Table of Contents

Insider Trading and Innovation

Ross Levine, UC Berkeley, Milken Institute, National Bureau of Economic Research (NBER)
Chen Lin, The University of Hong Kong - Faculty of Business and Economics
Lai Wei, The University of Hong Kong - Faculty of Business and Economics

Was Sarbanes-Oxley Costly? Evidence from Optimal Contracting on CEO Compensation

George-Levi Gayle, Carnegie Mellon University - David A. Tepper School of Business, Federal Reserve Bank of St. Louis
Chen Li, City University of New York, CUNY Baruch College, Zicklin School of Business
Robert A. Miller, Carnegie Mellon University - David A. Tepper School of Business

Are Banks Now Safer? What Can We Learn from the CoCo Markets?

Jan De Spiegeleer, Jabre Capital Partners & KU Leuven
Stephan Höcht, Independent
Wim Schoutens, KU Leuven - Department of Mathematics

How to Make the World Safe for (and from) Covered Bonds

Finn Poschmann, C.D. Howe Institute

Do Conflict-of-Interest Regulations Help or Hinder the Information Provision Role of Financial Analysts?

Tharindra Ranasinghe, Singapore Management University - School of Accountancy
Arpita Shroff, Texas A&M University - Corpus Christi
Shiva Sivaramakrishnan, Rice University

Audit Committee Effectiveness and Discretionary Revenues: Evidence from the UK after the 2008 Financial Crisis

Jihad Al Okaily, American University of Beirut - School of Business
Robert Dixon, Durham Business School
A. Salama, Newcastle University (UK) - Business School


REGULATION OF FINANCIAL INSTITUTIONS eJOURNAL

"Insider Trading and Innovation" Free Download

ROSS LEVINE, UC Berkeley, Milken Institute, National Bureau of Economic Research (NBER)
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CHEN LIN, The University of Hong Kong - Faculty of Business and Economics
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LAI WEI, The University of Hong Kong - Faculty of Business and Economics
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This paper assesses whether the enforcement of insider trading laws increases or decreases patent-based measures of technological innovation. Based on about 75,000 industry-country-year observations across 94 economies from 1976 to 2006, we find evidence consistent with the view that enforcing insider trading laws spurs innovation — as measured by patent intensity, scope, impact, generality, and originality — after controlling for country-year and industry-year fixed effects. Consistent with theories that insider trading slows innovation by impeding the valuation of innovative activities, the relationship between enforcing insider trading laws and innovation is much larger in industries that are naturally innovative and opaque, where we use the U.S. to benchmark industries.

"Was Sarbanes-Oxley Costly? Evidence from Optimal Contracting on CEO Compensation" Free Download
FRB St Louis Paper No. FEDLWP2015-017

GEORGE-LEVI GAYLE, Carnegie Mellon University - David A. Tepper School of Business, Federal Reserve Bank of St. Louis
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CHEN LI, City University of New York, CUNY Baruch College, Zicklin School of Business
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ROBERT A. MILLER, Carnegie Mellon University - David A. Tepper School of Business
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This paper develops measures of the costs and benefits of governance regulations within a dynamic principal agent model of hidden information and moral hazard following the passage of the Sarbanes-Oxley Act (SOX). We estimate the effects of changes in CEO compensation for S&P 1500 firms and find SOX increased total compensation in the primary sector, increasing both its agency and administrative components. The net effect was mainly insignificant in the consumer and service sectors, with agency costs rising (falling) but administrative costs falling (rising) in larger (smaller) firms.

"Are Banks Now Safer? What Can We Learn from the CoCo Markets?" Free Download

JAN DE SPIEGELEER, Jabre Capital Partners & KU Leuven
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STEPHAN HÖCHT, Independent
WIM SCHOUTENS, KU Leuven - Department of Mathematics
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Contingent Convertible bonds or CoCos are loss absorbing hybrid instruments.CoCos can be seen as derivative instruments contingent on the CET1 level. Hence one can, using some standard models, infer from observed market prices of CoCos implied CET1 volatility levels. Recent regulatory reforms have urged banks to increase their CET1 levels and many banks have clearly done so. However, if one calculates the implied CET1 volatilities either on the basis of the contractual accounting CoCo trigger or even on an estimated PoNV trigger level, one sees also a significant increase in the CET1 volatility levels over the same period of time. The average level of the CET1 has been rising, but also the volatility or standard deviation of that level, indicating that a higher CET1 level not necessarily implies that banks have become safer. Bank’s capital levels are higher but have become also much more volatile.

"How to Make the World Safe for (and from) Covered Bonds" Free Download
C.D. Howe Institute ebrief 214

FINN POSCHMANN, C.D. Howe Institute
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Although few outside of financial circles have heard of covered bonds, they have emerged as an important and efficient funding channel for Canadian mortgage lending, according to a new report released today from the C.D. Howe Institute. In “How to Make the World Safe for (and from) Covered Bonds,? author Finn Poschmann addresses the fact that covered bond issuance in Canada has a regulatory limit of 4 percent of bank assets, a rate that is lower than in most advanced economies, and explores the case for expanding that limit.

"Do Conflict-of-Interest Regulations Help or Hinder the Information Provision Role of Financial Analysts?" Free Download

THARINDRA RANASINGHE, Singapore Management University - School of Accountancy
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ARPITA SHROFF, Texas A&M University - Corpus Christi
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SHIVA SIVARAMAKRISHNAN, Rice University
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In 2002, a number of regulatory actions were introduced to alleviate the conflicts of interest faced by research analysts with investment banking affiliations. While the regulations have been beneficial to the extent that they eliminated these conflicts, they also gave rise to unintended consequences due to financial and informational restrictions imposed by severing the link between research and investment banking functions. While prior research has provided evidence of reduced conflicts of interest as well as unintended consequences, the overall impact of the regulations on the information provision role of financial analysts has remained unclear. In this paper, in order to investigate whether the regulations had an overall positive or negative effect in terms of analysts’ information dissemination, we examine the pre- to post-regulation differences in liquidity changes that surround coverage initiations. We document that, on average, coverage initiations in the post-regulation period evoke greater liquidity improvements than the pre-regulation period. This beneficial impact is stronger for high growth firms and firms with high pre-existing analyst coverage. Supplemental tests on the market reactions to earnings news contained in coverage initiations further corroborate these findings. It appears that the overall informational impact of the regulations has been positive.

"Audit Committee Effectiveness and Discretionary Revenues: Evidence from the UK after the 2008 Financial Crisis" Free Download

JIHAD AL OKAILY, American University of Beirut - School of Business
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ROBERT DIXON, Durham Business School
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A. SALAMA, Newcastle University (UK) - Business School
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The vast majority of prior research tackling the impact of audit committee effectiveness (ACE) on financial reporting quality (FRQ) has been conducted in the United States (US) where rules-based accounting standards exist, and before the 2008 global financial crisis. Targeting the United Kingdom (UK) principle-based context, we examine the impact of audit committee characteristics on FRQ after the 2008 financial crisis, using a sample of 662 FTSE 350 firms listed in the London Stock of Exchange. As surrogates for FRQ, we employ two measures expected to detect two substitute types of earnings management. Our first measure, which contributes to the uniqueness of this study, is discretionary revenues used to address UK regulators’ and standard setters’ widespread concerns for misleading revenue recognition practices during and after the financial crisis, and discretionary accruals, which is the most prevalent earnings management proxy over prior studies. Our results indicate that audit committees are associated with better FRQ only when the latter is proxied by discretionary revenues. Specifically, we find that audit committee independence and audit committee size are effective characteristics in curtailing revenue manipulations in the post-financial crisis period.

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About this eJournal

This eJournal distributes working and accepted paper abstracts covering regulatory and legal aspects of national and international financial institutions. The eJournal welcomes research that deals with legal aspects of depository institutions including banks, credit unions, trust companies, and mortgage loan companies. Topics also include regulation of insurance companies, brokers, underwriters, and investment funds.

Editors: G. William Schwert, University of Rochester, and Rene M. Stulz, Ohio State University (OSU)

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BANKING & FINANCIAL INSTITUTIONS EJOURNALS

MICHAEL C. JENSEN
Social Science Electronic Publishing (SSEP), Inc., Harvard Business School, National Bureau of Economic Research (NBER), European Corporate Governance Institute (ECGI)
Email: michael_jensen@ssrn.com

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Advisory Board

Regulation of Financial Institutions eJournal

EDWARD I. ALTMAN
Senior Advisor, Credit and Debt Markets Research Program, New York University (NYU) - Salomon Center, Max L. Heine Emeritus Professor of Finance, New York University (NYU) - Department of Finance

DENNIS R. CAPOZZA
Professor of Finance and Dykema Professor of Business Administration, University of Michigan, Stephen M. Ross School of Business

DONALD CHEW
Morgan Stanley Investment Management

J. DAVID CUMMINS
Joseph E. Boettner Professor, Temple University - Risk Management & Insurance & Actuarial Science

DOUGLAS W. DIAMOND
Merton H. Miller Distinguished Service Professor of Finance, University of Chicago - Booth School of Business, National Bureau of Economic Research (NBER)

EUGENE F. FAMA
Robert R. McCormick Distinguished Service Professor of Finance, University of Chicago - Finance

STEPHEN FIGLEWSKI
Professor of Finance, New York University - Stern School of Business

STUART I. GREENBAUM
Bank of America Professor of Managerial Leadership, Washington University in St. Louis - Olin Business School

MICHAEL C. JENSEN
Co-Founder, Chairman, Managing Director and Integrity Officer, Social Science Electronic Publishing (SSEP), Inc., Jesse Isidor Straus Professor of Business Administration, Emeritus, Harvard Business School, Research Associate, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

JONATHAN M. KARPOFF
Washington Mutual Endowed Chair in Innovation Professor of Finance, University of Washington - Michael G. Foster School of Business

KENNETH LEHN
Professor of Business Administration, University of Pittsburgh - Finance Group

STANLEY R. PLISKA
University of Illinois at Chicago - Department of Finance

CHARLES I. PLOSSER
President, Federal Reserve Bank of Philadelphia, National Bureau of Economic Research (NBER)

KATHERINE SCHIPPER
Duke University - Fuqua School of Business

ALAN SCHWARTZ
Sterling Professor of Law, Yale Law School

G. WILLIAM SCHWERT
Distinguished University Professor of Finance and Statistics, University of Rochester - Simon Business School, National Bureau of Economic Research (NBER)

RENE M. STULZ
Everett D. Reese Chair of Banking and Monetary Economics, Ohio State University (OSU) - Department of Finance, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

ROSS L. WATTS
Erwin H. Schell Professor of Management, Massachusetts Institute of Technology (MIT) - Sloan School of Management