Executive deferral plans and insider trading

We study executive equity contributions to nonqualified deferred compensation plans, which consist of the election to defer part or all of the executive's annual base salary and other cash pay into the company's stock. These transactions provide executives with an alternative channel to purchase shares in the firm while benefiting from an affirmative defense against illegal insider-trading allegations. Using a large sample of executive equity deferrals over 2000-2014, we find evidence that executives use these transactions as a means to acquire the company's stock during blackout windows. Consistent with the conjecture that deferrals can benefit from lower litigation costs that inhibit insider trades before the release of corporate news, we also find that the deferred amounts are significantly higher (lower) before the disclosure of good (bad) earnings news. These results suggest that executives can use equity deferrals to circumvent Rule 10b5 trading restrictions and generate significant returns through the timing and content of corporate disclosures around these transactions. Together, our evidence supports the recent concerns that executives might be engaging in strategic information releases around Rule 10b5 transactions

Properties of Accounting Performance Measures Used in Compensation Contracts

This paper provides an in-depth look into the properties of accounting numbers used in compensation contracts for S&P 500 firms from 2006 to 2017. Our data reveal wide variation in the accounting performance metrics used in compensation contracts, with some recent movement from bottom-line earnings-based measures to top-line measures. Investigating specific exclusions made to GAAP-based financial measures to arrive at realized compensation performances, we identify 27 different types of exclusions and document significant heterogeneity in tailoring across firms. We test whether exclusions are made to remove noise in performance measures as a way to better isolate managerial effort (efficient contracting theory) or to camouflage managerial rent extraction by modifying executive compensation parameters (managerial power theory). We find evidence consistent with both explanations

Do Companies Redact Material Information From Confidential SEC Filings? Evidence From the FAST Act

The Securities and Exchange Commission permits companies to redact proprietary information from material contract filings so long as the redacted information 1) would cause competitive harm if disclosed, and 2) the information is legally immaterial. Because these joint criteria are inherently contradictory, we examine whether legally immaterial redacted information is economically material to investors. We find that firms’ stock price discovery process is significantly slower and insider trading is significantly greater after companies file redacted contracts compared to non-redacted contracts. We then examine the impact of the 2019 FAST Act which reduced the SEC’s oversight of redacted contracts. Companies redact more frequently and insider trading (but not speed of stock price discovery) is more pronounced after the FAST Act. Taken together, these findings suggest that at least some redacted information is economically material to investors and that reducing SEC oversight of redacted information may not be in investors’ best interests

The Social Externalities of Bank Disclosure Regulation: Evidence from the Community Reinvestment Act

We investigate the impact of bank disclosure regulations on local business activities by exploiting the 2005 Community Reinvestment Act (CRA) reform, which exempted a group of banks from federal mandatory disclosure requirements for geographic loan distribution. We find that low and moderate income (LMI)-neighborhoods experience a significant decline in small business growth, small business employment, and wages following the disclosure reform. The negative impact on small businesses is particularly pronounced in LMI areas with a high proportion of racial minority population. Using hand-collected data, we also document that non-disclosing banks indeed reduce lending to LMI areas after the reform, consistent with our results being driven by the bank credit channel. Together, our findings suggest that the disclosure elimination causes negative externalities on marginalized communities that the CRA specifically targets to protect. Overall, our findings highlight the effectiveness of mandatory disclosures as a policy tool in incentivizing banks’ social behavior

Do Companies Redact Material Information From Confidential SEC Filings? Evidence From the FAST Act

The Securities and Exchange Commission permits companies to redact proprietary information from material contract filings so long as the redacted information 1) would cause competitive harm if disclosed, and 2) the information is legally immaterial. Because these joint criteria are inherently contradictory, we examine whether legally immaterial redacted information is economically material to investors. We find that firms’ stock price discovery process is significantly slower and insider trading is significantly greater after companies file redacted contracts compared to non-redacted contracts. We then examine the impact of the 2019 FAST Act which reduced the SEC’s oversight of redacted contracts. Companies redact more frequently and insider trading (but not speed of stock price discovery) is more pronounced after the FAST Act. Taken together, these findings suggest that at least some redacted information is economically material to investors and that reducing SEC oversight of redacted information may not be in investors’ best interests

The Social Externalities of Bank Disclosure Regulation: Evidence from the Community Reinvestment Act

We investigate the impact of bank disclosure regulations on local business activities by exploiting the 2005 Community Reinvestment Act (CRA) reform, which exempted a group of banks from federal mandatory disclosure requirements for geographic loan distribution. We find that low and moderate income (LMI)-neighborhoods experience a significant decline in small business growth, small business employment, and wages following the disclosure reform. The negative impact on small businesses is particularly pronounced in LMI areas with a high proportion of racial minority population. Using hand-collected data, we also document that non-disclosing banks indeed reduce lending to LMI areas after the reform, consistent with our results being driven by the bank credit channel. Together, our findings suggest that the disclosure elimination causes negative externalities on marginalized communities that the CRA specifically targets to protect. Overall, our findings highlight the effectiveness of mandatory disclosures as a policy tool in incentivizing banks’ social behavior

Corporate diversification and the cost of debt: the role of segment disclosures

Previous theoretical arguments suggest that industrial diversification provides a co-insurance effect that decreases the firm's default risk. In this paper, we endogenously estimate a firm's segment disclosure quality and investigate whether the quality of segment disclosures significantly affects bond investors' assessment of the coinsurance effect of diversification. We document that bonds issued by industrially diversified firms with high-quality segment disclosures have significantly lower yields than bonds issued by diversified firms with low-quality segment disclosures. We also find that the negative relation between industrial diversification and bond yields becomes stronger when firms improve segment disclosures as a result of FAS 131. Finally, we show that high-quality segment disclosures are associated with lower syndicated loan spreads for a subsample of loans issued by large bank syndicates, which are more likely to rely on publicly reported segment information

Determinants and Trading Performance of Equity Deferrals by Corporate Outside Directors

This study investigates the determinants and trading performance of outside directors’ equity deferrals, which represent the choice to convert part or all of their annual cash compensation into deferred company stock. Using a large sample of S&P 1500 firms that allowed directors to defer their cash fees into equity between 1999 and 2009, we find significant associations between equity deferral choices and specific features of the director compensation plans, proxies for directors’ outside wealth diversification, and future firm stock market performance. Trading performance analyses indicate that outside directors earn substantial abnormal returns from their deferrals, with a significant proportion of the deferral transactions occurring during blackout periods. These results are consistent with companies structuring director equity deferral plans to circumvent U.S. Securities and Exchange Commission Rule 10b-5’s trading restrictions

Accounting for leases and corporate investment

We examine the real effects of lease capitalization rules (i.e., standards that require firms to capitalize finance leases) on corporate investment. We show that the introduction of these rules leads to a decrease in investment, which is more pronounced for firms with high reliance on leases. We posit and find that lease capitalization affects investment via a learning channel and a contracting channel. Regarding the first channel, we argue that managers identify areas of overinvestment and activities that should be discontinued or downsized because of the information they collect and analyze to comply with lease capitalization rules. Accordingly, we find that the effect of lease capitalization is stronger when learning opportunities are higher. Regarding the second channel, we argue that lease capitalization affects investment via its effect on contracts. Accordingly, we document an increase in the likelihood of covenant breaches and a stronger decline in investment for financially constrained firms

Determinants and Trading Performance of Equity Deferrals by Corporate Outside Directors

This study investigates the determinants and trading performance of outside directors’ equity deferrals, which represent the choice to convert part or all of their annual cash compensation into deferred company stock. Using a large sample of S&P 1500 firms that allowed directors to defer their cash fees into equity between 1999 and 2009, we find significant associations between equity deferral choices and specific features of the director compensation plans, proxies for directors’ outside wealth diversification, and future firm stock market performance. Trading performance analyses indicate that outside directors earn substantial abnormal returns from their deferrals, with a significant proportion of the deferral transactions occurring during blackout periods. These results are consistent with companies structuring director equity deferral plans to circumvent U.S. Securities and Exchange Commission Rule 10b-5’s trading restrictions