Selected Working Papers
"Securities Law Precedents, Litigation Risk, and Misreporting" (with Benedikt Franke, Reeyarn Li and Hui Wang).
Using 321 circuit court rulings, we construct a measure that captures the within-country variation in courts’ attitudes toward securities law violations. Case-level analyses confirm that district courts heed home-circuit precedents and are more likely to dismiss pending cases when their home circuits are more defendant-friendly. Firm-level analyses show that misreporting firms located in more defendant-friendly circuits are less likely to face securities lawsuits. Finally, in more defendant-friendly circuits, firms invest less in efforts preventing misreporting, are more likely to misreport, and have less informative stock prices. Our findings suggest that defendant-friendly precedents decrease firms’ legal liability and financial reporting quality.
Using 321 circuit court rulings, we construct a measure that captures the within-country variation in courts’ attitudes toward securities law violations. Case-level analyses confirm that district courts heed home-circuit precedents and are more likely to dismiss pending cases when their home circuits are more defendant-friendly. Firm-level analyses show that misreporting firms located in more defendant-friendly circuits are less likely to face securities lawsuits. Finally, in more defendant-friendly circuits, firms invest less in efforts preventing misreporting, are more likely to misreport, and have less informative stock prices. Our findings suggest that defendant-friendly precedents decrease firms’ legal liability and financial reporting quality.
"Credit Rating Agencies and Accounting Fraud Detection" (with Pepa Kraft and Shiheng Wang).
This study examines whether and when credit rating agencies take negative rating actions against issuers that commit accounting fraud before the fraud is publicly revealed and investigates the economic effects of such rating actions. After controlling for firms’ economic fundamentals and other sources of information, we find that Standard & Poor’s (S&P), an issuer-paid rating agency, takes negative rating actions against fraud firms, including downgrades and negative credit watches, as early as four quarters before the revelation of fraud. Egan-Jones, an investor-paid rating agency with no access to management and material nonpublic information, is slower than S&P to downgrade fraud firms, especially when information uncertainty is high and when fraud firms are subject to private SEC investigations. Last, we find that S&P’s negative rating actions against fraud firms are informative to the market and are associated with a shorter fraud duration. Taken together, our results suggest that credit rating agencies use their information advantage to detect accounting fraud.
This study examines whether and when credit rating agencies take negative rating actions against issuers that commit accounting fraud before the fraud is publicly revealed and investigates the economic effects of such rating actions. After controlling for firms’ economic fundamentals and other sources of information, we find that Standard & Poor’s (S&P), an issuer-paid rating agency, takes negative rating actions against fraud firms, including downgrades and negative credit watches, as early as four quarters before the revelation of fraud. Egan-Jones, an investor-paid rating agency with no access to management and material nonpublic information, is slower than S&P to downgrade fraud firms, especially when information uncertainty is high and when fraud firms are subject to private SEC investigations. Last, we find that S&P’s negative rating actions against fraud firms are informative to the market and are associated with a shorter fraud duration. Taken together, our results suggest that credit rating agencies use their information advantage to detect accounting fraud.
"Judge Ideology and Corporate Tax Planning" (with Travis Chow, Kai Wai Hui and Terry Shevlin).
We investigate whether and how the federal judiciary affects corporate tax planning. We find that firms engage in less aggressive tax planning when Circuit Court and Tax Court judges are more liberal. This effect is economically significant and robust across various measures of tax planning. We further detail specific tax planning tactics in response to liberal judge ideology, such as shifting less income overseas, conducting more foreign tax planning, and acquiring more auditor-provided tax services. Firms also avoid liberal judges through forum shopping. Finally, we show that IRS enforcement complements the judge ideology effect. Overall, we are the first to demonstrate the judicial branch as a key determinant of corporate tax planning, which contributes to a more complete understanding of tax enforcement.
We investigate whether and how the federal judiciary affects corporate tax planning. We find that firms engage in less aggressive tax planning when Circuit Court and Tax Court judges are more liberal. This effect is economically significant and robust across various measures of tax planning. We further detail specific tax planning tactics in response to liberal judge ideology, such as shifting less income overseas, conducting more foreign tax planning, and acquiring more auditor-provided tax services. Firms also avoid liberal judges through forum shopping. Finally, we show that IRS enforcement complements the judge ideology effect. Overall, we are the first to demonstrate the judicial branch as a key determinant of corporate tax planning, which contributes to a more complete understanding of tax enforcement.
"Judge Ideology and Opportunistic Insider Trading" (with Kai Wai Hui and Yue Zheng).
This paper investigates whether and how federal judges’ political ideology affects opportunistic insider trading. Although federal judges are the ultimate arbiters of insider trading enforcement, whether their ideology matters to insiders’ trading decision is unclear because the primary enforcer of illegal insider trading, i.e., the Securities and Exchange Commission (SEC), can prosecute the case through its internal administrative proceedings and that personal trading may be driven by individuals’ behavior heuristics. Using the partisanship of judges’ nominating presidents to measure judge ideology, we find that firms located in circuits with more liberal judges have fewer opportunistic insider sales, suggesting that managers consider judges’ political ideology in their trading decisions. Cross-sectional analyses show that this deterrent effect is stronger when managers face higher litigation risk. We also find that the SEC considers judge ideology when selecting litigation forums. Finally, we validate that liberal judge ideology is associated with heavier penalties in insider trading lawsuits. In summary, this paper contributes to a holistic understanding of legal enforcement in deterring insider trading.
This paper investigates whether and how federal judges’ political ideology affects opportunistic insider trading. Although federal judges are the ultimate arbiters of insider trading enforcement, whether their ideology matters to insiders’ trading decision is unclear because the primary enforcer of illegal insider trading, i.e., the Securities and Exchange Commission (SEC), can prosecute the case through its internal administrative proceedings and that personal trading may be driven by individuals’ behavior heuristics. Using the partisanship of judges’ nominating presidents to measure judge ideology, we find that firms located in circuits with more liberal judges have fewer opportunistic insider sales, suggesting that managers consider judges’ political ideology in their trading decisions. Cross-sectional analyses show that this deterrent effect is stronger when managers face higher litigation risk. We also find that the SEC considers judge ideology when selecting litigation forums. Finally, we validate that liberal judge ideology is associated with heavier penalties in insider trading lawsuits. In summary, this paper contributes to a holistic understanding of legal enforcement in deterring insider trading.
