Accounting Quality in Banking: The Role of Regulatory Interventions
Manthos D. Delis, Iftekhar Hasan, Maria Iosifidi, Lingxiang Li
Journal of Banking and Finance,
2018
Abstract
Using the full sample of U.S. banks and hand-collected data on enforcement actions over 2000–2014, we analyze the role of these interventions in promoting several aspects of accounting quality. We find that enforcement actions issued for both risk-related and accounting-related reasons lead to significant improvements in accounting quality. This improvement is consistently found for earnings smoothing, big-bath accounting, timely recognition of future loan losses, the association of loan loss provisions with future loan charge offs, loss avoidance, and cash flow predictability and earnings persistence. Most of the effects are somewhat more potent in the crisis period and survive in several sensitivity tests. Our findings highlight the imperative role of regulatory interventions in promoting bank accounting quality.
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State Enforceability of Noncompete Agreements: Regulations that Stifle Productivity!
S. Anand, Iftekhar Hasan, P. Sharma, Haizhi Wang
Human Resource Management,
No. 1,
2018
Abstract
Noncompete agreements (also known as covenants not to compete [CNCs]) are frequently used by many businesses in an attempt to maintain their competitive advantage by safeguarding their human capital and the associated business secrets. Although the choice of whether to include CNCs in employment contracts is made by firms, the real extent of their restrictiveness is determined by the state laws. In this article, we explore the effect of state‐level CNC enforceability on firm productivity. We assert that an increase in state level CNC enforceability is detrimental to firm productivity, and this relationship becomes stronger as comparable job opportunities become more concentrated in a firm's home state. On the other hand, this negative relationship is weakened as employee compensation tends to become more long‐term oriented. Results based on hierarchical linear modeling analysis of 21,134 firm‐year observations for 3,027 unique firms supported all three hypotheses.
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Managerial Stability and the Pricing of New Equity Issuances: The Effects of State Enforcement of Noncompetition Agreements
Yin-chi Liao, Bill Francis, Iftekhar Hasan, Haizhi Wang
International Review of Entrepreneurship,
No. 2,
2017
Abstract
In this paper, we empirically investigate the relationship between managerial stability induced by the legal enforcement of noncompetition agreements and the pricing of new equity issuances. Making use of the variation in the enforceability of noncompetition contracts across states in the U.S., we find that managerial stability is negatively related to underpricing and price revision for our sample of new equity issuing firms. Our results demonstrate that the stability of management is important for an issuing firm to convey its intrinsic value credibly to the market.
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Enforceability of Noncompetition Agreements and Firm Innovation: Does State Regulation Matter?
Desheng Yin, Iftekhar Hasan, Nada Kobeissi, Haizhi Wang
Innovation: Organization & Management,
No. 2,
2017
Abstract
In this study, we examine how noncompetition agreements and the mobility of human capital – a core asset of any firm – affect innovations of publicly traded firms in the United States. We find that firms in states with stricter noncompetition enforcement have fewer patent applications. We also examine patent forward citations and find that tougher enforcement of such contracts is associated with less innovative patents. Notably, we find that stronger enforcement of noncompetition agreements impedes innovation for firms facing intense industry labor mobility. High-powered, equity-based compensation positively moderates the relationship between noncompetition enforcement and innovation, but only for the quality of innovation.
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Mortgage Companies and Regulatory Arbitrage
Yuliya Demyanyk, Elena Loutskina
Journal of Financial Economics,
No. 2,
2016
Abstract
Mortgage companies (MCs) do not fall under the strict regulatory regime of depository institutions. We empirically show that this gap resulted in regulatory arbitrage and allowed bank holding companies (BHCs) to circumvent consumer compliance regulations, mitigate capital requirements, and reduce exposure to loan-related losses. Compared to bank subsidiaries, MC subsidiaries of BHCs originated riskier mortgages to borrowers with lower credit scores, lower incomes, higher loan-to-income ratios, and higher default rates. Our results imply that precrisis regulations had the capacity to mitigate the deterioration of lending standards if consistently applied and enforced for all types of intermediaries.
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Asymmetric Investment Responses to Firm-specific Uncertainty
Julian Berner, Manuel Buchholz, Lena Tonzer
Abstract
This paper analyzes how firm-specific uncertainty affects firms’ propensity to invest. We measure firm-specific uncertainty as firms’ absolute forecast errors derived from survey data of German manufacturing firms over 2007–2011. In line with the literature, our empirical findings reveal a negative impact of firm-specific uncertainty on investment. However, further results show that the investment response is asymmetric, depending on the size and direction of the forecast error. The investment propensity declines significantly if the realized situation is worse than expected. However, firms do not adjust their investment if the realized situation is better than expected, which suggests that the uncertainty effect counteracts the positive effect due to unexpectedly favorable business conditions. This can be one explanation behind the phenomenon of slow recovery in the aftermath of financial crises. Additional results show that the forecast error is highly concurrent with an ex-ante measure of firm-specific uncertainty we obtain from the survey data. Furthermore, the effect of firm-specific uncertainty is enforced for firms that face a tighter financing situation.
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Fiscal Equalization, Tax Salience, and Tax Competition
Martin Altemeyer-Bartscher
IWH Discussion Papers,
No. 3,
2014
Abstract
Jurisdictions that engage in inter-regional tax competition usually try to attenuate competitive pressures by substituting salient tax instruments with hidden ones. On this effect, we investigate the efficiency consequences of inter-regional tax competition and fiscal equalization in a federal system when taxpayers fail to optimally react on shrouded attributes of local tax policy. If the statuary tax rate is a relatively salient instrument and taxpayers pay low attention to the quality and the frequency of tax enforcement, the underlying substitution of tax instruments with the aim of reducing the perceived tax price may suppress the under-exploitation of tax bases that is typically triggered by fiscal equalization.
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Financial Constraints and Foreign Direct Investment: Firm-level Evidence
Claudia M. Buch, I. Kesternich, A. Lipponer, Monika Schnitzer
Review of World Economics,
No. 2,
2014
Abstract
Low productivity is an important barrier to the cross-border expansion of firms. But firms may also need external finance to shoulder the costs of entering foreign markets. We develop a model of multinational firms facing real and financial barriers to foreign direct investment (FDI), and we analyze their impact on the FDI decision. Theoretically, we show that financial constraints can affect highly productive firms more than firms with low productivity because the former are more likely to expand abroad. We provide empirical evidence based on a detailed dataset of German domestic and multinational firms which contains information on parent-level financial constraints as well as on the location the foreign affiliates. We find that financial factors constrain firms’ foreign investment decisions, an effect felt in particular by firms most likely to consider investing abroad. The locational information in our dataset allows exploiting cross-country differences in contract enforcement. Consistent with theory, we find that poor contract enforcement in the host country has a negative impact on FDI decisions.
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Determinants of Illegal Mexican Immigration into the US Southern Border States
A. Buehn, Stefan Eichler
Eastern Economic Journal,
No. 4,
2013
Abstract
We model illegal immigration across the US-Mexico border into Arizona, California, and Texas as an unobservable variable applying a Multiple Indicators Multiple Causes model. Using state-level data from 1985 to 2004, we test the incentives and deterrents influencing illegal immigration. Better labor market conditions in a US state and worse in Mexico encourage illegal immigration while more intense border enforcement deters it. Estimating the state-specific inflow of illegal Mexican immigrants we find that the 1994/95 peso crisis in Mexico led to significant increases in illegal immigration. US border enforcement policies in the 1990s provided temporary relief while post-9/11 re-enforcement has reduced illegal immigration.
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