Archive for the ‘Accounting & Disclosure’ Category

Updated CD&A Template Aims to Improve Communication

Posted by Matt Orsagh, CFA Institute, on Friday October 24, 2014 at 9:02 am
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Editor’s Note: Matt Orsagh is a director at CFA Institute.

In 2011, CFA Institute released the Compensation Discussion and Analysis (CD&A) Template as a tool to help companies produce a more succinct and informative CD&A that served the needs of both companies and investors. At the time there were complaints from both issuers and investors that the typical CD&A was seen by too many issuers as a compliance document that was too lengthy and too opaque to serve as the communication tool investors desired.

In the intervening years disclosures in the CD&A have improved a great deal, due in part to increased engagement between issuers and investors, a better understanding of disclosure best practices by issuers, and more willingness by some issuers to experiment with more creative ways of telling their stories.

…continue reading: Updated CD&A Template Aims to Improve Communication

Disclosure and Financial Market Regulation

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday October 19, 2014 at 8:31 am
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Editor’s Note: The following post comes to us from Luca Enriques, Allen & Overy Professor of Corporate Law at University of Oxford, Faculty of Law, and Sergio Gilotta of University of Bologna.

In our recent paper, Disclosure and Financial Market Regulation, we provide a critical overview of the role of disclosure in financial market regulation.

We begin by discussing the goals of disclosure regulation, which we identify in investor protection, agency cost reduction and price accuracy enhancement. Disclosure protects investors because (a) it gives them the information that is needed in order to make correct investment decisions, (b) it prevents them from being “exploited” by traders having superior information, and (c) it constrains managers’ and controlling shareholders’ opportunistic behavior. In this last respect, the goal of investor protection equates that of agency cost reduction.

…continue reading: Disclosure and Financial Market Regulation

SEC Enforcement Actions Regarding Section 16 Reporting Obligations

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday October 14, 2014 at 9:09 am
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Editor’s Note: The following post comes to us from John P. Kelsh, partner in the Corporate and Securities group at Sidley Austin LLP, and is based on a Sidley Austin publication by Mr. Kelsh, Paul V. Gerlach, and Holly J. Gregory.

Last month, the SEC announced that it brought enforcement actions primarily relating to Section 16(a) under the Securities Exchange Act against 34 defendants. The defendants were 13 individuals who were or had been officers or directors of public companies, five individual investors, ten investment funds/advisers and six public companies.

This post briefly discusses several noteworthy points regarding this development and also discusses practical steps that companies could consider taking in response.

…continue reading: SEC Enforcement Actions Regarding Section 16 Reporting Obligations

2014 CPA-Zicklin Index of Corporate Political Disclosure

Posted by Bruce F. Freed, Center for Political Accountability, on Tuesday October 7, 2014 at 9:17 am
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Editor’s Note: Bruce F. Freed is president and a founder of the Center for Political Accountability. This post is based on the 2014 CPA-Zicklin Index of Corporate Political Disclosure and Accountability by Mr. Freed and Sol Kwon; the full report is available here. Work from the Program on Corporate Governance about corporate political spending includes Shining Light on Corporate Political Spending by Lucian Bebchuk and Robert Jackson, discussed on the Forum here. A committee of law professors co-chaired by Bebchuk and Jackson submitted a rulemaking petition to the SEC concerning corporate political spending; that petition is discussed here.

Dozens of leading American corporations have embraced political transparency without the prodding of shareholder proposals. This is a new and important finding in the fourth annual CPA-Zicklin Index of Corporate Political Disclosure and Accountability released by the Center for Political Accountability on September 24.

At the same time, the Index found that companies that have already adopted disclosure and accountability continue to strengthen their policies, making them more robust and comprehensive. All this is happening in the face of intense opposition by several of the leading business trade associations.

…continue reading: 2014 CPA-Zicklin Index of Corporate Political Disclosure

Public Pressure and Corporate Tax Behavior

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday October 7, 2014 at 9:16 am
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Editor’s Note: The following post comes to us from Scott Dyreng of the Accounting Area at Duke University, Jeffrey Hoopes of the Department of Accounting & Management Information Systems at Ohio State University, and Jaron Wilde of the Department of Accounting at the University of Iowa.

In our paper, Public Pressure and Corporate Tax Behavior, which was recently made publicly available on SSRN, we examine whether public scrutiny related to firms’ tax avoidance activities has a significant effect on their tax avoidance behavior. In contrast to U.S. regulations that only require disclosure of significant subsidiaries, the U.K.’s Companies Act of 2006 (“Companies Act”) requires firms to disclose the name and location of all subsidiaries, regardless of size or materiality. Although the U.K. law went into effect in 2006, in 2010, ActionAid International, a global non-profit dedicated to ending poverty worldwide, discovered that approximately half of the firms in the FTSE 100 were not disclosing the name and location of all subsidiaries. ActionAid’s finding was prima facie evidence that the Companies House was not enforcing the subsidiaries disclosure requirement. More importantly, the fact that some firms chose not to comply with the law suggests that the cost of disclosing detailed information on subsidiaries was greater than the benefit of a more complete information environment for the non-compliant firms.

…continue reading: Public Pressure and Corporate Tax Behavior

Executive Gatekeepers: Useful and Divertible Governance?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday September 30, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Adair Morse of the Finance Group at the University of California, Berkeley; and Wei Wang and Serena Wu, both of Queen’s School of Business, Canada.

In our paper, Executive Gatekeepers: Useful and Divertible Governance?, which was recently made publicly available on SSRN, we study the role of executive gatekeepers in preventing governance failures, and the counter-incentive effects created by equity compensation. Specifically, we examine the following two questions. First, do executive gatekeepers actually improve governance in the average firm? Second, does the effectiveness of gatekeepers in ensuring compliance and/or reducing corporate misconduct depend on their incentive contracts?

…continue reading: Executive Gatekeepers: Useful and Divertible Governance?

Mandatory Disclosure Quality, Inside Ownership, and Cost of Capital

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday September 29, 2014 at 9:08 am
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Editor’s Note: The following post comes to us from John Core and Rodrigo Verdi of the Accounting Group at MIT, and Luzi Hail of the Department of Accounting at the University of Pennsylvania.

Whether mandatory disclosure regulation and insider ownership affect a firm’s cost of capital is an important question in financial economics. In our paper, Mandatory Disclosure Quality, Inside Ownership, and Cost of Capital, which was recently made publicly available on SSRN, we examine this question on a large global sample of more than 10,000 firms across 35 countries.

Theory predict that disclosure regulation is negatively related to the cost of capital due to two separate effects: (i) an information effect in which better disclosure improves investors’ prediction of future cash flows, or (ii) a stewardship effect in which better disclosure improves managerial alignment with shareholders and therefore increases expected cash flows. The stewardship effect is not unique to disclosure, but is also present in other governance mechanisms that increase managerial alignment such as inside ownership. As a result, these alternative alignment mechanisms potentially reinforce or substitute for the stewardship effect of disclosure. We test this argument by examining whether inside ownership is negatively associated with the cost of capital and how inside ownership affects the relation between disclosure and the cost of capital.

…continue reading: Mandatory Disclosure Quality, Inside Ownership, and Cost of Capital

Audit Committee Reporting To Shareholders: 2014 Proxy Season Update

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday September 25, 2014 at 9:07 am
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Editor’s Note: The following post comes to us from Ernst & Young, and is based on an Ernst & Young study by Allie M. Rutherford and Ruby Sharma. The complete publication is available here.

The 2014 proxy season saw significant growth in audit committee transparency. Continuing the trend of the past several years, an increased number of Fortune 100 companies are going beyond the minimum disclosures required.

These disclosures are also more robust—providing valuable perspectives on the activities of audit committees, including their oversight of external auditors.

The recent movement toward increased audit committee transparency has been encouraged by a variety of factors and entities. In addition to the ongoing disclosure effectiveness review by the US Securities and Exchange Commission (SEC) involving a holistic review of the US corporate disclosure regime, audit committee disclosures are receiving significant attention from a variety of stakeholders. These stakeholders include US and non-US regulators, investors, and policy organizations.

…continue reading: Audit Committee Reporting To Shareholders: 2014 Proxy Season Update

SEC Enforcement Actions Over Stock Transaction Reporting Obligations

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday September 21, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Ronald O. Mueller, partner in the securities regulation and corporate governance practice area of Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn alert.

On September 10, 2014, the Securities and Exchange Commission announced an unprecedented enforcement sweep against 34 companies and individuals for alleged failures to timely file with the SEC various Section 16(a) filings (Forms 3, 4 and 5) and Schedules 13D and 13G (the “September 10 actions”). [1] The September 10 actions named 13 corporate officers or directors, five individuals and 10 investment firms with beneficial ownership of publicly traded companies, and six public companies; all but one settled the claims without admitting or denying the allegations. The SEC emphasized that the filing requirements may be violated even inadvertently, without any showing of scienter. Notably, among the executives targeted by the SEC were some who had provided their employers with trading information and relied on the company to make the requisite SEC filings on their behalf.

…continue reading: SEC Enforcement Actions Over Stock Transaction Reporting Obligations

Real Effects of Frequent Financial Reporting

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday September 19, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Arthur Kraft of Cass Business School, City University London, and Rahul Vashishtha and Mohan Venkatachalam, both of the Accounting Area at Duke University.

In our paper, Real Effects of Frequent Financial Reporting, which was recently made publicly available on SSRN, we examine the impact of financial reporting frequency on firms’ investment decisions. Whether increased financial reporting frequency improves or adversely influences a manager’s investments decision is ambiguous. On the one hand, increased transparency through higher reporting frequency can beneficially affect firms’ investment decisions in two ways. First, increased transparency can reduce firms’ cost of capital and improve access to external financing, allowing firms to invest in a larger set of positive NPV projects. Second, increased transparency can improve external monitoring and help mitigate over- or under-investment stemming from managerial agency problems. On the other hand, frequent reporting can distort investment decisions. In particular, frequent reporting can cause managers to make myopic investment decisions that boost short-term performance measures at the cost of long run firm value. Which of these two forces dominate is an open empirical question that we explore in this study.

…continue reading: Real Effects of Frequent Financial Reporting

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