Saiying Deng

Shareholder Litigation, Reputational Loss, and Bank Loan Contracting

We examine shareholder litigation and the price and nonprice terms of bank loan contracts. After filing a lawsuit, defendant firms pay higher loan spreads and up-front charges, experience more financial covenants, and are more likely to have a collateral requirement. These findings are consistent with reputational losses associated with shareholder litigation. The magnitude of a firm’s lost market value when the lawsuit is filed is positively related to the increase in the firm’s future borrowing costs. We investigate whether the lawsuit allegations and its merit affect future bank loan terms. Our results do not appear to be affected by self-selection.

Institutional Ownership, Diversification, and Riskiness of Bank Holding Companies

We examine the relationship among the level and stability of institutional ownership, diversification, and riskiness of publicly traded bank holding companies. We find that large and stable institutional ownership is associated with a higher (lower) level of geographic, revenue, and nontraditional banking (asset) diversification and lower risk, suggesting that institutional investors are prudent and favor risk‐reducing diversification strategies. The association between institutional ownership level and diversification is more pronounced under deregulation and during the crisis, suggesting a substitution effect between regulation and market discipline, and a greater level of monitoring and/or advising by institutional investors during the crisis, respectively.

Geography and Local (Dis)Advantage: Evidence from Muni Bond Funds

We examine the relationship between the geographic location of mutual fund managers and fund performance using the unique setting of single-state municipal-bond mutual funds. We find that local managers underperform non-local muni-bond fund managers. Furthermore, we document that local muni-bond fund managers perform relatively better in states with more local funds, consistent with knowledge spillovers, business connections and networking effects associated with those areas. Locals also perform relatively better in states with higher levels of political integrity, consistent with less political pressure on local fund managers in these locations. Our results are robust to several sensitivity checks.

Geography and Local (Dis)advantage

We examine the relationship between the geographic location of mutual fund managers and fund performance using the unique setting of single-state municipal-bond mutual funds. We find that local managers underperform non-local muni-bond fund managers. Furthermore, we document that local muni-bond fund managers perform relatively better in states with more local funds, consistent with knowledge spillovers, business connections and networking effects associated with those areas. Locals also perform relatively better in states with higher levels of political integrity, consistent with less political pressure on local fund managers in these locations. Our results are robust to several sensitivity checks.

Loan Sales and Borrowers’ Accounting Conservatism: Loan Sales and Conservatism

We examine whether initial loan sales in the secondary loan market relate to borrowing firms’ accounting conservatism. We find that borrowing firms exhibit a significant decline in accounting conservatism after the initial loan sales. We show that the decline in borrower conservatism is more pronounced for firms borrowing from lenders with lower monitoring incentive and for firms with lower incentive to supply conservatism. The baseline results are robust to a battery of sensitivity tests. Collectively, we provide corroborative evidence that lead lenders’ monitoring incentive is a mechanism through which accounting conservatism is enforced in the private debt market, and that lead lenders play a more prominent role than secondary loan market participants in shaping corporate (conservative) reporting.

CEO Turnover, Information Uncertainty, and Debt Contracting

CEO turnovers are important corporate events that can lead to significant changes within the firm. We find that CEO departures are associated with a subsequent increase in bank loan financing. The negative effect that CEO departures have on borrowing costs is largely driven by forced CEO turnovers. Following such departures, firms pay higher loan spreads, see an increase in covenants, and are more likely to be subject to collateral requirements, when compared to matched non-turnover and voluntary turnover firms. Evidence suggests that asset substitution and changes in accounting information quality help to explain the observed worsened terms following forced dismissals. On the other hand, more traditional voluntary departures are unrelated to changes in price and non-price loan terms.

The SEC's Elimination of 20-F Reconciliation and the Cost of Debt

The SEC adopted a rule in December 2007 to eliminate the 20-F reconciliation requirement for foreign private issuers preparing financial statements under IFRS as issued by the IASB. We examine whether the SEC’s elimination of the 20-F reconciliation affects the cost of debt for such foreign issuers during the 2005-2008 period. On one hand, the reconciliation can provide debt holders useful information to assess firm default risk, and hence eliminating the reconciliation leads to information loss, which is associated with increased cost of debt. On the other hand, significant cost savings from not reconciling earnings and book value can enhance firm value, which decreases cost of debt. We find evidence that the interest expense ratio decreases after such firms discontinue the 20-F reconciliation. Moreover, the cost of debt reduction is driven by firms with higher pre-rule reconciliation magnitude or larger pre-rule number of reconciling items, which is consistent with cost savings dominating the information loss. Lastly, we find evidence of the information loss for firms with higher market uncertainty and limited evidence of information loss for firms with lower bank monitoring incentive. Taken together, our paper provides insight into the SEC’s decision to eliminate the 20-F reconciliation and the SEC’s consideration to adopt IFRS for U.S. domestic firms.