Congress, Foreign Policy & Financial Reporting
54 Pages Posted: 15 Jun 2019
Date Written: June 3, 2019
I examine the economic consequences of expanding the scope of financial disclosure to include a foreign policy objective. I use the disclosure requirements of Iran Threat Reduction Act of 2012 (ITRA), which attempts to isolate Iran by forcing SEC issuers to disclose ties with Iranian-affiliated entities, as my empirical setting. I find ITRA disclosures impose penalties on firms who do business with Iran along several dimensions: (i) Iran revenue declines by 70 percent following implementation, (ii) disclosure generates negative abnormal returns and (iii) institutional ownership declines. I also document other unintended consequences of ITRA disclosures. First, I find that foreign issuers are more likely to delist from U.S. exchanges following ITRA disclosures and domestic issuers’ political action committees increase their campaign contributions. Second, I document a financial reporting distortion through a temporary pattern of depressed reported income but stable cash flows. Third, I find that disclosing firms’ annual filings have a more negative tone. Overall, the evidence suggests that adapting securities regulation to serve political objectives, while effective at achieving those objectives, also entails unintended consequences.
Keywords: Non-financial Disclosure; Real Effects; Iran Threat Reduction Act; Political Cost Hypothesis
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