The Journal of Law, Finance, and Accounting (JLFA) is pleased to announce its sixth conference, that was held at the London Business School, Sussex Place Regents Park, Friday November 17th and Saturday November 18th, 2017. This conference is being organized in conjunction with the European Corporate Governance Institute (ECGI).
JLFA is an interdisciplinary journal sponsored by the NYU Stern School of Business and the NYU School of Law. It seeks to publish top-quality empirical, theoretical, and policy-oriented scholarship at the intersection of law, finance and accounting. The JLFA conference was sponsored by KPMG. Prior JLFA conferences have been held at NYU (2014), Hong Kong Polytechnic University (2015, 2017), Harvard (2015) and Northwestern University (2016).
Information
Friday, 17 November
Registration at the Ratcliffe Reception Welcome Desk
Welcome - John Armour (Oxford University) & Julian Franks (London Business School)
Chair: Joshua Ronen (New York University, Stern School of Business)
The SEC's Enforcement Record against Auditors
Speakers:
Discussant:
The SEC's Enforcement Record against Auditors
Transparency has two dimensions that financial economists and accounting experts tend to analyse separately even though they are closely related. The first dimension concerns the process of security trading: a security market is transparent insofar as its participants are aware of each others' behaviour (e.g. know current bid and ask quotes or recent transaction prices). The second dimension of transparency instead depends on the disclosure decisions of companies: it concerns how much information investors have about company 'fundamentals'. In most cases, both forms of transparency lower transaction costs, and ultimately benefit firms via lower cost of capital and/or better access to external finance. But they may also impose some costs on firms which in some cases may opt for a degree of transparency that is socially inefficient, This in turn could create a rationale for regulatory intervention. Moreover, the two types of transparency are not independent of each other: for instance, if markets are very transparent, firms may want to be less transparent.
Speakers
Discussants
Conference Documents
Coffee in R1 Lounge
Textual Disclosure in SEC Filings and Litigation Risk
Speakers:
Textual Disclosure in SEC Filings and Litigation Risk
Prior studies are quite ambivalent on the relation between disclosure and litigation risk since greater disclosure can be perceived as either ex ante deterrent or ex post misleading. I hypothesize that more information is disclosed in the non-numerical narratives in SEC filings than that has been analyzed in the extant literature. Using a comprehensive hand-collected data on federal securities class action lawsuits spanning nearly two decades, propensity-score matched sample, and widely used measures in natural language processing (NLP) that capture degree, readability and sentiments in textual disclosures, I find results consistent with the theoretical view that argues that more and difficult to comprehend disclosure is often perceived as ex post misleading, hence, precipitating litigations. After controlling for other numerical variables, these results are robust to various empirical specifications using difference-in-differences (DiD) and principal component analysis (PCA). Such findings indicate that there is a need to distinguish between more versus better disclosure.
Speakers
Conference Documents
Dark Trading at the Midpoint: Does SEC Enforcement Policy Encourage Stale Quote Arbitrage?
Speakers:
Discussant:
Dark Trading at the Midpoint: Does SEC Enforcement Policy Encourage Stale Quote Arbitrage?
Prevailing research posits that liquidity providers bypass long queue lines on exchanges by offering liquidity in dark venues with de minimis sub-penny price improvement, thus exploiting an exception to the penny quote rule. We show that (a) the SEC enforces the quote rule to prevent sub-penny queue-jumping in dark pools unless trades are “pegged” to the NBBO midpoint and (b) the documented increase in dark trading due to investor queue-jumping stems from increased midpoint trading. Although encouraging pegged orders can subject traders to stale quote arbitrage, we show it could have affected no more than 5% of our sample midpoint trades.
Speakers
Discussants
Conference Documents
Lunch in Park Restaurant Suite 1
Chair: Bernard Black (Northwestern University Law School)
Common Ownership, Competition, and Top Management Incentives
Speakers:
Discussant:
Common Ownership, Competition, and Top Management Incentives
We show that managers have stronger financial incentives to compete against rivals when an industry’s firms tend to be controlled by shareholders with concentrated stakes in the firm, and relatively few holdings in competitors. Conversely, wealth-performance sensitivities are reduced when there is more common ownership. We exploit quasi-exogenous variation in common ownership from a mutual fund trading scandal to support a causal interpretation. These findings inform a debate about the objective function of the firm.
Speakers
Discussants
Conference Documents
Debt Contract Terms and Creditor Control
Speakers:
Discussant:
Debt Contract Terms and Creditor Control
The law and finance literature characterizes debt covenants as a means to manage agency conflicts between creditors and shareholders. While both banks and bondholders make use of these covenants, they do so in quite different ways. Banks typically monitor their debtors closely and rely on financial maintenance covenants to protect their interests. When these covenants get triggered, banks can use the leverage of accelerating the loan to achieve their governance goals. This ability to monitor and renegotiate suggests that tailoring precise ex ante contract restrictions is not of paramount importance because a bank and a debtor can negotiate around those restrictions based on ex post contract conditions. Bond holders, in contrast, generally do not monitor and renegotiate with their debtors because these bond holders tend to be large groups of passive investors who face substantial collective action problems. As a consequence, ex ante restrictive terms in the contract are likely to be the primary means through which bondholders can address potential conflicts with shareholders. These differences in contracting technologies suggest that the restrictions in bond contracts are more likely to be responsive to changes in background legal rules. This paper tests this theory by treating two Delaware decisions that limited the default duties that the directors of Delaware corporations owe to their creditors as a shock to the contracting conditions for Delaware firms. Difference-in-difference and triple difference tests suggest that restrictive terms in bond contracts for Delaware firms increased in reaction to this change, while there was not a detectable shift in the strictness of loan agreements.
Speakers
Discussants
Coffee in R1 Lounge
What Drives Financial Reform? Economics and Politics of the State-Level Adoption of Municipal Bankruptcy Laws
Speakers:
Discussant:
What Drives Financial Reform? Economics and Politics of the State-Level Adoption of Municipal Bankruptcy Laws
We investigate drivers of financial reform by examining state-level adoption of municipal bankruptcy laws (Chapter 9). To guide empirical work, we present a new model where municipal bankruptcy law destroys labor union rents and expands local firms’ ability to invest. Consistent with theory, we find that the relative strength of unions vis-à-vis bondholders, courts’ efficiency, and trust in local government explain Chapter 9 adoptions over 1980-2012; similar factors explain congressional voting on municipal bankruptcy law; after adoptions, municipal bond spreads decrease, local firms invest more and perform better. Our results highlight a novel spillover channel from public to private sectors.
Speakers
Discussants
Conference Documents
Color and Credit: Race, Regulation, and the Quality of Financial Services
Speakers:
Discussant:
Color and Credit: Race, Regulation, and the Quality of Financial Services
We investigate drivers of financial reform by examining state-level adoption of municipal bankruptcy laws (Chapter 9). To guide empirical work, we present a new model where municipal bankruptcy law destroys labor union rents and expands local firms’ ability to invest. Consistent with theory, we find that the relative strength of unions vis-à-vis bondholders, courts’ efficiency, and trust in local government explain Chapter 9 adoptions over 1980-2012; similar factors explain congressional voting on municipal bankruptcy law; after adoptions, municipal bond spreads decrease, local firms invest more and perform better. Our results highlight a novel spillover channel from public to private sectors.
Speakers
Discussants
Conference Documents
Session Close
Dinner at Park Restaurant Suite 1 - Keynote speaker: Franklin Allen (Imperial Business School, Brevan Howard Centre for Financial Analysis)
Saturaday, 18 November
Coffee in R1 Lounge
Chair: John Armour (University of Oxford, Faculty of Law)
Government Intervention, Ownership Structure and Firm Value: The Case of the German Tax Reduction Act
Speakers:
Discussant:
Government Intervention, Ownership Structure and Firm Value: The Case of the German Tax Reduction Act
This paper provides causal evidence on the effect of ownership structure on firm value and on the impact of large tax incentives on the divestiture decision of equity blockholders by exploiting a quasi-experimental policy change in Germany. The 2000 Tax Reduction Act repealed corporate shareholders from capital gains taxation, whereas individual shareholders experienced only minor tax reductions. We show that stronger tax incentives to dispose shares do not necessarily reduce ownership concentration in the presence of strategic value premia as we find an increase in ownership concentration in firms controlled by a (tax exempt) corporate investor in response to the tax repeal. As the general policy of the German government was aiming at a more active market for corporate control via a more dispersed ownership structure, this result is not in line with the intentions of the policy makers. With respect to the relation between ownership structure and firm value the results from our difference-in-differences estimation suggest that the tax repeal was effective in removing market frictions and allowing for a more efficient shareholder structure: we find a positive relationship between ownership concentration and firm value.
Speakers
Discussants
Conference Documents
Organizational Complexity and Bank Loan Spreads
Speakers:
Discussant:
Organizational Complexity and Bank Loan Spreads
This study examines whether and how organizational complexity arising from the legal fragmentation of the firm into multiple entities affects the interest spread charged on bank loans and the design of loan contracts. The legal fragmentation of the firm is bound to be a consideration lenders make in determining the pricing of debt and design of contract terms because, for instance, lenders can only enter into legally enforceable agreements with specific legal entities. I document that organizational complexity is associated with higher loan spreads and the use of debt covenants and other loan terms. The relation between complexity and loan spreads is more pronounced for loan characteristics that reflects higher risk, but is attenuated by contracting mechanisms. Yet, contracts in the sample do not always include terms that mitigate contracting risks from organizational complexity. Subsequent tests are suggestive of potential channels related to credit quality and control rights.
Speakers
Discussants
Conference Documents
Coffee in R1 Lounge
Rise of Bank Competition: Evidence from Banking Deregulation in China
Speakers:
Discussant:
Rise of Bank Competition: Evidence from Banking Deregulation in China
Using proprietary loan-level data and detailed bank branch data in China, this paper investigates the effects of the 2009 bank branch deregulation on competition dynamics between new and incumbent banks and on real economic activities. Tracing out each of the loans firms borrowed, we find that new entrant banks tend to target different firms than incumbent banks (e.g., more efficient firms). Increased interbank competition leads to more relationship bank lending than transaction lending. Loans from new banks have longer maturity, better internal ratings, more third party guarantees, and lower delinquency rates. When competition pressure is higher, incumbent banks provide better loan terms, lower loan-screening standards, and have higher delinquency rates. Overall, increased interbank competition leads to increases in firm investments, employments, sales, and efficiency, especially for private firms. Moreover, interbank competition leads to greater added value of bank loans for firms which depend mainly on transaction lending than for firms which mainly borrow relationship loans.
Speakers
Discussants
Conference Documents
TBA
Speakers
Discussants
Lunch at Park Restaurant Suite 1
Speakers
Presentations
The SEC's Enforcement Record against Auditors
Transparency has two dimensions that financial economists and accounting experts tend to analyse separately even though they are closely related. The first dimension concerns the process of security trading: a security market is transparent insofar as its participants are aware of each others' behaviour (e.g. know current bid and ask quotes or recent transaction prices). The second dimension of transparency instead depends on the disclosure decisions of companies: it concerns how much information investors have about company 'fundamentals'. In most cases, both forms of transparency lower transaction costs, and ultimately benefit firms via lower cost of capital and/or better access to external finance. But they may also impose some costs on firms which in some cases may opt for a degree of transparency that is socially inefficient, This in turn could create a rationale for regulatory intervention. Moreover, the two types of transparency are not independent of each other: for instance, if markets are very transparent, firms may want to be less transparent.
Speakers
Discussants
Conference Documents
Textual Disclosure in SEC Filings and Litigation Risk
Prior studies are quite ambivalent on the relation between disclosure and litigation risk since greater disclosure can be perceived as either ex ante deterrent or ex post misleading. I hypothesize that more information is disclosed in the non-numerical narratives in SEC filings than that has been analyzed in the extant literature. Using a comprehensive hand-collected data on federal securities class action lawsuits spanning nearly two decades, propensity-score matched sample, and widely used measures in natural language processing (NLP) that capture degree, readability and sentiments in textual disclosures, I find results consistent with the theoretical view that argues that more and difficult to comprehend disclosure is often perceived as ex post misleading, hence, precipitating litigations. After controlling for other numerical variables, these results are robust to various empirical specifications using difference-in-differences (DiD) and principal component analysis (PCA). Such findings indicate that there is a need to distinguish between more versus better disclosure.
Speakers
Conference Documents
Dark Trading at the Midpoint: Does SEC Enforcement Policy Encourage Stale Quote Arbitrage?
Prevailing research posits that liquidity providers bypass long queue lines on exchanges by offering liquidity in dark venues with de minimis sub-penny price improvement, thus exploiting an exception to the penny quote rule. We show that (a) the SEC enforces the quote rule to prevent sub-penny queue-jumping in dark pools unless trades are “pegged” to the NBBO midpoint and (b) the documented increase in dark trading due to investor queue-jumping stems from increased midpoint trading. Although encouraging pegged orders can subject traders to stale quote arbitrage, we show it could have affected no more than 5% of our sample midpoint trades.
Speakers
Discussants
Conference Documents
Common Ownership, Competition, and Top Management Incentives
We show that managers have stronger financial incentives to compete against rivals when an industry’s firms tend to be controlled by shareholders with concentrated stakes in the firm, and relatively few holdings in competitors. Conversely, wealth-performance sensitivities are reduced when there is more common ownership. We exploit quasi-exogenous variation in common ownership from a mutual fund trading scandal to support a causal interpretation. These findings inform a debate about the objective function of the firm.
Speakers
Discussants
Conference Documents
Debt Contract Terms and Creditor Control
The law and finance literature characterizes debt covenants as a means to manage agency conflicts between creditors and shareholders. While both banks and bondholders make use of these covenants, they do so in quite different ways. Banks typically monitor their debtors closely and rely on financial maintenance covenants to protect their interests. When these covenants get triggered, banks can use the leverage of accelerating the loan to achieve their governance goals. This ability to monitor and renegotiate suggests that tailoring precise ex ante contract restrictions is not of paramount importance because a bank and a debtor can negotiate around those restrictions based on ex post contract conditions. Bond holders, in contrast, generally do not monitor and renegotiate with their debtors because these bond holders tend to be large groups of passive investors who face substantial collective action problems. As a consequence, ex ante restrictive terms in the contract are likely to be the primary means through which bondholders can address potential conflicts with shareholders. These differences in contracting technologies suggest that the restrictions in bond contracts are more likely to be responsive to changes in background legal rules. This paper tests this theory by treating two Delaware decisions that limited the default duties that the directors of Delaware corporations owe to their creditors as a shock to the contracting conditions for Delaware firms. Difference-in-difference and triple difference tests suggest that restrictive terms in bond contracts for Delaware firms increased in reaction to this change, while there was not a detectable shift in the strictness of loan agreements.
Speakers
Discussants
What Drives Financial Reform? Economics and Politics of the State-Level Adoption of Municipal Bankruptcy Laws
We investigate drivers of financial reform by examining state-level adoption of municipal bankruptcy laws (Chapter 9). To guide empirical work, we present a new model where municipal bankruptcy law destroys labor union rents and expands local firms’ ability to invest. Consistent with theory, we find that the relative strength of unions vis-à-vis bondholders, courts’ efficiency, and trust in local government explain Chapter 9 adoptions over 1980-2012; similar factors explain congressional voting on municipal bankruptcy law; after adoptions, municipal bond spreads decrease, local firms invest more and perform better. Our results highlight a novel spillover channel from public to private sectors.
Speakers
Discussants
Conference Documents
Color and Credit: Race, Regulation, and the Quality of Financial Services
We investigate drivers of financial reform by examining state-level adoption of municipal bankruptcy laws (Chapter 9). To guide empirical work, we present a new model where municipal bankruptcy law destroys labor union rents and expands local firms’ ability to invest. Consistent with theory, we find that the relative strength of unions vis-à-vis bondholders, courts’ efficiency, and trust in local government explain Chapter 9 adoptions over 1980-2012; similar factors explain congressional voting on municipal bankruptcy law; after adoptions, municipal bond spreads decrease, local firms invest more and perform better. Our results highlight a novel spillover channel from public to private sectors.
Speakers
Discussants
Conference Documents
Government Intervention, Ownership Structure and Firm Value: The Case of the German Tax Reduction Act
This paper provides causal evidence on the effect of ownership structure on firm value and on the impact of large tax incentives on the divestiture decision of equity blockholders by exploiting a quasi-experimental policy change in Germany. The 2000 Tax Reduction Act repealed corporate shareholders from capital gains taxation, whereas individual shareholders experienced only minor tax reductions. We show that stronger tax incentives to dispose shares do not necessarily reduce ownership concentration in the presence of strategic value premia as we find an increase in ownership concentration in firms controlled by a (tax exempt) corporate investor in response to the tax repeal. As the general policy of the German government was aiming at a more active market for corporate control via a more dispersed ownership structure, this result is not in line with the intentions of the policy makers. With respect to the relation between ownership structure and firm value the results from our difference-in-differences estimation suggest that the tax repeal was effective in removing market frictions and allowing for a more efficient shareholder structure: we find a positive relationship between ownership concentration and firm value.
Speakers
Discussants
Conference Documents
Organizational Complexity and Bank Loan Spreads
This study examines whether and how organizational complexity arising from the legal fragmentation of the firm into multiple entities affects the interest spread charged on bank loans and the design of loan contracts. The legal fragmentation of the firm is bound to be a consideration lenders make in determining the pricing of debt and design of contract terms because, for instance, lenders can only enter into legally enforceable agreements with specific legal entities. I document that organizational complexity is associated with higher loan spreads and the use of debt covenants and other loan terms. The relation between complexity and loan spreads is more pronounced for loan characteristics that reflects higher risk, but is attenuated by contracting mechanisms. Yet, contracts in the sample do not always include terms that mitigate contracting risks from organizational complexity. Subsequent tests are suggestive of potential channels related to credit quality and control rights.
Speakers
Discussants
Conference Documents
Rise of Bank Competition: Evidence from Banking Deregulation in China
Using proprietary loan-level data and detailed bank branch data in China, this paper investigates the effects of the 2009 bank branch deregulation on competition dynamics between new and incumbent banks and on real economic activities. Tracing out each of the loans firms borrowed, we find that new entrant banks tend to target different firms than incumbent banks (e.g., more efficient firms). Increased interbank competition leads to more relationship bank lending than transaction lending. Loans from new banks have longer maturity, better internal ratings, more third party guarantees, and lower delinquency rates. When competition pressure is higher, incumbent banks provide better loan terms, lower loan-screening standards, and have higher delinquency rates. Overall, increased interbank competition leads to increases in firm investments, employments, sales, and efficiency, especially for private firms. Moreover, interbank competition leads to greater added value of bank loans for firms which depend mainly on transaction lending than for firms which mainly borrow relationship loans.