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Non-Standard Errors

Albert J. Menkveld, Anna Dreber, Felix Holzmeister, Juergen Huber, Magnus Johannesson, Michael Koetter, Markus Kirchner, Sebastian Neusüss, Michael Razen, Utz Weitzel, Shuo Xia, et al.
Journal of Finance, No. 3, 2024
Abstract
In statistics, samples are drawn from a population in a datagenerating process (DGP). Standard errors measure the uncertainty in sample estimates of population parameters. In science, evidence is generated to test hypotheses in an evidencegenerating process (EGP). We claim that EGP variation across researchers adds uncertainty: non-standard errors. To study them, we let 164 teams test six hypotheses on the same sample. We find that non-standard errors are sizeable, on par with standard errors. Their size (i) co-varies only weakly with team merits, reproducibility, or peer rating, (ii) declines significantly after peer-feedback, and (iii) is underestimated by participants.
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The Bright Side of Bank Lobbying: Evidence from the Corporate Loan Market

Manthos D. Delis, Iftekhar Hasan, Thomas Y. To, Eliza Wu
Journal of Corporate Finance, June 2024
Abstract

Bank lobbying has a bitter taste in most forums, ringing the bell of preferential treatment of big banks from governments and regulators. Using corporate loan facilities and hand-matched information on bank lobbying from 1999 to 2017, we show that lobbying banks increase their borrowers' overall performance. This positive effect is stronger for opaque and credit-constrained borrowers, when the lobbying lender possesses valuable information on the borrower, and for borrowers with strong corporate governance. Our findings are consistent with the theory positing that lobbying can provide access to valuable lender-borrower information, resulting in improved efficiency in large firms' corporate financing.

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Financial Debt Contracting and Managerial Agency Problems

Björn Imbierowicz, Daniel Streitz
Financial Management, No. 1, 2024
Abstract
This paper analyzes if lenders resolve managerial agency problems in loan contracts using sweep covenants. Sweeps require a (partial) prepayment when triggered and are included in many contracts. Exploiting exogenous reductions in analyst coverage due to brokerage house mergers and closures, we find that increased borrower opacity significantly increases sweep use. The effect is strongest for borrowers with higher levels of managerial entrenchment and if lenders hold both debt and equity in the firm. Overall, our results suggest that lenders implement sweep covenants to mitigate managerial agency problems by limiting contingencies of wealth expropriation.
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Credit Supply Shocks: Financing Real Growth or Takeovers?

Tobias Berg, Daniel Streitz, Michael Wedow
Review of Corporate Finance Studies, No. 2, 2024
Abstract
How do firms invest when financial constraints are relaxed? We document that firms affected by a large positive credit supply shock predominantly increase borrowing for transaction-based purposes. These treated firms have larger asset and employment growth rates; however, growth entirely stems from the increased takeover activity. Announcement returns indicate a low quality of the credit-supply-induced takeover activity. These results offer the possibility that credit-driven growth can simply reflect redistribution, rather than net gains in assets or employment.
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The Effect of Bank Organizational Risk-management on the Price of Non-deposit Debt

Iftekhar Hasan, Emma Peng, Maya Waisman, Meng Yan
Journal of Financial Services Research, April 2024
Abstract

We test whether organizational risk management matters to bondholders of U.S. bank holding companies (BHCs), and find that debt financing costs increase when the BHC has lower-quality risk management. Consistent with bailouts giving rise to moral hazard among bank creditors, we find that bondholders put less emphasis on risk management in large institutions for which bailouts are expected ex-ante. BHCs that maintained strong risk management before the financial crisis had lower debt costs during and after the crisis, compared to other banks. Overall, quality risk management can curtail risk exposures at BHCs and result in lower debt costs.

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Asymmetric Reactions of Abnormal Audit Fees Jump to Credit Rating Changes

June Cao, Mong Shan Ee, Iftekhar Hasan, He Huang
British Accounting Review, No. 2, 2024
Abstract
Considering the inherent stickiness of abnormal audit fees, our study contributes to the literature by decomposing abnormal audit fees into a jump component and long-run sticky component. We investigate whether and how changes in credit ratings asymmetrically affect the jump component of abnormal audit fees. We document a positive association between rating downgrades and the jump component. We find that heightened bankruptcy risk and misstatement risk are the mechanisms that drive this relationship. Further analysis shows that firms experiencing rating downgrades are more likely to receive a going concern opinion and experience longer audit report lags. Taken together, our findings provide direct evidence that credit ratings are significantly associated with abnormal audit fees, particularly with the jump component. Given the serial correlation of abnormal audit fees, our study sheds light on the importance of disaggregation of the abnormal audit fee residuals into the jump and long-run sticky components.
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Climate Change Exposure and the Value Relevance of Earnings and Book Values of Equity

Iftekhar Hasan, Joseph A. Micale, Donna Rapaccioli
Journal of Sustainable Finance and Accounting, March 2024
Abstract

We investigate whether a firm’s exposure to climate change, as proxied by disclosures during quarterly earnings conference calls, provides forward-looking information to investors regarding the long-term association of stock prices with current earnings and the book values of equity. Following a key regulatory mandate around the formation of the cap-and-trade program to reduce emissions related to climate change, firms’ climate change exposure decreases the association between current earnings and stock prices while increasing the relevance of book values of equity (i.e., historical earnings). However, these relationships flip when the sentiment around climate change exposure is negative, suggesting that the risks related to climate change exposure provide forward-looking information to investors when they evaluate the ability of current earnings to predict firm values. Such a relationship is stronger for new economy firms and is sensitive to conservative accounting. We also observe that the inclusion of climate change disclosure to our models improves the joint ability of earnings and book values to predict stock prices.

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Does IFRS Information on Tax Loss Carryforwards and Negative Performance Improve Predictions of Earnings and Cash Flows?

Sandra Dreher, Sebastian Eichfelder, Felix Noth
Journal of Business Economics, January 2024
Abstract
We analyze the usefulness of accounting information on tax loss carryforwards and negative performance to predict earnings and cash flows. We use hand-collected information on tax loss carryforwards and corresponding deferred taxes from the International Financial Reporting Standards tax footnotes for listed firms from Germany. Our out-of-sample tests show that considering accounting information on tax loss carryforwards does not enhance performance forecasts and typically even worsens predictions. The most likely explanation is model overfitting. Besides, common forecasting approaches that deal with negative performance are prone to prediction errors. We provide a simple empirical specification to account for that problem.
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Exploring Accounting Research Topic Evolution: An Unsupervised Machine Learning Approach

June Cao, Zhanzhong Gu, Iftekhar Hasan
Journal of International Accounting Research, No. 3, 2023
Abstract
This study explores the evolution of accounting research by utilizing an unsupervised machine learning approach. We aim to identify the latent topics of accounting from the 1980s up to 2018, the dynamics and emerging topics of accounting research, and the economic reasons behind those changes. First, based on 23,220 articles from 46 accounting journals, we identify 55 topics using the latent Dirichlet allocation model. To illustrate the connection between topics, we use HistCite to generate a citation map along a timeline. The citation clusters demonstrate the “tribalism” phenomenon in accounting research. We then implement the dynamic topic model to reveal the dynamics of topics to show changes in accounting research. The emerging research trends are identified from the topic analytics. We further explore the economic reasons and in-depth insights into the topic evolution, indicating the economic development embeddedness nature of accounting research.
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"Let Me Get Back to You" — A Machine Learning Approach to Measuring NonAnswers

Andreas Barth, Sasan Mansouri, Fabian Wöbbeking
Management Science, No. 10, 2023
Abstract
Using a supervised machine learning framework on a large training set of questions and answers, we identify 1,364 trigrams that signal nonanswers in earnings call questions and answers (Q&A). We show that this glossary has economic relevance by applying it to contemporaneous stock market reactions after earnings calls. Our findings suggest that obstructing the flow of information leads to significantly lower cumulative abnormal stock returns and higher implied volatility. As both our method and glossary are free of financial context, we believe that the measure is applicable to other fields with a Q&A setup outside the contextual domain of financial earnings conference calls.
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