Arbitrage andy capital markets analyst12/30/2023 ![]() This setting corroborates our inference that voluntary information sharing reduces lender holdup and alleviates financial constraints for private firms. For private firms that go public, we analyze changes in the net benefits of information sharing and study the potential estimation bias from unobservable borrower quality. These borrowers switch lenders at a 16% higher rate and receive lower loan financing costs. Despite proprietary costs, a subset of private borrowers voluntarily share private information in loan and credit underwriting agreements. To mitigate holdup by an informed incumbent lender, a private borrower may publicly share information in order to increase lender competition. A borrower can limit informational hold up by disclosing key financial metrics in its loan agreements. Idea: Banks hold an informational advantage to the market with respect to their borrowers. Information Sharing, Hold-up, and External Finance: Evidence from Private Firms (with Andrew Bird and Stephen Karolyi)) This reduction occurred despite an increase in benefits, consistent with the market rationally becoming less skeptical of firms that just meet benchmarks. Finally, we use the Sarbanes-Oxley Act as a policy experiment and find that by increasing costs, the Act reduced equilibrium earnings management by 36%. The estimated model parameters yield the percentage of manipulating firms, magnitude of manipulation, noise in manipulation, and sufficient statistics to evaluate proxies for identifying firms suspected of manipulation. ![]() We develop a new structural methodology to estimate the model and uncover the unobserved cost function. ![]() We link these two facts in a model of the earnings management decision in which the manager trades off the capital market benefits of meeting earnings benchmarks against the costs of manipulation. Two well-known stylized facts on earnings management are that the earnings surprise distribution has a discontinuity at zero, and that positive earnings surprises are associated with positive abnormal returns. Idea: To uncover the costs of earnings management, we empirically link evidence of manipulation in the earnings surprise distribution to the fact that positive earnings surprises receive positive abnormal returns. Journal of Accounting and Economics 68(2-3), 2019 Understanding the 'Numbers Game' (with Andrew Bird and Stephen Karolyi) ![]() Our findings suggest that policies designed to “level the playing field” by publicizing internal information can have significant unintended consequences by reducing the informativeness of prices for real decisions. This crowding out effect is stronger when outsiders' incentives for gathering information are stronger and for firms that rely more on external information. We find that the staggered introduction of EDGAR reduced the sensitivity of firm investment to prices, consistent with prices being less informative to managers due to the crowding out of external information gathering. By publicizing corporate filings, the SEC's EDGAR web platform reduces the cost of acquiring internal information for outsiders and so makes it relatively less attractive to gather external information. We study whether and how publicizing internal information affects the value of financial markets to the real economy. Idea: Level-the-playing-field policies that make internal information more available to market participants can crowd out information gathering by markets that is important to efficient managerial decisions. More is Less: Publicizing Information and Market Feedback (with Andrew Bird, Stephen Karolyi, and Phong Truong) Market reactions to announcements of material covenant violations when lenders have short-term incentives are 0.88% lower, suggesting that short-termism spillovers are value-decreasing for borrowers. Affected borrowers switch lenders more frequently, receive worse loan terms on future loans, and reduce investment. Further, they target relatively higher quality borrowers with which they have a prior relationship and that are less financially constrained. We find that lenders with short-termism incentives enforce material covenant violations at higher rates. To meet short-term benchmarks, lenders may alter their monitoring behavior, providing a channel for short-termism incentives to spill over into the corporate sector. Idea: Lenders manage earnings to meet short term benchmarks by enforcing contractual breaches by borrowers at a higher rate.
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