Research

Equity Crowdfunding Analyst Reports (recent draft available here)

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Equity crowdfunding (ECF) is an emerging, opaque capital market, where start-ups issue unregistered securities primarily to retail investors. Since 2016, U.S. entrepreneurs have raised over a billion dollars from millions of individual investors. I provide the first evidence on investor responses to ECF analyst report recommendations, which are typically released six weeks into an offering and therefore of questionable timeliness. I find a one-unit increase in recommendation favorableness is associated with a 35-46 percent increase in average weekly investment pledges over the six weeks following report release, equating to $31,027. Results are not explained by other news events and vary predictably with market uncertainty and investor information sensitivity. Additionally, recommendation favorableness is associated with the occurrence and success of future ECF offerings. Collectively, these findings suggest that analyst report recommendations are useful to retail investors in the opaque ECF market despite their lack of timeliness.

SEC Rule 14a-8 Shareholder Proposals: No-Action Requests, Determinants, and the Role of SEC Staff 

Journal of Accounting and Public Policy 

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Under SEC Rule 14a-8, shareholders can petition management to include a topic for vote on the annual proxy statement. In response, management may request no-action relief from the Securities and Exchange Commission (SEC) staff to exclude unwelcome proposals. Using a sample of 3,040 no-action letters from the SEC between 2008 and 2019, I examine the determinants of the SEC staff’s decision to grant no-action relief. I find that legal characteristics, pressures on the staff, and proposal attributes have a statistically significant association with the SEC’s decision. Beyond these factors, I find evidence individual SEC staff members differ in the likelihood that they grant no-action relief. On average, these staff members appear to add value, as evidenced by a positive market response to their decisions, but this favorable valuation effect is concentrated among relatively more experienced staff.

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Equity Crowdfunding “Rules”: Compliance with Mandated Ongoing Reporting in an Unenforced Environment (w/ Riley League)

Equity crowdfunding (ECF) is an emerging capital market in the U.S. where start-ups publicly issue unregistered securities under Regulation Crowdfunding (Reg CF) which requires minimal annual financial reporting following the offering. And with billions of dollars invested by millions of investors, less than half of issuers comply with this seemingly minimal annual reporting mandate with only a third issuing timely. We show tardy filings are partially explained by the desire to issue additional securities, and the timing of offerings is impacted by annual reporting deadlines. Using a randomized intervention, we find compliance increases from email reminders, but only from emails that increase the salience of the issuers lack of choice and not among issuers presented with potential economic benefits of reporting compliance. This paper provides the first evidence on financial reporting compliance behaviors of ECF issuers in this mandated, but largely unenforced environment. 

Employee Board Representation and Firm Investment

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I examine whether employee board representation (EBR) affects firm investment. On the one hand, employee knowledge may improve the monitoring of and information available to managers when making investment decisions. On the other hand, misalignments between shareholders and employees may result in intentional investment distortions. Using German co-determination laws mandating EBR of firms with over 500 domestic employees, I study if the level of investment and its sensitivity to investment opportunities is affected by EBR. I find EBR decreases the level of firm investment, but does not impact investment sensitivity to opportunities. While I find no evidence to suggest EBR investment reductions are explained by divergent employee-shareholder risk preferences, my results suggest incentive misalignment may influence EBR investment reductions when employees face labor insecurity. These results provide timely feedback to policy makers as they consider legislation mandating EBR in the United States (U.S.).

Investor Processing Costs and Annual Financial Reporting Timeliness in the Municipal Bond Market (w/ Bill Mayew & Vincent Zhang)

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On July 1, 2020, the Municipal Securities Rulemaking Board (MSRB) enacted a rule change altering the display of information pertaining to the timeliness of annual financial disclosures submitted to the Electronic Municipal Market Access (EMMA) system. The rule change did not alter the information provided to investors regarding annual financial reporting timeliness, but did potentially lower the awareness costs and acquisition costs of timeliness information. We examine the impact of this rule change by estimating the association between secondary market bond yields and financial reporting timeliness in the four month window surrounding the rule change. We find the association between financial reporting timeliness and secondary market bond yields, which we label the timeliness response coefficient (TRC), increased from 1.9 basis points to 2.7 basis points per month. In the cross section, a TRC increase is observed among uninsured bonds but not among insured bonds, consistent with financial reporting timeliness effects existing solely when financial statements are most useful for assessing credit risk. Among uninsured bonds, a TRC increase is only observed for retail investor trades but not for institutional investor trades. Given retail investors are more likely to use EMMA as an information source, this finding is consistent with the rule change lowering processing costs for retail investors with respect to financial reporting timeliness. These findings are useful for assessing the efficacy of regulatory interventions and for improving our understanding of processing costs in capital markets.

When to Raise Capital from the Crowds: A Survey of Equity Crowdfunding Founders (w/ Brian Miller & Rosh Sinha)

A long-run view of the SEC’s regulation of shareholder proposals (w/ James Cox & Matt Kubic)

Pearson, N. C., A. Byun McKay with J. Ballanco, H. Hoyd, G. Burke and S. Lamauro. 2010. Emergent Properties: Interdisciplinary Team Teaching in Literature and Biology. Currents in Teaching and Learning 2: (2), 79-88.