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Mark-to-market accounting helps create asset bubbles and exacerbate their negative collateral con... more Mark-to-market accounting helps create asset bubbles and exacerbate their negative collateral consequences when they burst. It does the latter by forcing the hand of counterparties to demand collateral even when it is inefficient to do so. Watchful waiting and inaction is often the more efficient course of action. Yet often this is the road not taken, out of fear of litigation and regulatory sanctions. Nonetheless, as a business matter, forbearance on foreclosure may well make sense if the party is optimistic about future values and a collateral call would generate assets sales that, under present mark-to-market rules, would negatively impact these values. But if the party forbears and is wrong about the future values, shareholders may sue the firm for not exercising its legal rights in order to protect their interests. Because future values are uncertain, litigation costs are high, and courts are likely to make some mistakes, firms will demand excessive levels of collateral.
Firms have the option to voluntarily disclose the existence of and details within insiders' Rule ... more Firms have the option to voluntarily disclose the existence of and details within insiders' Rule 10b5-1 trade plans. This study examines the determinants of disclosure and the association between disclosure and insiders' strategic trade behavior. We find evidence that voluntary disclosure is greater at firms with higher litigation risk and with higher insider strategic trade potential. We also find that insiders' trade returns are greater for firms disclosing plan participation, particularly at firms that disclose specific plan details. Disclosure firms' insiders' sales are associated with subsequent earnings news declines and other substantive negative news events. Collectively, this suggests that 10b5-1 voluntary disclosure may provide legal protection for strategic trade. It also suggests that non-disclosing firms are least associated with strategic trade; therefore an SEC disclosure mandate might not mitigate strategic activity within the Rule.
Mark-to-market accounting helps create asset bubbles and exacerbate their negative collateral con... more Mark-to-market accounting helps create asset bubbles and exacerbate their negative collateral consequences when they burst. It does the latter by forcing the hand of counterparties to demand collateral even when it is inefficient to do so. Watchful waiting and inaction is often the more efficient course of action. Yet often this is the road not taken, out of fear of litigation and regulatory sanctions. Nonetheless, as a business matter, forbearance on foreclosure may well make sense if the party is optimistic about future values and a collateral call would generate assets sales that, under present mark-to-market rules, would negatively impact these values. But if the party forbears and is wrong about the future values, shareholders may sue the firm for not exercising its legal rights in order to protect their interests. Because future values are uncertain, litigation costs are high, and courts are likely to make some mistakes, firms will demand excessive levels of collateral.
Firms have the option to voluntarily disclose the existence of and details within insiders' Rule ... more Firms have the option to voluntarily disclose the existence of and details within insiders' Rule 10b5-1 trade plans. This study examines the determinants of disclosure and the association between disclosure and insiders' strategic trade behavior. We find evidence that voluntary disclosure is greater at firms with higher litigation risk and with higher insider strategic trade potential. We also find that insiders' trade returns are greater for firms disclosing plan participation, particularly at firms that disclose specific plan details. Disclosure firms' insiders' sales are associated with subsequent earnings news declines and other substantive negative news events. Collectively, this suggests that 10b5-1 voluntary disclosure may provide legal protection for strategic trade. It also suggests that non-disclosing firms are least associated with strategic trade; therefore an SEC disclosure mandate might not mitigate strategic activity within the Rule.