Walid Saffar

Auditor Choice in Politically Connected Firms

We extend recent research on the links between political connections and financial reporting by examining the role of auditor choice. Our evidence that public firms with political connections are more likely to appoint a Big 4 auditor supports the intuition that insiders in these firms are eager to improve accounting transparency to convince outside investors that they refrain from exploiting their connections to divert corporate resources. In evidence consistent with another prediction, we find that this link is stronger for connected firms with ownership structures conducive to insiders seizing private benefits at the expense of minority investors. We also find that the relation between political connections and auditor choice is stronger for firms operating in countries with relatively poor institutional infrastructure, implying that tough external monitoring by Big 4 auditors becomes more valuable for preventing diversion in these situations. Finally, we report that connected firms with Big 4 auditors exhibit less earnings management and enjoy greater transparency, higher valuations, and cheaper equity financing.

State Ownership and Debt Choice: Evidence from Privatization

Using a large sample of privatized firms, we find that state ownership is significantly positively associated with the use of bank debt financing, suggesting that privatized firms benefit from the soft budget constraint associated with state ownership. We further find that the relation is more pronounced in countries with high government ownership of banks, high corruption in bank lending, a left-oriented government, and a collectivist national culture, which provides additional support for the soft-budget-constraint view. Finally, in external validity tests, we find that state ownership affects other aspects of debt structure, such as debt maturity and debt security.

Executive Equity Risk-Taking Incentives and Firm's Choice of Debt Structure

We examine the impact of executive equity risk-taking incentives on firms’ choices of debt structure. Using a longitudinal sample of U.S. firms, we document that firms with higher sensitivity of executive compensation to stock volatility (vega) rely less on bank debt and more on public debt. We utilize the passage of FAS 123R option expensing regulation as an exogenous shock to management option compensation to account for potential endogeneity of the examined relation. In the cross-sectional analyses, we find that the documented effect of vega is amplified for firms with higher growth opportunities and more opaque financial information. The results of supplemental analyses suggest that firms with higher vega face more stringent bank loan covenants and that public debt mediates the positive relation between vega and firms’ risk-taking. We conclude that, by encouraging risk-taking, higher vega increases firms’ reliance on public debt in order to avoid more stringent bank monitoring.

Economic Policy Uncertainty and Accrual Estimates: Evidence from the Banking Industry

Policy uncertainty (PU) is an increasingly important issue in many economies. Extensive evidence indicates that higher PU is associated with future negative macroeconomic and microeconomic conditions. In this paper, we examine how PU affects banks’ accruals for loan losses. Consistent with banks signaling more expected loan losses, we document that in times of higher PU, banks make more loan loss provisions. This positive association is more pronounced for banks that were previously less prudent in their risk-taking and loan loss reserving, indicating that less prudent banks are more adversely affected by loan losses in difficult times. We also show that higher attention paid to a banks’ financial reporting strengthens the role of loan loss provisions as a signal of expected loan losses. Overall, our paper offers insight into how, in the face of PU, banks convey information about their loan portfolios to their stakeholders.

The Effect of Timely Loan Loss Recognition in the Banking System on Firms' Debt Choice

In this paper, we examine how the timeliness of loan loss recognition within the banking system affects borrowers’ debt structure. Using data from 55 countries, we find that more timely loan loss recognition reduces firms’ reliance on bank debt, consistent with firms relying less on bank debt due to more costly monitoring by banks. In addition, we find that this negative impact is more pronounced when there is stringer regulatory supervision of banks and among financially constrained and opaque firms. We further find that the negative impact is more pronounced in countries with more developed bond markets, consistent with such markets facilitating a switch from bank debt when banks impose more costly monitoring on firms.

The Role of Financial Reporting in Trade Credit: Evidence from Mandatory IFRS Adoption

We investigate the effect of mandatory IFRS adoption on trade credit, which is informal financing based largely on private information and supplier-customer dependencies. We document that firms in countries that adopt IFRS receive more trade credit from their suppliers, consistent with better financial reporting playing a role in facilitating informal financing. This increase is larger in countries with a low level of societal trust, a poor pre-IFRS-adoption information environment, and stronger legal enforcement. These cross-sectional results suggest that a reduction in information risk is one channel through which IFRS adoption increases trade credit. This increase is also larger for firms with greater exposure to foreign markets, and this finding highlights the importance of more comparable international financial reporting standards in facilitating cross-country trade credit. We also find a stronger positive effect of IFRS adoption on trade credit for firms with operations that typically need liquidity from suppliers. Finally, we find that firms in countries that adopt IFRS also extend more trade credit to their customers. Overall, our results support the notion that financial reporting can have a causal effect on trade credit.

Political Uncertainty and Cost Stickiness: Evidence from National Elections around the World

In analyzing a large panel of elections in 56 countries for the period 1989-2012, we show that political uncertainty surrounding elections can affect asymmetric cost behaviors to activity changes (i.e., cost stickiness). The asymmetry in cost behaviors is stronger during election years than in the non-election years, even after controlling for other firm-level and country-level determinants. In another series of tests, we report strong, robust evidence supporting the predictions that the importance of political uncertainty to cost stickiness is concentrated in countries with sound political, legal, and disclosure institutions and countries having populations known to exhibit low uncertainty avoidance. The results are consistent with the view that managers retain slack resources when political uncertainty is high but to be resolved soon.