Ed deHaan

Does Voluntary Adoption of a Clawback Provision Improve Financial Reporting Quality

We examine whether financial reporting quality improves after firms voluntarily adopt a compensation clawback provision. Clawback provisions allow companies to recoup excess incentive pay in the event of an accounting restatement, and are intended to ex ante deter managers from publishing misstated accounting information and to ex post penalize managers who do so. For the period 2007-2009, our difference-in-differences analysis reveals significant improvements in both actual and perceived financial reporting quality following clawback adoption, relative to a propensity-matched set of control firms. We also find an increase in compensation for CEOs who are subject to new clawback provisions, as well as an increase in the sensitivity of cash compensation to accounting performance. In cross-sectional tests, our findings indicate that “robust�? clawback provisions, those that apply to restatements caused by either intentional or unintentional errors, have an incrementally larger impact on financial reporting quality and compensation than do clawback provisions that apply only to restatements involving fraud.

Market (In)Attention and the Strategic Scheduling and Timing of Earnings Announcements

We investigate whether managers “hide” bad news by announcing earnings during periods of low attention, or by providing less forewarning of an upcoming earnings announcement. Our findings are consistent with managers reporting bad news after market hours, on busy days, and with less advance notice, and with earnings receiving less attention in these settings. Paradoxically, our findings indicate that managers also report bad news on Fridays, but we do not find lower attention on Fridays. Further, we find negative returns when the market is notified of an upcoming Friday earnings announcement, which is consistent with investors inferring forthcoming bad news.

The Revolving Door and the SEC's Enforcement Outcomes: Initial Evidence from Civil Litigation

We provide empirical evidence on the consequences of revolving door phenomenon at the SEC. If future job opportunities make SEC lawyers increase their enforcement effort to showcase their expertise, then the revolving door phenomenon will promote more enthusiastic regulatory effort (the “human capital” hypothesis). In contrast, SEC lawyers can relax enforcement efforts in order to curry favor with prospective employers in the private sector (the “rent seeking” hypothesis”). We collect data on the career paths of 336 SEC lawyers that span 284 SEC enforcement actions against fraudulent financial reporting over the period 1990-2007. We find evidence consistent with the “human capital” hypothesis. Specifically, enforcement efforts, proxied by the fraction of losses collected as damages, the likelihood of criminal proceedings and the likelihood of naming the CEO as a defendant, are higher when the SEC lawyer leaves to join law firms that defend clients charged by the SEC. Our evidence does not support popular concerns that revolving doors undermine the SEC’s enforcement efforts. We would like to thank Jonathan Karpoff, Scott Lee and Gerald Martin for graciously sharing their SEC enforcement data. We thank the seminar participants at Fordham University for their comments. We are grateful for financial support from the Foster School of Business, Nanyang Business School, Goizueta Business School and the Whitcomb Center at Rutgers Business School. Does the Revolving Door Affect the SEC’s Enforcement Outcomes? “At a minimum, the revolving door has undermined the integrity of the SEC’s oversight on numerous occasions, and the SEC isn’t policing as aggressively as it should,” said Nick Schwellenbach, POGO’s director of investigations. 1.0 Introduction In this paper, we examine whether revolving doors are associated with compromised regulatory oversight by the SEC. In particular, we investigate whether regulatory enforcement is influenced by the future job prospects of SEC lawyers. It is commonly recognized that there exist revolving doors connecting government regulatory agencies with the firms that they regulate. These revolving doors lead to both the SEC hiring officials from firms that they regulate, as well as, SEC officials leaving to work for firms that are regulated. For instance, Peter H. Bresnan, a former Deputy Director in the SEC’s Division of Enforcement, resigned in December 2007 and joined the law firm of Simpson Thacher & Bartlett LLP. In November 2009, Mr. Bresnan filed a statement advising the SEC that he had been “retained to represent a client [name redacted (b)(7)(C)] in connection with SEC v. Bank of America Corp. (09-Civ-6892 (JSR)) (S.D.N.Y.).” An example of reverse revolving doors relates to the hiring of Robert S. Khuzami, the SEC’s director of enforcement, who was previously the general counsel of Deutsche Bank. Revolving doors are common as the SEC needs industry specific expertise to monitor and regulate its constituents effectively and regulated firms need experience and knowledge of complex regulations to minimize their cost of compliance. However, revolving doors are a problem if prior experience in industry makes SEC personnel unduly sympathetic to the industry’s interests or if the prospect of future employment makes ex-SEC personnel go easier on violations by regulated firms. The media, members of Congress, academics, former employees of the SEC and investors have all raised questions about the impact of the revolving door on the SEC’s efficacy and independence. Despite the inherent importance of the SEC’s SEC Staff’s ‘revolving door’ prompts concerns about agency’s independence” by David S. Hilzenrath. Published May 13, 2011. Available at http://www.washingtonpost.com/business/economy/sec-staffs-revolving-door-prompts-concernsabout-agencys-independence/2011/05/12/AF9F0f1G_story.html 2 The case charged Bank of America with “misleading investors about billions of dollars in bonuses that were being paid to Merrill Lynch & Co. executives at the time of its

Robo-journalism and Capital Markets

50 billion acquisition of the firm.” See the 2011 report by the Project on Government Oversight (POGO). 1 revolving door phenomenon, there is surprisingly little systematic evidence on the matter. Our paper attempts to provide such evidence. Crucial to whether revolving doors enhance or compromise regulatory effort is why the regulator is being hired by industry. If the regulator is being hired for his knowledge of the complex regulatory environment and his technical expertise, he will have an incentive to invest in his human capital to increase his future prospects in the regulated industry. Such increased investment in human capital will have a positive effect on the regulators’ performance in office (Che 1995). A similar positive effect on regulatory oversight may also arise if SEC personnel aggressively monitor constituents to signal their competence to their prospective employers in industry. In contrast, if the SEC employee is being hired for his ability to lobby decision makers at the agency, the presence of revolving doors is likely to undermine enforcement. 3 In this paper, we investigate the influence of future job opportunities of SEC employees on the SEC’s regulatory effort. In particular, we examine whether SEC employees invest in human capital that is reflected in aggressive monitoring while at the SEC to improve their future job opportunities (labeled the “human capital” hypothesis). Alternatively, the SEC employee could relax oversight of firms to increase his chance of getting a lucrative future job with potential future employers (labeled the “rent-seeking” hypothesis). We test these hypotheses by hand-collecting data on the career profiles of a sample of lawyers involved with SEC enforcement. For each lawyer that prosecuted on behalf of the SEC, we collect data on whether he left the SEC and if so the name of his future employer. The “rent-seeking” hypothesis implies that lawyers that leave the SEC to work in a private law firm, also referred to as “revolvers,” are associated with lenient or lax enforcement while at the SEC. In contrast, the “human-capital” hypothesis implies that “revolvers” will be associated with aggressive enforcement efforts while at the SEC. 3 The SEC seeks to control such potential conflict of interest via post-employment restrictions. These restrictions bar former employees from (i) appearing before the SEC; or (ii) assisting others in appearing before the SEC on matters in which they participated personally and substantially while they were at the Commission. The SEC also requires former employees to file statements when they expect to appear before the agency on behalf of outside parties for two years after leaving. The Project on Government Oversight (POGO 2011) reports that between 2006 and 2010, 219 former SEC employees filed 789 statements with the SEC declaring their intent to represent outside clients before the Commission.

Reputation Repair after a Serious Restatement

In 2014, the Associated Press (AP) began using algorithms to write articles about firms’ earnings announcements. These “robo-journalism�? articles synthesize information from firms’ press releases, analyst reports, and stock performance and are widely disseminated by major news outlets a few hours after the earnings release. The articles are available for thousands of firms on a quarterly basis, many of which previously received little or no media attention. We use AP’s staggered implementation of robo-journalism to examine the effects of media synthesis and dissemination, in a setting where the articles are devoid of private information and are largely exogenous to the firm’s earnings news and disclosure choices. We find compelling evidence that automated articles increase firms’ trading volume and liquidity. The effects are most likely driven by retail traders. We find no evidence that the articles improve or impede the speed of price discovery. Our study provides novel evidence on the impact of pure synthesis and dissemination of public information in capital markets and initial insights into the implications of automated journalism for market efficiency. An Internet Appendix with supplementary materials is available at the following URL: http://ssrn.com/abstract=2966859