Mirko Stanislav Heinle

Soft information and the stewardship value of accounting disclosure

In light of IASB’s statement to drop stewardship as a separate objective of financial accounting and the ongoing debate about increasing the disclosure of soft information, we investigate the economic consequences of publicly reported soft information from a stewardship perspective. In an LEN model we include market price as a performance measure and investigate whether the principal benefits from disclosing additional information. While the principal can only use contractible performance measures in the contract with the agent, capital market participants can only use disclosed information when pricing firm value. We find that the disclosure of information can decrease the principal’s expected net profit. This result follows from either a noisier or a less congruent market price as a consequence of disclosing additional information. Thus, we present a rationale for partial disclosure in the absence of proprietary costs or the uncertainty of information endowment.

Multistage Capital Budgeting with Delayed Consumption of Slack

Capital budgeting frequently involves multiple stages at which firms can continue or abandon ongoing projects. In this paper, we study a project requiring two stages of investment. Failure to fund Stage 1 of the investment precludes investment in Stage 2, whereas failure to fund Stage 2 results in early termination. In contrast to the existing literature, we assume that the firm can limit the managers informational rents with the early termination of the project. In this setting, we find that the firm optimally commits to a capital allocation scheme whereby it forgoes positive net present value NPV projects at Stage 1 capital rationing, whereas at Stage 2, depending on the managers previous report, it sometimes implements projects with a negative continuation NPV but in other situations forgoes implementing projects with positive continuation NPVs. This paper was accepted by Mary Barth, accounting.

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.

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.

Transient Institutional Investors, Incentives, and Disclosure

As institutional ownership increased, its influence has been investigated in both empirical and theoretical studies. Results indicate that the different horizon of institutional investors’ holdings changes the way they act as firm owners. A different stream of literature investigates how managerial incentives are influenced by the informativeness of price. Information can be impounded into price either because it is public or through trading of (institutional) investors with superior information in the company’s shares. We connect these streams of literature and build a model to show the trade-off an institutional investor is facing when holding a large fraction of a firm’s shares. Disclosing information may lead to a more informative stock price but on the other hand diminishes possible gains through trading on superior information. We predict that as the uncertainty about future cash flows increases or the liquidity in the market decreases, the firm’s level of disclosure increases.