Network-Induced Agency Conflicts in Delegated Portfolio Management
Authors: Gao, X.; Wong, T.J.; Xia, L.; Yu, G.
(Under review for third round, The Accounting Review)
Abstract: Social ties between mutual funds and the companies in which they invest (investees) can both facilitate information transfers and encourage favoritism. Using the investment choices of mutual funds in China, we compare investment performance of holdings in companies that are socially connected to mutual funds versus those that are not. We find that funds allocate more investment to connected investees’ stocks, especially when a fund is weakly monitored. This overweighting is greater in times of poor investee performance, when the benefits of additional investment to the connected investees are high. Weakly monitored funds’ preference for connected stocks hurts the returns of these funds, yielding a 6.6% lower annualized risk-adjusted return, relative to closely monitored funds. These results suggest that, absent sufficient monitoring, agency conflicts generated by social networks will dominate the information advantages of these networks.
Market Power and Credit Rating Standard: Global Evidence
Authors: Hung, M.; Kraft, P.; Wang, S.; Yu, G.
Abstract: Using a global sample from 27 developed markets between 1994 to 2016, we document a tightening trend of corporate credit ratings, which parallels the growth of rating agencies’ market shares in the region. Increased market share precedes a decline in ratings and the result holds among a set of constant firms. In addition, the trend reverses following the NRSRO designation of a local rating agency in the region. Further supporting the notion that market power strengthens rating agencies’ reputational incentives to issue stringent ratings, we find that rating agencies’ market shares are associated with pessimistic qualitative rating adjustments. Last, we find that firms with lower than predicted ratings face diminished access to debt markets.
Managerial Effort and Reporting Quality: Evidence from a Regulatory Intervention
Authors: Lee, R.; Yu, G.
Abstract: Ensuring that firms devote sufficient resources to the reporting process is important for quality reporting. We use a regulatory intervention in South Korea that led to increased managerial effort in the reporting process by requiring firms to file internally prepared, pre-audited financial statements before the start of the audit process. We find that the regulation led to increased managerial effort, measured using the number of internal accounting employees, especially among firms that were previously underinvested in the reporting process. The increase in managerial effort was largely driven by an increase in mid-level employees’ involvement in the reporting process, not top executives. Increased managerial effort leads to higher external reporting quality (i.e., fewer restatements), especially when concurrent with an increase in audit effort (i.e., audit hours). Improving external reporting quality through an increased managerial effort leads to capital market benefits, but not forfirms with strong internal capital markets. The finding suggests that regulatory efforts to increase managerial effort will lead to higher reporting quality but not capital market benefits unless there is sufficient demand from external capital providers.
Investor Stewardship Codes and the Rise of Global Shareholder Activism
Authors: Miller, G.; Naranjo, P.; Yu, G.
Abstract: Coming soon