The effect of corporate governance regulation on transparency:Evidence from the Sarbanes-Oxley Act of 2002

We argue that the Sarbanes-Oxley Act (SOX) of 2002 provides a natural experiment to study the effect of corporate governance and disclosure reform on corporate transparency. For identification, we use a difference-in-differences estimation approach and compare changes in transparency of European firms that are cross-listed in the US with changes in transparency of comparable European firms that are not cross-listed. We measure transparency based on the accuracy and dispersion of analyst earnings forecasts. Our findings suggest that, relative to the control group, European cross-listed firms became significantly more transparent after the implementation of SOX. We provide evidence that the transparency-enhancing effect of SOX was particularly pronounced for firms operating in informationally sensitive industries, such as financial services and the technology sector. We complement our analysis with a comprehensive textual analysis of corporate annual reports in order to shed light on how SOX may have affected firms’ disclosure and reporting behavior

Credit Protection and Lending Relationships

We examine the impact CDS protection on lending relationships and efficiency. CDS insulate lenders against losses from forcing borrowers into default and liquidation. This improves the credibility of foreclosure threats, which can have positive implications for borrower incentives and credit availability ex ante. However, lenders may also abuse their enhanced bargaining power vis-a-vis borrowers and extract additional surplus in debt renegotiations. If this hold up threat becomes severe, borrowers will be reluctant to agree to debt maturity designs or control right transfers that would have been optimal in the absence of CDS protection. The introduction of CDS markets may then ultimately tighten credit constraints and be detrimental to welfare

The pricing of bank debt guarantees

We analyze the desirability of fair pricing of government guarantees for bank liabilities. Fair pricing is desirable only if the banking sector is sufficiently transparent. In opaque banking systems, fair pricing may exacerbate banks' incentive to take excessive risks