"Out of Site, Out of Mind? The Role of the Government-Appointed Corporate Monitor" with Lindsey Gallo and Rimmy Tomy
- Journal of Accounting Research, 61: 1633-1698. 2023
- Abstract: We study the role of a relatively new type of external firm monitor, an on-site government-appointed Corporate Monitor, and assess whether such appointments reduce firms' propensity to violate laws. Using a sample of deferred and non-prosecution agreements, we first document the determinants of Monitor-appointment. We find firms that voluntarily disclose wrongdoing and have more independent directors are less likely to have Corporate Monitors, whereas those with more severe infractions, mandated board changes, and increased cooperation requirements are more likely to have Monitors. We find such appointments are associated with an 18% - 25% reduction in violations while the Monitor is on site, however, the effect does not persist after the Monitorship ends. Using a semi-supervised machine learning method to measure changes in firms' ethics and compliance norms, we find that the reduction in violations is associated with changes in ethics and compliance that also do not persist. Finally, we document that firms under Monitorship experience a persistent reduction in innovation, highlighting a previously unexplored cost of these interventions. Overall, our results suggest that, although Corporate Monitors on site are associated with fewer violations, Monitors are less successful in changing firms' long-term behavior.
- 2022-2023 recipient of the Glen McLaughlin Prize for Research in Accounting Ethics from the Steed School of Accounting (University of Oklahoma)
- Media mentions:
- Featured on the Business Scholarship Podcast with Andrew K. Jennings: https://andrewkjennings.com/2023/09/11/lindsey-gallo-kendall-lynch-on-corporate-monitors/ or https://podcasts.apple.com/us/podcast/lindsey-gallo-kendall-lynch-on-corporate-monitors/id1470002641?i=1000627451848
“The Effect of Self-Reporting Policies on Cross-Border Investment: Evidence from the Foreign Corrupt Practices Act Enforcement Policy”
- Abstract: I study the impact of the U.S. Department of Justice’s self-reporting policy for the Foreign Corrupt Practices Act (FCPA) on cross-border investment. I find that the establishment of a policy which rewards firms for self-reporting corruption violations reduces the likelihood that FCPA-exposed acquirers engage in high-risk mergers and acquisitions. These results are more pronounced for larger acquirers, who face relatively higher penalties for FCPA violations. Consistent with firms perceiving the self-reporting policy as an increase in expected enforcement costs, I find that FCPA-exposed firms seek forms of cross-border investment where uncertainty regarding pre-existing misconduct is reduced to zero: establishing new subsidiaries. In deal-level analyses, I document additional uncertainty-reducing measures that FCPA-exposed firms take within high-risk deals during the self-reporting regime. FCPA-exposed firms increase the length of due diligence on high-risk targets, and this increase does not appear to be due to acquirers choosing relatively riskier target firms. Taken together, my findings suggest that self-reporting policies designed to curb misconduct can lead to reduced risk-taking in cross-border investments.
- Job market paper
- Draft available upon request
"Copying FASB Language in Initial Narrative Disclosures: Evidence from ASC 842, Leases"
- Abstract: I evaluate the extent to which firms copy FASB-provided language in initial narrative disclosures upon adoption of new accounting standards. Specifically, I use the adoption of ASC 842 and relevant disclosures to gauge how prevalent copying FASB-provided language is, as well as, the determinants of using this repetitive language. Using three measures of copying, I find that the median (mean) lease disclosure uses “tetragrams” found in ASC 842 requirements in 21.1% (21.9%) of its sentences. Moreover, I find that the median (mean) lease disclosure has a cosine similarity score with a FASB-provided example disclosure of 69.4% (67.5%). In response to SEC fears that these types of repetition create boilerplate disclosures, I evaluate market outcomes associated with varying degrees of copying. I find that my copying measures have no significant relation with the proxies for information asymmetry or information processing costs. When interacting the copying measures with an indicator for high leasing intensity, I find that for firms with high leasing intensity, a one-standard deviation increase in copying ASC 842 requirements is associated with a 0.74 day reduction in median analyst revision time. On balance, these findings suggest that copying FASB-provided language can beneficial to financial statement users when done properly.
- Solo-authored, based on Second-Year Paper
- Draft available upon request
Research in Progress:
"The Changing Landscape of Shareholders' ESG Proposals" with Lindsey Gallo and Greg Miller
"Lease Accounting and Debt Contracting" with Christopher Williams and Regina Wittenberg-Moerman
"Fundamentals in Crisis Periods" with Heather Graham and Christopher Williams