Proactive Financial Reporting Enforcement and Shareholder Wealth
80 Pages Posted: 27 Sep 2016 Last revised: 6 Oct 2019
Date Written: October 3, 2019
Within the U.K.’s proactive financial-reporting-enforcement regime, we examine the effect of increased regulatory scrutiny on equity values. 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 for firms with strong private oversight that likely ensures that they are closer to their equity-value-maximizing level of transparency. Additional evidence suggests that competition increases and that managers’ investment horizons decrease in industries selected for increased regulatory scrutiny, consistent with direct compliance costs not fully explaining the reduction in equity values.
Keywords: Financial reporting enforcement, costs and benefits of enforcement, unintended consequences of regulation
JEL Classification: G14, G18, G38, K22, M41
Suggested Citation: Suggested Citation