Henry L. Friedman

Does Self-Efficacy Affect Entrepreneurial Investment?

We empirically examine the effect of self-efficacy on entrepreneurial investment choices. We identify various attributes of entrepreneurial investment and argue that higher self-efficacy is associated with more aggressive entrepreneurial investment decisions. We show that self-efficacy increases the likelihood of being a nascent entrepreneur and creating an operating business. Self-efficacy also increases the proportion of personal wealth invested in the venture and the amount of hours per week the entrepreneur devotes to the venture. These results are significant even when controlling for other known characteristics associated with entrepreneurial investment. Copyright

Influence Activities, Coalitions, and Uniform Policies

This paper examines the effects of endogenous coalition formation in a setting where agents lobby a policy-maker. Our motivating example is of insiders lobbying for weaker regulation to allow for privately beneficial but socially-wasteful diversion. Policy uniformity (e.g., one-size-fits-all rules) cause agents to free ride on each others lobbying and gives them an incentive to form lobbying coalitions, i.e., lobbies. We show that the coalition formation mechanism influences whether lobbies are formed by similar or dissimilar agents. Additionally, endogenous lobby formation causes the effects of policy uniformity and lobbying costs on aggregate lobbying activity and policy strength to be non-monotonic.

Capital market development and confidence in disclosure quality

Using a survey-based measure that directly captures beliefs about disclosure quality (SFARS) in a panel with over 1,000 country-year observations, this study examines macro-level capital market consequences of confidence in disclosure quality. Supporting construct validity, SFARS is associated with prior measures of disclosure quality, tends to decline around accounting scandals, and tends to increase around corporate reforms. Evidence from panel regressions controlling for country effects, prior levels of market development, and other plausible determinants suggests that more positive beliefs about disclosure quality are associated with credit market development, but inferences associated with equity market development are sensitive to empirical specification and variable definitions. Additional analyses find little support for the effects of SFARS on capital market development varying with other macroeconomic or institutional features.

Capital Market Development and the (Perceived) Strength of Auditing and Reporting Standards

Using a survey-based measure that directly captures beliefs about disclosure quality (SFARS) in a panel with over 1,000 country-year observations, this study examines macro-level capital market consequences of confidence in disclosure quality. Supporting construct validity, SFARS is associated with prior measures of disclosure quality, tends to decline around accounting scandals, and tends to increase around corporate reforms. Evidence from panel regressions controlling for country effects, prior levels of market development, and other plausible determinants suggests that more positive beliefs about disclosure quality are associated with credit market development, but inferences associated with equity market development are sensitive to empirical specification and variable definitions. Additional analyses find little support for the effects of SFARS on capital market development varying with other macroeconomic or institutional features.

Implications of a Multi-Purpose Reporting System on CEO and CFO Incentives and Risk Preferences

This paper presents a model in which the CEO generates productive output while the CFO oversees a reporting system that provides information useful for monitoring, decision-making, and contracting, but is also subject to costly manipulation. Because the reporting system serves multiple roles, the CEOs compensation incentives and the quality of the reporting system can be substitutes or complements. When they are substitutes, the CEOs incentive compensation is positively related to performance metric risk, firm value can be increasing in the CFOs risk aversion, and high biasing costs can reduce the positive association between firm value and CFO risk aversion. Whether they are primarily substitutes or complements can depend on the speed of decreasing returns to scale in the production function. The potential value of CEO-CFO collusion in this setting is explored in an extension.

Lobbying and Uniform Disclosure Regulation

This study examines the costs and benefits of uniform accounting regulation in the presence of heterogeneous firms that can lobby the regulator. A commitment to uniform regulation reduces economic distortions caused by lobbying by creating a free-rider problem between lobbying firms at the cost of forcing the same treatment on heterogeneous firms. Resolving this tradeoff, an institutional commitment to uniformity is socially desirable when firms are sufficiently homogeneous or the costs of lobbying to society are large. We show that the regulatory intensity for a given firm can be increasing or decreasing in the degree of uniformity, even though uniformity always reduces lobbying. Our analysis sheds light on the determinants of standard-setting institutions and their effects on corporate governance and lobbying efforts.

Financial Reporting Quality and Noise in Stock Returns: Evidence from Chinese A-B Twin Shares

We test whether public financial reporting can reduce noise trading using the setting of A-B twin shares traded in the Chinese stock markets. Using a theoretical model, we show that in the absence of noise trading, A- and B-share prices should move in synchronicity in response to innovations in fundamentals. The existence of noise trading can, however, cause return non-synchronicity. Using the A-B return non-synchronicity as a measure of noise trading, we find that A-B return non-synchronicity is negatively associated with financial reporting quality and is significantly reduced on earnings announcement dates. Our results remain robust to alternative model specifications. This paper provides the first evidence that quality financial reporting can reduce noise trading and improve price informativeness.

The Impact of Discretionary Disclosure on Financial Reporting Systems: An Extension of Bayesian Persuasion

We study how the potential for discretionary disclosure affects the way a firm designs its reporting system. In our model, the firms primary but nonexclusive concern is to induce beliefs that exceed a threshold. Such thresholds arise in numerous contexts, including investing decisions, liquidation/continuation choices, covenants, audits, impairments, listing requirements, index inclusion, credit ratings, analyst recommendations, and stress tests. The optimal reporting system is characterized by informative good reports when the threshold is high and, potentially, uninformative reports when the threshold is low. Under an optimal impairment-type reporting system, the likelihood of reported impairments and the information content of non-impairment reports both increase in the probability of the firm observing private information. We provide a novel motivation for the quiet period around an IPO and empirical predictions relating the probability of discretionary disclosure to the properties of financial reports. In extensions, we consider disclosure mandates, report manipulation, endogenous thresholds, and alternative payoff functions.

Gender Bias, Portfolio Choice, and Firm Value

This study examines whether investor-level preferences for director characteristics influence portfolio choices, using data on the U.S. holdings of non-U.S. funds. Consistent with bias-based preferences influencing portfolio allocations, funds from countries with greater gender inequality invest less and hold smaller stakes in firms with more female directors. Since variation in funds’ home-country gender biases are plausibly unrelated to the selection and performance of female directors in U.S. firms, the empirical strategy mitigates endogeneity concerns arising from estimates based on associations between market performance and gender demographics. The study contributes by linking investments to measured gender biases, and by providing evidence, through additional analysis, of potential channels through which gender bias may affect portfolio choice.

Capital Market Development, the Strength of Financial Reporting Standards, and Trust

Using a survey-based measure that directly captures beliefs about disclosure quality (SFARS) in a panel with over 1,000 country-year observations, this study examines macro-level capital market consequences of confidence in disclosure quality. Supporting construct validity, SFARS is associated with prior measures of disclosure quality, tends to decline around accounting scandals, and tends to increase around corporate reforms. Evidence from panel regressions controlling for country effects, prior levels of market development, and other plausible determinants suggests that more positive beliefs about disclosure quality are associated with credit market development, but inferences associated with equity market development are sensitive to empirical specification and variable definitions. Additional analyses find little support for the effects of SFARS on capital market development varying with other macroeconomic or institutional features.