Investors are flocking to companies with good environmental, social, and governance (ESG) scores and are threatening to shun companies with poor ones. For many investors, ESG scores are critical to a company’s long-term profitability, not to mention its impact on people and the planet. But there is good reason for skepticism about the trustworthiness of the underlying metrics. For example, there is little correlation among the scores that different ESG ratings services assign to the same companies.
This situation is not inevitable. Despite their huge differences, the practices developed in financial reporting over many decades can contribute to the emerging … Read more
In a new paper, I add to the debate over hedge fund regulation by introducing empirical evidence that hedge fund registration requirements reduce misreporting. Using three alternating changes in hedge fund regulation, my study finds consistent evidence that registration reduces hedge funds’ misreporting — and provides evidence on why this regulatory regime is effective. In particular, my analysis suggests that the disclosure requirements led funds to make changes in their internal governance, such as hiring or switching the fund’s auditor, and that these changes induced funds to report their financial performance more accurately.
It was initially unclear whether regulation would … Read more
The Securities and Exchange Commission has proposed changes to its rules requiring companies to obtain attestation on their internal controls from an independent public accountant. The proposal rests on the idea that attestation’s costs often exceed its benefits. The SEC’s principal empirical support for that idea is a Journal of Finance article using data from 2004. Since markets have changed since then, over 40 law and accounting professors have petitioned the SEC to replicate the Journal of Finance study using recent data before proceeding with the proposed changes.
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The attestation requirement, known as Section 404(b), is … Read more
Since the financial crisis, federal regulators have been searching for ways to rein in excessive risktaking in the financial sector. Many scholars and regulators have argued that executive retirement benefits can serve this risk-curbing function. Because top managers might not receive their promised retirement payouts if their firm goes bankrupt, the theory goes, generous retirement benefits encourage them to manage their firms more carefully. This view—sometimes called the “inside debt” hypothesis—assumes that, through retirement benefits, managers continue to be exposed to the firm’s credit risk after they retire. But no previous work has tested that assumption empirically. In our new … Read more