Mark G. Maffett

Economic Effects of Transparency in International Equity Markets: A Review and Suggestions for Future Research

In this monograph, we discuss the existing literature on the economic effects of transparency in international equity markets, present aspects of an international setting that make it a fruitful environment for investigating these effects and suggest directions for future research.

Foreign Institutional Ownership and the Global Convergence of Financial Reporting Practices

This paper investigates whether foreign institutional investors affect the global convergence of financial reporting practices. Using several measures of reporting convergence, we show that U.S. institutional ownership is positively associated with subsequent changes in emerging market firms’ accounting comparability to their U.S. industry peers. We identify this association using an instrumental variable approach that exploits exogenous variation in U.S. institutional investment generated by the JGTRRA Act of 2003. Further, we provide evidence of a specific mechanism—the switch to a Big Four audit firm—through which U.S. institutional investors affect reporting convergence. Finally, we show that, for emerging market firms, an increase in comparability to U.S. firms is associated with an improvement in the properties of foreign analysts’ forecasts.This paper investigates whether institutional investors have a significant influence on the comparability of their investee firms’ financial reporting. Using the comparability measure developed in De Franco et al. (2011), we show that emerging market firms with a higher level of U.S. mutual fund ownership experience an increase in their financial statement comparability with their U.S. industry peers. To address the possibility of reverse causality and omitted variables, we adopt a changes-in-changes specification and an instrumental variables approach, both of which suggest changes in institutional ownership drive comparability changes. Consistent with our interpretations, we find no evidence that non-U.S. foreign institutional ownership affects firms’ comparability with their U.S. industry peers. Further, the documented comparability increase is particularly strong when U.S. mutual funds’ positions are concentrated in large blocks and have been held for over a year. Finally, we show that the appointment of independent U.S. directors to the board and audit committee and the hiring of a big-four auditing firm appear to be important channels through which U.S. institutions affect non-U.S. investees’ financial reporting practices. JEL classifications: G32; G34; G38; M41; M48

Listing Choices and Self-Regulation: The Experience of the AIM

We compare companies listing on the London AIM to regulated exchanges in the US and UK. The AIM is unique in that it is privately-regulated and relies on Nominated Advisors to provide oversight rather than traditional regulators. We find that AIM firms perform poorly on a variety of dimensions. Their post-listing returns significantly underperform stocks on other exchanges. Liquidity is low and there is evidence of substantial information asymmetry. Results are similar across subsets of firms including US firms that directly list on AIM, firms that cross list, and domestic listings. AIM firms do not appear to distinguish themselves through choice of Nomad. Failure rates are very high and there is no evidence that significant numbers develop into “highfliers” or graduate to better exchanges. AIM stocks even underperform stocks that trade on the unregulated “Pink Sheets” in the US, inconsistent with a significant bonding effect of AIM listing.

The Effects of Charge-Price Transparency Regulation on Prices in the Healthcare Industry

Using micro data on actual healthcare purchases, we provide evidence on the causal effects of charge-price transparency regulation (PTR). We find that PTR causes providers to reduce charges by approximately 6%. However, despite the strong cross-hospital correlation between charge and actual prices, these reductions do not lead to lower actual payments. Cross-sectional variation in the estimated treatment effect suggests that the reputational costs of perceived overcharging rather than increased consumer search explain the reduction in charges. Our results show that reputational concerns affect hospitals’ charge setting strategies and illustrate how the healthcare industry’s complex, heterogeneous pricing structure makes it difficult to increase consumer welfare by increasing transparency.

The Real Effects of Mandated Information on Social Responsibility in Financial Reports: Evidence from Mine-Safety Records

We examine the real effects of mandatory social-responsibility disclosures, which require SEC-registered mine owners to include their mine-safety records in their financial reports. These safety records are already publicly available elsewhere, which allows us to isolate and estimate the incremental real effects of including this information in financial reports. Comparing mines owned by SEC-registered issuers with mines that are not, we document that including safety records in financial reports decreases mining-related citations and injuries, and reduces labor productivity. Evidence from stock-market reactions and mutualfund holdings suggests that increased awareness of safety issues is a likely explanation for the observed real effects.

Equity-Market Trading Restrictions and Credit Prices: Evidence from Short-Sale Constraints Around the World

We examine how equity-market trading restrictions affect credit prices. Using short-sale constraints (SSCs) as a proxy for trading restrictions, we examine two specific sources of variation — the randomized Regulation SHO experiment and time-series variation in short-selling bans during the 2008 financial crisis. In both analyses, we find that greater SSCs are associated with significantly higher credit-default-swap (CDS) spreads. Changes in the term structure of CDS spreads suggest that this increase is attributable to a decrease in the availability of default-risk-relevant information. Further, using a default-model-prediction framework, we document that it is more difficult to accurately assess default risk when short selling is constrained, which corroborates information risk as a channel through which SSCs lead to higher credit prices.

Securities Regulation and Household Equity Ownership

Using aggregate data from national accounts, we study whether strengthening and harmonizing securities regulation across the European Union increases household equity ownership. We find a significant increase in the proportion of liquid assets invested in equity, both when a household’s own country adopts the regulation and when other countries adopt the regulation. To directly explore the mechanism through which households’ willingness to directly invest in the equity market increases, we show that the effect of securities regulation is stronger in countries where trust is low and between countries where cultural biases are most pronounced.

Pessimistic-Trading Restrictions and the Information Environment: Evidence from Short-Sale Constraints and Default Prediction around the World

We examine how constraints on pessimistic trading affect the ability to assess a firm’s likelihood of default using publicly available sources of information. Using cross-country differences in short selling as our primary empirical proxy for the ability of market participants to trade pessimistically, our results indicate that a dynamic multiperiod logit model accurately predicts 18 percentage points more actual occurrences of default in countries where short-selling is widely practiced. We find little evidence that short selling restrictions reduce the proportion of inaccurately classified non-default observations. These associations are further identified using time-series variation in the introduction of put option trading. Finally, in countries that face significant pessimistic trading constraints, we document that the direct incorporation of accounting information leads to a greater improvement in default prediction accuracy, particularly where financial reporting transparency is relatively high.We examine how pessimistic-trading restrictions, such as short-sale constraints, affect firms’ information environments. Although prior research finds that such restrictions reduce equity price informativeness, other non-equity-market-based sources of information, such as firm’s financial statements, could offset this loss of information. We assess the availability of firm-specific information based on the accuracy of a public-information-based default prediction model. We find that, while short-sale constraints both decrease the usefulness of equity-market variables for predicting firm default and increase the usefulness of equity-market variables for predicting non-defaults, the net effect of pessimistic-trading restrictions is a reduction in the informativeness of equity-market-based default predictors. Accounting and other non-equity-market-based sources of information significantly mitigate this informational cost. However, using an exogenous shock, we document that short-sale constraints are associated with higher credit spreads, which suggests that the net effect of pessimistic-trading restrictions is a reduction in the availability of firm-specific information.

The Real Effects of Mandated Non-Financial Information in Financial Reports: Evidence from Mine-Safety Records

We examine the real effects of mandatory social-responsibility disclosures, which require SEC-registered mine owners to include their mine-safety records in their financial reports. These safety records are already publicly available elsewhere, which allows us to isolate and estimate the incremental real effects of including this information in financial reports. Comparing mines owned by SEC-registered issuers with mines that are not, we document that including safety records in financial reports decreases mining-related citations and injuries, and reduces labor productivity. Evidence from stock-market reactions and mutual-fund holdings suggests that increased awareness of safety issues is a likely explanation for the observed real effects.

The Real Effects of Mandatory Dissemination of Non-Financial Information through Financial Reports

We examine the real effects of mandatory social-responsibility disclosures, which require SEC-registered mine owners to include their mine-safety records in their financial reports. These safety records are already publicly available elsewhere, which allows us to isolate and estimate the incremental real effects of including this information in financial reports. Comparing mines owned by SEC-registered issuers with mines that are not, we document that including safety records in financial reports decreases mining-related citations and injuries, and reduces labor productivity. Evidence from stock-market reactions and mutual-fund holdings suggests that increased awareness of safety issues is a likely explanation for the observed real effects.