Risk Fact or Fiction: The information content of risk factor disclosures

By Maclean Gaulin

I find that managers time their identification of new risk factors and removal of previously identified ones to align with the expected occurrence of future adverse outcomes. By using individual risk factors as the unit of disclosure, I am able to provide novel evidence that managers remove stale disclosures on a timely basis. My results are inconsistent with concerns of uninformative boilerplate or purely 'copy and paste' disclosure. To shed light on what shapes the disclosure equilibrium, I study the managerial response to demand 'shocks' from public and private enforcement actions. The results show that firms respond to investor demand in a manner consistent with the litigation shield hypothesis, and that this effect persists for multiple years. Consistent with the regulatory cost-benefit function, public enforcement does not result in a net increase in disclosed risk factors, but does evoke more definitive disclosures through more specific language and an increased use of numbers.

The Salience of Creditors' Interests and CEO Compensation

By Brian Akins, Jonathan Bitting, David De Angelis, Maclean Gaulin

This paper shows that firms adjust CEO compensation policies when creditors’ interestsare more salient. This effect helps explain controversial compensation practices such asweak performance incentives and short pay duration. Our findings also show that tomitigate the agency cost of debt, compensation contracts can reflect not only the firm’scapital structure but the debt contract itself. For example, firms tend to contract onaccounting-based goals when creditors do as well. Our analysis relies on a regressiondiscontinuity design around loan covenant violations. We also confirm our conclusionsstudying a broad sample of financially constrained firms seeking debt financing.

Debt Contracting on Management

By Brian Akins, David De Angelis, Maclean Gaulin

Change of management restrictions (CMRs) in loan contracts give lenders explicit ex-ante control rights over managerial retention and selection. This paper shows that lenders use CMRs to mitigate risks arising from CEO turnover, especially those related to the loss of human capital and replacement uncertainty, thereby providing evidence that human capital risk affects debt contracting. With a CMR in place, the likelihood of CEO turnover decreases by more than half, and future firm performance improves when retention frictions are important, suggesting that lenders can influence managerial turnover, even outside of default states, and help the borrower to retain talent.