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

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

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

Entrepreneurial alliances as contractual forms

Advancing upon taxonomical research on interfirm alliances, we investigate the design of entrepreneurial firms’ alliances in more fine- grained terms by focusing on the specific contractual provisions that firms negotiate into their alliance contracts. Drawing upon transaction cost arguments, we examine the determinants of the contractual complexity of collaborative agreements in the German telecommunications industry. The findings reveal that alliance contracts vary greatly in their complexity, yet contracts for non-equity alliances tend to be no more or less complex than those for equity alliances on average, which challenges the view that the latter unambiguously afford firms greater control than the former. Furthermore, multivariate findings on the roles of transaction-specific investment, relational capital, search costs, and so forth demonstrate that firms’ contractual and governance choices have distinct antecedents

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

A quantitative approach for measuring the reservoir of latent HIV-1 proviruses.

A stable latent reservoir for HIV-1 in resting CD4+ T cells is the principal barrier to a cure1-3. Curative strategies that target the reservoir are being tested4,5 and require accurate, scalable reservoir assays. The reservoir was defined with quantitative viral outgrowth assays for cells that release infectious virus after one round of T cell activation1. However, these quantitative outgrowth assays and newer assays for cells that produce viral RNA after activation6 may underestimate the reservoir size because one round of activation does not induce all proviruses7. Many studies rely on simple assays based on polymerase chain reaction to detect proviral DNA regardless of transcriptional status, but the clinical relevance of these assays is unclear, as the vast majority of proviruses are defective7-9. Here we describe a more accurate method of measuring the HIV-1 reservoir that separately quantifies intact and defective proviruses. We show that the dynamics of cells that carry intact and defective proviruses are different in vitro and in vivo. These findings have implications for targeting the intact proviruses that are a barrier to curing HIV infection