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We investigate voluntary disclosure strategies in contested takeovers and the associated economic consequences. Using a difference-in-differences research design and propensity score matching, we find that relative to friendly takeovers, target management in contested takeovers provides more earnings guidance and conveys more good news during the takeover. Moreover, voluntary disclosure helps contested targets negotiate a better offer and the results are stronger for targets with more information asymmetry. Collectively, targets adopt voluntary disclosure and alter their strategies under the threat of contested takeover to enhance their bargaining power. Voluntary disclosure by contested targets serves as a negotiation tactic that potentially benefits target shareholders.

We examine whether the joint provision of corporate social responsibility (CSR) assurance services and financial audit by the same audit firm influences auditors’ assessment of going concern risk. We predict that the provision of CSR assurance and financial audit by the same audit firm creates CSR-related knowledge spillovers from the CSR assurance team to the financial audit engagement team, which help in the auditor’s assessment of going concern risk. Using more than 28,000 firm-year observations from 55 countries, we document that, relative to audit firms that provide only the financial audit, audit firms that provide both CSR assurance and financial audit for the same client (1) issue more frequent going concern opinions and have lower Type-II going concern errors, (2) have clients that book larger environmental and litigation provisions, (3) report earnings that are more persistent and value relevant and are less likely to book income-decreasing earnings restatements, and (4) do not charge higher audit fees or total fees. Our results are important especially because of firms’ increasing exposure to CSR risks and the growing number of countries that require assurance of CSR reports.

Supplemental material, sj-pdf-1-jaf-10.1177_0148558X20967814 for Signaling Under Threat: Evidence of Voluntary Disclosure in Contested Takeovers by Gerald J. Lobo, Kangzhen Xie and Claire J. Yan in Journal of Accounting, Auditing & Finance

Supplemental material, sj-pdf-1-jaf-10.1177_0148558X20967814 for Signaling Under Threat: Evidence of Voluntary Disclosure in Contested Takeovers by Gerald J. Lobo, Kangzhen Xie and Claire J. Yan in Journal of Accounting, Auditing & Finance

54 p. ; Includes bibliographical references (pp. 32-36). ; "July 2017"; "An earlier version of a related paper was titled, “Social Capital and Bank Accounting Transparency.” We thank the Social Sciences and Humanities Research Council of Canada (SSHRC) and the Canadian Securities Institute Research Foundation for its financial support." Using a sample of public and private banks, we study how social capital relates to bank stability. Social capital, which captures the level of cooperative norms in society, is likely to reduce opportunistic behavior (Jha and Chen 2015; Hasan et al. 2016) and, therefore, act as an informal monitoring mechanism. Consistent with our expectations, we find that banks in high social capital regions experienced fewer failures and less financial trouble during the 2007–2010 financial crisis than banks in low social capital regions. In addition, we find that social capital is negatively associated with abnormal risk-taking and positively associated with accounting transparency and accounting conservatism in the pre-crisis period of 2000–2006, indicating that risk-taking, accounting transparency, and accounting conservatism are possible channels through which social capital affected bank stability during the crisis. Valuation Insight: The paper provides a review of the literature and considers directions for future research regarding the relevance for company value of an expansion in distribution channels along the intensive and the extensive margins. In terms of factual measures of firm value the paper finds that the effects of distribution expansion are most clearly positive for firm value measured by shareholder value (as opposed to Tobin’s Q). The positive effects on firm value appear to be stronger for the addition of new channels than for the increase in distribution intensity.

52 p. ; Includes bibliographical references (pp. 31-34). ; "November 10, 2015." Jin thanks the DeGroote School of Business for its financial support. Jin and Kanagaretnam thank the Social Sciences and Humanities Research Council of Canada (SSHRC) for its financial support. Using a sample of public and private banks and a county-level index for social capital, we study how social capital relates to accounting transparency. In a region with high social capital, individuals have a greater propensity to honor an obligation and there is greater mutual trust within a much denser network that deters opportunistic/self-serving actions such as misrepresentation of accounting numbers and taking excessive risk for personal gain (Jha and Chen 2015). Consistent with expectations, our analysis indicates that social capital is positively associated with accounting transparency (proxied by accounting restatements and income-increasing earnings management) and this relationship is stronger for small, unaudited private banks. Additionally, we document that social capital is negatively associated with bank risk taking in the 2000-2006 pre-financial crisis period. We also find that banks in low social capital counties that are likely to engage in higher risk taking and have lower financial reporting transparency experienced more bank failures and bank trouble during the 2007-2009 financial crisis. Valuation Insight: Jin, Kanagaretnam, and Lobo examine the role of social capital in the valuation of banks. In regions with high social capital there is greater mutual trust which deters opportunistic actions. As a result there is greater accounting transparency which has a positive impact on market value. Banks in low social capital regions have lower reporting transparency and experienced more failures during the 2007-2009 financial crisis.

We study whether bank managers’ use their discretion in estimating the allowance for loan losses (ALL) for efficiency or for opportunistic reasons. We do so by examining whether the use of this discretion relates to bank stability and bank risk taking, or whether it relates to earnings management to meet or beat earnings benchmarks. We find that banks that had higher abnormal ALL during the period prior to the 2007-2009 financial crisis engaged in less risk taking during the pre-crisis period and had a lower probability of failure during the crisis period. In tests related to earnings management to meet or beat earnings benchmarks, we find that abnormal ALL is unrelated to next period’s loss avoidance and just meeting or beating the prior year’s earnings. Our results suggest that bank managers use their discretion over ALL for efficiency and not for opportunistic purposes. They inform policy makers and accounting standard setters on banks’ use of accounting discretion as a means to build a cushion against future credit losses as they transition from the incurred loss model to the expected loss model for loan loss accounting. Valuation Insight: Jin, Kanagaretnam, and Lobo study the allowance for loan losses by banks. Managers use discretion in determining loan loss allowances. More ‘abnormal’ allowances, rather than a signal that market values should decrease, preserve value by serving as a cushion against future shocks and, accordingly, decreased the probability of bank failures during the recent global financial crisis. 32 p. ; Includes bibliographical references (pp. 23-25). ; "November 10, 2015." ; Jin thanks the DeGroote School of Business for its financial support. Jin, Kanagaretnam and Lobo thank the Social Sciences and Humanities Research Council of Canada (SSHRC) for its financial support.

We examine the relation between disaster risk and banks’ loan loss provisions (LLP). We propose a disaster risk measure based on the natural disasters declared as major disasters by the Federal Emergency Management Agency over a 15-year span. We theoretically support and empirically validate our measure using three different approaches, including the UN Sendai Framework for disaster risk reduction, which relates disaster risk to natural hazard exposure, vulnerability and capacity, and hazard characteristics. Using more than 445,000 bank-quarter observations, we document that banks located in U.S. counties with higher disaster risk recognize larger LLP after controlling for other bank-level factors related to LLP. We employ several techniques to ensure the robustness of our findings, including difference-in-differences estimation and matched samples. In additional analysis, we explore the characteristics that better enable banks to recognize disaster risk in their LLP, and investigate the consequences of managing disaster risk through LLP. Our results are important, especially because of the increasing concern about disaster risk and because they inform the growing debate on the economic consequences of disaster risk and the ability of the banking system to proactively manage the resulting credit risk through LLP.