated with the amount of user delay and the valuation of user delay. The next most sensitive inputs are those associated with the cost of deploying and operating the Smart Work Zone system. The model developed in this research concurs with the approach and analysis used in other models for the analysis of transportation projects. The model developed in this research provides a tool that can be used for decision making regarding the deployment of a Smart Work Zone and comparison with other transportation project alternatives. The model employs a user definable approach that enables it to be adapted to the specific conditions of a diverse range of field state conditions and has the ability to interface with several traffic flow models. When applied to a case study project on Interstate 95 in North Carolina, the model was found to be capable of providing useful and relevant results that correlated to observed performance. The case study represented one of many operating scenarios on the project, and is not necessarily representative of all the field state conditions occurring over the period of the entire deployment. The model results included a sensitivity analysis that identified the sensitivity of the outcome to uncertainty in the input values and a risk analysis that quantified the uncertainty of the predictions. The findings indicated that, at a 95 percent confidence level, the expected benefit / cost ratio of deploying a Smart Work Zone system was between 1.2 and 11.9 and the net value was between$10,000 and $225,000 per month of operation. Approximately 94 percent of the expected benefits were from savings in user delay and the remainder from savings due to improved safety, reduced emissions, and reduced vehicle operating costs. The results indicate that when applied under appropriate conditions, Smart Work Zones have the potential to provide significant benefits to road users. Under heavily congested conditions, the diversion of even a small amount of traffic to a more efficient route can provide sizable travel time improvements for all traffic.In summary, the model developed in this research was specifically developed to apply to Smart Work Zones, but in its general form could also be applied to other work zone traffic management applications. In the case study the model was applied to a single rural work zone, but the framework could be extended for an integrated analysis of multiple work zones and network analysis in an urban setting. The research provides a fundamental framework and model for the analysis of Smart Work Zones and a method to determine the sensitivity of the uncertainty of input values. The research also identifies areas for continued examination of the effects of Smart Work Zone deployment and the prediction of expected benefits

Informativeness and Timeliness of 10-K Text Similarity for Predicting Tail-Risk Comovement

We measure a bank’s connectedness by constructing a measure of its text similarity with other banks based on 10-K business description and MD&A discussions. We find that tail-risk comovement between a given bank and the banking system is increasing in the bank’s average similarity. We also construct groups of connected peer banks, finding that banks co-move significantly more in the tails with their highest similarity peers. Finally, we separate 10-K text into boilerplate and non-boilerplate components. We find that both boilerplate and non-boilerplate similarity have incremental information about future tail comovement. However, non-boilerplate similarity is significantly timelier than boilerplate, consistent with non-boilerplate similarity capturing commonalities across banks in currently evolving fundamentals and boilerplate similarity capturing commonalities in structural features that evolve slowly over time

Delayed Expected Loss Recognition and the Risk Profile of Banks

This paper investigates the extent to which delayed expected loan loss recognition (DELR) is associated with greater vulnerability of banks to three distinct dimensions of risk: (1) stock market liquidity risk, (2) downside tail risk of individual banks, and (3) codependence of downside tail risk among banks. We hypothesize that DELR increases vulnerability to downside risk by creating expected loss overhangs that threaten future capital adequacy and by degrading bank transparency, which increases financing frictions and opportunities for risk‐shifting. We find that DELR is associated with higher correlations between bank‐level illiquidity and both aggregate banking sector illiquidity and market returns (i.e., higher liquidity risks) during recessions, suggesting that high DELR banks as a group may simultaneously face elevated financing frictions and enhanced opportunities for risk‐shifting behavior in crisis periods. With respect to downside risk, we find that during recessions DELR is associated with significantly higher risk of individual banks suffering severe drops in their equity values, where this association is magnified for banks with low capital levels. Consistent with increased systemic risk, we find that DELR is associated with significantly higher codependence between downside risk of individual banks and downside risk of the banking sector. We theorize that downside risk vulnerability at the individual bank level can translate into systemic risk by virtue of DELR creating a common source of risk vulnerability across high DELR banks simultaneously, which leads to risk codependence among banks and systemic effects from banks acting as part of a herd.Peer Reviewedhttp://deepblue.lib.umich.edu/bitstream/2027.42/111770/1/joar12079.pd

Human judgments of executive teams’ human capital

We provide the first large-sample evidence on whether human-generated judgments of the human capital of a firm’s executive team are informative about future performance. Using a novel dataset from the banking industry, we find that banks with better human capital have fewer future non-performing loans and are less likely to fail. These results are robust to holding the overall ex-ante health of the bank constant and including bank fixed effects. We further find that better human capital is associated with more intense loan monitoring and timelier loan loss recognition. Finally, we find that the association between human capital and future performance is amplified when perceived human capital diverges from the bank’s overall performance and when macroeconomic uncertainty is higher

The Changing Landscape of Accrual Accounting

A fundamental property of accrual accounting is to smooth temporary timing fluctuations in operating cash flows, indicating an inherent negative correlation between accruals and cash flows. We show that the overall correlation between accruals and cash flows has dramatically declined in magnitude over the past half century and has largely disappeared in more recent years. The adjusted R 2 from regressing (changes in) accruals on (changes in) cash flows drops from about 70% (90%) in the 1960s to near zero (under 20%) in more recent years. In exploring potential reasons for the observed attenuation, we find that increases in non-timing-related accrual recognition, as proxied by one-time and nonoperating items and the frequency of loss firm-years, explain the majority of the overall decline. On the other hand, temporal changes in the matching between revenues and expenses, and the growth of intangible-intensive industries play only a limited role in explaining the observed attenuation. Finally, the relative decline of the timing role of accruals does not appear to be associated with an increase in the asymmetrically timely loss recognition role

The Informational Role of the Media in Private Lending

ABSTRACT We investigate whether a borrower's media coverage influences the syndicated loan origination and participation decisions of informationally disadvantaged lenders, loan syndicate structures, and interest spreads. In syndicated loan deals, information asymmetries can exist between lenders that have a relationship with a borrower and less informed, nonrelationship lenders competing to serve as lead arranger on a syndicated loan, and also between lead arrangers and less informed syndicate participants. Theory suggests that the aggressiveness with which less informed lenders compete for a loan deal increases in the sentiment of public information signals about a borrower. We extend this theory to syndicated loans and hypothesize that the likelihood of less informed lenders serving as the lead arranger or joining a loan syndicate is increasing in the sentiment of media‐initiated, borrower‐specific articles published prior to loan origination. We find that as media sentiment increases (1) outside, nonrelationship lenders have a higher probability of originating loans; (2) syndicate participants are less likely to have a previous relationship with the borrower or lead bank; (3) lead banks retain a lower percentage of loans; and (4) loan spreads decrease

The Informational Role of the Media in Private Lending

We investigate whether a borrower’s media coverage influences the syndicated loan origination and participation decisions of informationally disadvantaged lenders, loan syndicate structures, and interest spreads. In syndicated loan deals, information asymmetries can exist between lenders that have a relationship with a borrower and less informed, nonrelationship lenders competing to serve as lead arranger on a syndicated loan, and also between lead arrangers and less informed syndicate participants. Theory suggests that the aggressiveness with which less informed lenders compete for a loan deal increases in the sentiment of public information signals about a borrower. We extend this theory to syndicated loans and hypothesize that the likelihood of less informed lenders serving as the lead arranger or joining a loan syndicate is increasing in the sentiment of mediaâ initiated, borrowerâ specific articles published prior to loan origination. We find that as media sentiment increases (1) outside, nonrelationship lenders have a higher probability of originating loans; (2) syndicate participants are less likely to have a previous relationship with the borrower or lead bank; (3) lead banks retain a lower percentage of loans; and (4) loan spreads decrease.Peer Reviewedhttps://deepblue.lib.umich.edu/bitstream/2027.42/136338/1/joar12131_am.pdfhttps://deepblue.lib.umich.edu/bitstream/2027.42/136338/2/joar12131.pd

Hedgehog pathway responsiveness correlates with the presence of primary cilia on prostate stromal cells

<p>Abstract</p> <p>Background</p> <p>Hedgehog (Hh) signaling from the urogenital sinus (UGS) epithelium to the surrounding mesenchyme plays a critical role in regulating ductal formation and growth during prostate development. The primary cilium, a feature of most interphase vertebrate cell types, serves as a required localization domain for Hh signaling transducing proteins.</p> <p>Results</p> <p>Immunostaining revealed the presence of primary cilia in mesenchymal cells of the developing prostate. Cell-based assays of a urongenital sinus mesenchymal cell line (UGSM-2) revealed that proliferation-limiting (serum starvation and/or confluence) growth conditions promoted cilia formation and correlated with pathway activation associated with accumulation of Smoothened in primary cilia. The prostate cancer cell lines PC-3, LNCaP, and 22RV1, previously shown to lack demonstrable autocrine Hh signaling capacity, did not exhibit primary cilia even under proliferation-limiting growth conditions.</p> <p>Conclusion</p> <p>We conclude that paracrine Hedgehog signaling activity in the prostate is associated with the presence of primary cilia on stromal cells but that a role in autocrine Hh signaling remains speculative.</p

Risk and CEO turnover

This paper investigates the role played by performance risk in impacting a board’s ability to learn about a CEO’s unknown talent and influencing their decision to fire or retain a CEO. We posit that idiosyncratic stock return volatility reflects information arrival about the impact of CEO talent on firm performance, enhancing the informativeness of performance with respect to CEO talent, while systematic volatility captures aspects of return variability beyond the CEO’s control. We predict that these distinct aspects of volatility will have opposite effects on CEO turnover given their differential implications for the process of learning about CEO talent. We provide robust empirical evidence that the likelihood of CEO turnover is increasing in idiosyncratic risk and decreasing in systematic risk, after controlling for firm performance. We also predict and document that turnover-performance-sensitivity increases in idiosyncratic risk and decreases in systematic risk, consistent with the information content of performance with respect to learning about CEO’s talent increasing in idiosyncratic risk and decreasing in systematic risk. This result stands in stark contrast to the extant executive compensation literature where higher performance risk from any source is generally expected to decrease pay-performance-sensitivity due to risk aversion considerations. In our turnover setting, risk impacts the learning process, and can either increase or decrease turnover-performance-sensitivity depending on the underlying source of the volatility! Finally, we investigate relations between the threat of termination and CEO compensation, documenting that for retained CEOs, both subsequent pay-performance-sensitivity and pay levels decrease in the probability of turnover