SOAR Accounting Symposium is the School of Accountancy Research (SOAR) Centre’s annual flagship event and is part of the Centre's efforts to contribute knowledge, thought-leadership and innovative ideas.
This year, the event was held from 15 to 16 December 2020, and conducted in hybrid format as both an online and onsite event. The 2020 Symposium featured innovative ideas shared by researchers from the School of Accountancy and top schools around the world, including the impact of flu-like illnesses on companies’ financial reporting, and the impact of greater public information on the market liquidity of information-insensitive securities.
How illness impacts corporate disclosure
The paper Flu Fallout: Information Production Constraints and Corporate Disclosure was presented by Wang Rencheng, Associate Professor of Accounting at Singapore Management University (SMU). Wang co-authored this paper with Chen Chen of Monash University, Leonard Leye Li of UNSW Sydney, and Louise Yi Lu of Australian National University.
With the world having spent the past year dealing with the economic repercussions of the coronavirus epidemic, the research subject of this paper was particularly relevant to the current and future outlook for corporate behaviour in light of public health challenges.
The flu causes employee absenteeism and a lower quality of work from employees who continue working when they are ill, and its impact on workplace productivity has been the subject of academic inquiry. In this paper, the authors focus on how flu-like illnesses affect the way managers develop strategies for disclosing financial forecasts. Such forecasting requires coordination and collaboration across different managerial levels and business units.
The authors analysed data from US-incorporated firms for the period 2003 to 2018, and flu activity data from the U.S. Department of Health and Human Services Centers for Disease Control and Prevention and Google Flu Trends. Their results suggested that flu activity increases a firm’s information production constraints, and reduces the quality of internal information. This results in financial reporting lags, and an increased likelihood reporting errors in financial statements.
How do managers respond to such information production constraints? The paper’s findings suggest that managers tend to avoid issuing short-run forecasts, because issuing low-quality short-run forecasts is more likely to be seen by investors as a reflection of managers’ poor abilities. Comparatively, low-quality long-run forecasts that can be revised over time are viewed less negatively by investors, and hence cause a less substantial loss of reputation for managers.
This paper points to the economic consequences of failures in maintaining good employee health conditions, specifically with regards to the quality of information production and its relation to corporate decision-making.
How information affects liquidity
The paper (When) Does Public Information Hurt Liquidity? was presented by Yun Lee, Assistant Professor of Accounting at SMU. He co-authored the paper with Karthik Balakrishnan Rice University and Aytekin Ertan of London Business School.
In the wake of the 2007-08 global financial crisis, regulators and policymakers identified the opacity of securitization (whereby an issuer packages various financial assets, such as loans, to sell to investors in the form of debt securities in order to obtain funding) as one of the main causes of the crisis. Accordingly, making securitisation more transparent through public disclosure of detailed information became a key part of the post-crisis reforms.
But how does such information disclosure impact liquidity in debt funding markets? Compared to equity markets (where investors actively gather information to value stocks), debt funding markets rely on collaterised debt, which is generally expected to be paid in full and thus is information-insensitive. That is, investors do not have great incentives to produce private information about the collateral to value the debt.
Information-insensitivity allows for the liquidity of debt funding markets — financial institutions and corporations can execute large trades quickly without undertaking costly information-gathering efforts. This liquidity underpins the stability of debt funding and is thus important to the functioning of financial systems.
The authors studied the impact of the European Central Bank’s (ECB) Loan-level Disclosure (LLD) Initiative of 2013 on the liquidity of European residential mortgage-backed securities (MBSs). The LLD Initiative mandates that banks provide periodic and detailed disclosures on individual loans underlying the MBSs that the banks pledge as collateral to the ECB in their repo borrowings. That means investors now have much more detailed information about the MBSs, and these disclosures are hard to process.
The study found that loan-level disclosures reduced the liquidity of the debt tranches of MBSs by 23 per cent. Furthermore, the liquidity decline was stronger among securities that were more complex to value, which is consistent with the authors’ hypothesis that public information for such securities can result in differential information advantages for investors. That is, sophisticated investors can understand the implications of the information better and are more incentivised to process the information. In turn, unsophisticated investors, for whom such private information production remains too costly, face a typical adverse selection problem and may reduce or eliminate their trading activities. Indeed, the study found that loan-level disclosures decreased liquidity especially when the disparity in investor sophistication was high.
These findings show that an increase in public information can make information-insensitive securities information-sensitive, and the resulting decline in liquidity can persist significantly. This phenomenon could change the efficacy of such funding tools. A better understanding of such effects can help to inform regulators as they design and implement reforms and policies for debt funding markets.
The Symposium also featured the following research presentations by other scholars from top universities around the world:
“Investment Opportunities, Market Feedback, and Voluntary Disclosure: Evidence from the Shale Oil Revolution”
Authors: Zackery D FOX (Oregon), Jaewoo KIM (Oregon), and Bryce SCHONBERGER (CU Boulder)
Presenter: Jaewoo KIM (Oregon)
“Commonality of Accounting Standards and Investment Beauty Contests”
Authors: Xu JIANG (Duke), Chao TANG (HKUST), and Gaoqing ZHANG (Minnesota)
Presenter: Chao TANG (HKUST)
“How to Talk When a Machine is Listening: Corporate Disclosure in the Age of AI”
Authors: Sean CAO (GSU), Wei JIANG (Columbia), Baozhong YANG (GSU), Alan L ZHANG (GSU)
Presenter: Sean CAO (GSU)
“Proprietary Information Cost of Contracting with the Government”
Authors: Jiapeng HE (UT Dallas), Kevin LI (Santa Clara), Ningzhong LI (UT Dallas), and Weining ZHANG (CKGSB)
Presenter: Ningzhong LI (UT Dallas)
“Are Financial Statement Audits Too Coarse? Evidence from Audits of Technology Service Companies”
Author: Jordan SCHOENFELD (Dartmouth)
Presenter: Jordan SCHOENFELD (Dartmouth)
“Bilateral Political Relationships and Cross-Border Lending”
Authors: Zhiming MA (Peking), Derrald STICE (HKU), Florin P VASVARI (LBS), Yue ZHANG (Peking)
Presenter: Derrald STICE (HKU)
Click here for more details on the above research papers presented at SOAR Accounting Symposium 2020.