Proactive Financial Reporting Enforcement and Shareholder Wealth
83 Pages Posted: 27 Sep 2016 Last revised: 6 Mar 2019
Date Written: March 4, 2019
We examine the effect of increased proactive-financial-reporting-enforcement (PFRE) on shareholder wealth. We find that a fourfold increase in the likelihood of regulator-initiated reviews of financial reports reduces equity values by 1.3% on average. Reductions in equity values are largest in settings where it is most likely that, prior to PFRE, private oversight ensures firms are already at their equity-value-maximizing level of transparency. Consistent with proprietary costs of increased transparency partly explaining the effect, firms with abnormally high profits experience the largest reductions in equity value and, in industries selected for increased regulatory scrutiny, profitability mean reverts faster after PFRE.
Keywords: Financial reporting enforcement, costs and benefits of enforcement, unintended consequences of regulation
JEL Classification: G14, G18, G38, K22, M41
Suggested Citation: Suggested Citation