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Studying regulation 2

Continuing the interpretation of the null discussion! Last day was interpreting the null when one found a reaction to a disclosure. Today, the opposite.

Case 2. Managers do not react in real operations to a information disclosure that they knew but is new information to the market. You predict managers would react to the disclosure, but you found they did not. In other words you cannot reject the null. Beyond the danger of interpreting any null result, let’s ensure we understand the null hypothesis fully.

Embedded in the null is that the disclosure does not affect managers decisions. But there is more! Also embedded in the null is that the required disclosure was too vague, too hidden, too new to affect managers decisions. In other words the regulation did not really focus attention of either third parties or the managers themselves of the fact new information to the market is being disclosed.

That is, all disclosures are not created equal ( I thought we were well beyond the naive EMH world where any public disclosure of information no matter how vague and obscure must affect decisions due to market magic!). Hence another interpretation of the null is that nothing happened due to too weak of a disclosure regulation so that managers feel no difference in accountability due to the vague or hidden disclosure.

In both cases the policy prescriptions differ depending how you interpret the null. In last post’s Case 1, misunderstanding the null could cause you to recommend disclosure must happen or managers would not use the new information. Maybe they would not, but maybe they would. In Case 2, you could conclude disclosure is not effective, so get rid of the disclosure. But you cannot rule out that the regulatory invention was too weak , vague or unclear in it current form but higher quality disclosure could change managers actions. Hence, the another solution is more effective disclosure. The opposite of the first null conclusion! And again as in case 1, the researcher cannot tell the difference!

Studying regulation

A little geek talk about understands what the null hypothesis means in a couple of common research settings. One of my longer blog posts.

When an audit or financial accounting researcher studies a mandatory disclosure regulation it is important to think about what is the null. The alternative hypothesis is simple, there is a reaction to the disclosure.

Case 1. You find the disclosure of new information to both markets and to managers affects real operations of the firm. In other words the null is rejected. What did you reject?

The null is NOT no disclosure would not affect real operations. If the new information is insightful to managers, whether they disclose it or not, they might use it in their operating decisions. Hence, the null is that the disclosure of new information to both market and managers does not affect operating decisions, which is quite different from disclosure of new information to managers but not to the public means no effects on operating decisions! The problem is that without the disclosure-being made, or researcher inside access to the firm, is that the researcher cannot tell the difference between the two possible nulls! Read this slowly to fully appreciate the difference.

In Case 1, misunderstanding the null could cause you to recommend disclosure must happen or managers would not use the new information. Maybe they would not, but maybe they would still use it in managing! The problem is that the researcher without inside access can not tell unless the disclosure is made! Next day, what if you find no effect?

Press(ed) release(ed) by the AAA

The American Accounting Association press release bandwagon has hit again! A young author team eager for recognition of their work okays a press release that is a great overstatement of what they report in the actual article!

Why?

1. Incentives of the publicity person – get coverage in media. To heck with accuracy as long as it is correct from a 30000 foot level (a little less than 10000 m)

2. Incentives of author – recognition for research impact.

Result:

The most populist interpretation possible of the article’s results! Any nuance is lost! But it gets great coverage.

While it is tough to do, it is the responsibility of the academic authors to ensure that the conclusion they reached in the article is reflected in the press release! Using the old Nancy Regan quote, it is okay to Just Say No!

I have consistently advised the powers that be that their hiring an “expert” and then leaving it to the authors to deal with the PR guy will at some point lead to a great black eye for the AAA. It has not happened yet, but it will. You read it here first!

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