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  5. Corporate Finance: Transparency and Regulation
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Corporate Finance: Transparency and Regulation

Paper Session

Saturday, Jan. 7, 2023 2:30 PM - 4:30 PM (CST)

Sheraton New Orleans, Rhythms II
Hosted By: American Finance Association
  • Chair: Christian Leuz, University of Chicago

Regulatory Fragmentation

Joseph Kalmenovitz
,
Drexel University
Michelle Lowry
,
Drexel University
Ekaterina Volkova
,
University of Melbourne

Abstract

Regulatory fragmentation occurs when multiple federal agencies oversee a single issue. Using the full text of the Federal Register, the government’s official daily publication, we provide the first systematic evidence on the extent and costs of regulatory fragmentation. We find that fragmentation increases the firm’s costs while lowering its productivity, profitability, and growth. Moreover, it deters entry into an industry. These effects arise from regulatory redundancy and, more prominently, regulatory inconsistency between agencies. Our results uncover a new source of regulatory burden: companies pay a substantial economic price when regulatory oversight is fragmented across multiple government agencies.

Do Private Firms (Mis)Learn from the Stock Market?

Dong Yan
,
Stockholm School of Economics and CEPR

Abstract

This paper examines whether and to what extent private firms learn from the stock market. I develop a novel test strategy using the identification advantages of private firms and the industry composition of conglomerates to establish the learning channel. Using a large panel data set for the United Kingdom, I find that private firms' investment responds positively to the valuation of public firms in the same industry. The sensitivity increases with price informativeness and the extent to which firms are exposed to common shocks. Since private firms do not have their own stock prices and are less subject to agency concerns, the results are less likely to be driven by alternative mechanisms such as passive reflection or catering. To further sharpen identification, I construct a price noise measure based on public firms' unrelated minor segments and show that it positively affects the investment of private firms in the major-segment industry. The results are consistent with models featuring learning from noisy signals and are not driven by unobserved investment opportunities or industry competition. My findings suggest that the stock market can have real effects on private firms through an information-spillover channel, even when these firms do not list their shares on the stock exchanges.

Does Social Media Reduce Corporate Misconduct?

Jonas Heese
,
Harvard Business School
Joseph Pacelli
,
Harvard Business School

Abstract

In this study, we examine whether social media activity can reduce corporate misconduct. We use the staggered introduction of 3G mobile broadband access across the United States to identify exogenous increases in social media activity and test whether access to 3G reduces misconduct. We find that facilities reduce violations by 1.8% and penalties by 13% following the introduction of 3G in a local area. To validate social media activity as the underlying mechanism, we show that 3G access results in sharp increases in Tweet volume and that facilities located in areas with high Tweet volume engage in less misconduct. The effect of 3G access on misconduct is stronger for facilities of firms with a large Twitter following and concentrated in non-financial violations, such as those involving unsafe workplace conditions and inappropriate treatment of employees and customers. Overall, our results demonstrate that social media helps reduce corporate misconduct.

Discussant(s)
Constantine Nicholas Yannelis
,
University of Chicago
Matthias Breuer
,
Columbia University
Alexander Dyck
,
University of Toronto
JEL Classifications
  • G3 - Corporate Finance and Governance