Tjomme O. Rusticus

Endogeneity and Empirical Accounting Research

Abstract The discussion reinforces and expands on some of the fundamental issues about endogeneity raised by Chenhall and Moers (European Accounting Review, this issue, pp. 173–195). We focus on the econometric problems researchers encounter when investigating the performance effects of some endogenous firm choice. Our points are illustrated using the classic research question about the relation between managerial equity ownership and firm value. We consider cases where ownership is treated as an exogenous, endogenous and ‘partially’ endogenous variable. We argue treating ownership as an exogenous variable is seriously flawed. Unfortunately, when ownership is at least partially endogenous, it is necessary for empirical researchers to identify exogenous variables that are the determinants of the ownership choice. This calls for better theory to guide the empirical work.

Private Litigation Costs and Voluntary Disclosure: Evidence from the Morrison Ruling

We use a natural experiment, the Supreme Court Ruling in Morrison v. National Australia Bank and the subsequent Dodd-Frank Act, to examine whether and how expected private litigation costs affect voluntary disclosure behavior. The Morrison decision applied a presumption against extraterritoriality for all securities actions. Congress quickly responded by exempting SEC actions through the Dodd-Frank Act, with the result that Morrison eliminates only private securities actions for shares purchased on non-US exchanges. These events lowered the expected private litigation costs for foreign firms cross-listed on US exchanges. We find a deterioration in our proxies for voluntary disclosure for these firms relative to a matched sample of US firms. The effects we document are stronger for firms with weaker home country institutions and for firms that experienced a larger decline in expected private litigation costs following Morrison. The evidence is consistent with firms responding to a reduction in expected private litigation costs by reducing voluntary disclosure.