Proactive Financial Reporting Enforcement and Shareholder Wealth
59 Pages Posted: 27 Sep 2016 Last revised: 15 Dec 2017
Date Written: December 14, 2017
We examine the effect of increased proactive-financial-reporting-enforcement (PFRE) intensity on shareholder wealth. In a setting where specific industries are periodically targeted for greater regulatory scrutiny, we find that PFRE is associated with increased disclosure, greater resources expended on regulatory compliance, and higher stock-market liquidity. Yet, the market reaction to the announcement of the targeted industries is negative, suggesting that, despite an improvement in transparency, increasing PFRE intensity could have a net-negative effect on shareholder wealth. Supporting this interpretation, firms with stronger preexisting private oversight—where additional public enforcement is presumably least beneficial—experience the largest reductions 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