Thursday, November 13, 2014

12:00 p.m.

  Buffet lunch – Main dining room, 3rd floor, Charles F. Knight Executive Education Center

1:00 p.m.

  Welcome to the conference! (Charles F. Knight Executive Eduation Center, Room 220)

  Dean Mahendra Gupta

1:15 p.m.










  Textual Analysis and International Financial Reporting:  Large Sample    Evidence

  Mark Lang, Kenan-Flagler Business School, University of North Carolina

Abstract:  We examine annual report text for over 15,000 non-US companies from 42 countries over the period 1998-2011, focusing on the length of disclosure, presence of boilerplate, comparability with US and non-US firms and complexity.  We find that textual attributes are predictably associated with regulation and incentives for more transparent disclosure, and are correlated with economic outcomes such as liquidity, institutional ownership and analyst following.  Using mandatory IFRS adoption as an exogenous shock, annual report disclosure improved in the sense that quantity of disclosure increased, boilerplate was reduced and comparability increased relative to both US and non-US firms.  Firms with the greatest improvements in financial reporting experienced the greatest improvements in economic outcomes around IFRS adoption.


  2:10 p.m. - (10-minute discussion followed by a 10-minute break)

 Discussant:  K. Ramesh, Jones Graduate School of Business, Rice University

2:30 p.m.







   A Tale of Two Regulators:  Risk Disclosures, Liquidity, and Enforcement in   the Banking Sector

  Luzi Hail, The Wharton School, University of Pennsylvania

Abstract:  This paper examines the effects of heterogeneity in regulatory supervision on firms' disclosure behavior and the ensuing capital market consequences.  The effectiveness of regulation depends not only on the written rules, but also on how regulators and the firms they regulate enforce and adhere to these rules.  We exploit the fact that banks are subject to quasi-identical risk disclosure rules under securities laws (IFRS 7) and banking regulation (Pillar 3 of the Basel II accord), but that different regulators enforce these rules at different points in time.  We find that banks substantially increase their risk disclosures upon the adoption of Pillar 3 even if they had to comply with the same requirements under IFRS 7 beforehand.  The increase is larger in countries where the banking regulator has more powers and resources and is less involved in the general oversight of securities markets.  It is also larger for banks most likely to attract regulatory scrutiny from the banking supervisor due to higher distress risk.  The improved risk disclosures translate into higher market liquidity around Pillar 3 but not around IFRS 7.  The results indicate that the success of regulation depends on the fit between regulator and regulatee and that having multiple regulators may lead to inconsistent implementation and enforcement of the same rules. 


  3:30 p.m. -  (10-minute discussion followed by a 10-minute break)

  Discussant:  Elizabeth Chuk Marshall School of Business, University of Southern California

3:50 p.m.

  Are Tax Avoidance Costs and Benefits Easily Quantified?  Evidence from    Credit Rating Agencies

  Kevin Koharki, Olin Business School, Washington University

Abstract:  This study investigates whether sophisticated information intermediaries have difficulty examining and quantifying the costs and benefits associated with tax avoidance.  Specifically, we examine whether tax avoidance obfuscates the credit rating process to the point that credit rating agencies are more likely to disagree on tax avoidance firms' overall creditworthiness.  Using a sample of initial credit ratings assigned to public debt during the 1994-2011 timeframe, we find that credit rating agencies do in fact have difficulty agreeig on the risks and rewards associated with tax avoidance, resulting in more frequent and pronounced rating agency disagreement for tax avoidance firms.  In supplemental analysis, we also show that FIN 48 disclosures further obfuscated the credit rating process, resulting in incrementally higher amounts of rating agency disagreement ex post.  Our results are consistent across a variety of tax avoidance proxies.  By highlighting that tax opacity impacts the second moment of the rating distribution (e.g., variance), our study provides an explanation as to why sophisticated information intermediaries have consistently viewed tax avoidance negatively.  In addition, our study sheds light onto the credit rating process by showing that tax opacity is not overcome during the credit rating process, potentially calling into question rating agencies effectiveness as ongoing firm monitors. 


  4:50 p.m. - (10-minute discussion)

  Discussant:  Brian Miller, Indiana University

5:00 p.m.

  Cocktails and seated dinner - the Whittemore House.


  A celebratory birthday cake for Nick will be served at dinner.


Friday, November 14, 2014

7:30 a.m.

  Continental breakfast  - John E. Simon Hall, Room 110

8:00 a.m.

  Optimal Relative Performance Evaluation

  Thomas Hemmer, Jones Graduate School of Business, Rice University

Abstract:  The theoretical prediction of a negative coefficient on positively correlated peer performance that underlies much of the empirical literature on relative performance evaluation, is commonly obtained from the special case where variance-covariance matrix of the performance measures is exogenously restricted to be independent of the evaluee's action.  Using the dynamic approach of Holmström and Milgrom (1987), I study the properties of contracts that optimally condition an agent's compensation both on his own performance and on how well he fares relative to a peer (group) when this restriction is not imposed.  I show that the variance-covariance matrix is independent of the evaluee's action if and only if the covariance is zero and relative performance evaluation therefore is not optimal.  If the covariance is non-zero, I show that the optimal contract is linear in own performance and its correlation with peer performance while, in line with the preponderance of the empirical evidence, the expected coefficient on peer performance is exactly zero.  


  9:00 a.m.  (10-minute discussion followed by a 10-minute break)

 Discussant:  Mirko Heinle, The Wharton School, University of Pennsylvania

9:20 a.m.










  Does Earnings Lockout make U.S. Multinationals Attractive to Foreign    Acquirers?

 Terry Shevlin, The Paul Merage School of Business, University of California – Irvine

Abstract:  The ability for deferral of home country taxation on multinationals' foreign earnings within the U.S. tax code creates an incentive for firms to avoid or delay repatriation of earnings to the U.S. Consistent with this notion, prior research has documented a substantial lockout effect resulting from the current U.S. worldwide tax and financial reporting systems.  We hypothesize and find that U.S. domiciled M&A target firms with more locked-out earnings are more attractive M&A targets for foreign bidders and are more likely to be acquired by foreign bidders, compared to domestic bidders.  The effect is economically significant; a standard deviation increase in our proxy for locked-out earnings is associated with a 14% relative increase in the likelihood that an acquirer is foreign.  We also examine the impact of the home country tax system of the foreign acquirers.  Because multinationals facing territorial tax systems are able to shift income to save taxes to a greater extent that firms domiciled in worldwide countries, the advantages for a foreign firm acquiring a U.S. target with locked-out earnings are potentially greater when the foreign firm operates under a territorial tax system.  We find that foreign acquirers of U.S. target firms with locked-out earnings are more likely to be residents of countries that use territorial tax systems.


 10:20 a.m.  (10-minute discussion followed by a 10-minute break)

 Discussant:  Jake Thornock, Foster School of Business, University of Washington

10:40 a.m.







 Internal Information Asymmetry, Internal Capital Markets, and Firm Value

  Xiumin Martin, Olin Business School, Washington University

Abstract:  We examine the effects of internal information asymmetry between corporate headquarters and division managers on internal capital market efficiency and firm value.  Using a novel measure of internal inofrmation asymmetry - the differential insider trading profit between division managers on top executives, we find a negative relation between internal information asymmetry and both internal capital market efficiency and firm value.  These relations are more pronounced for firms with complex information environments and with weaker corporate governance.  Higher internal information asymmetry also associates with a greater probability of divesting and with more positive shareholder wealth effects from refocusing events.  


  11:40 a.m. (10-minute discussion)

  Discussant:  Mark Maffett, Booth School of Business, The University of Chicago

12:00 p.m.

  Buffet lunch – Main dining room, 3rd floor, Charles F. Knight Executive Education Center