Jayanthi Sunder

Interests

Research

Financial reporting and capital markets, debt contracting and compensation contracting

Teaching

Financial accounting

Courses

Scholarly Contributions

Journals/Publications

• Ashraf, M., & Sunder, J. (2023). Can shareholders benefit from consumer protection disclosure mandates? Evidence from data breach disclosure laws and the cost of equity. The Accounting Review, 98(4), 1-32. doi:https://doi.org/10.2308/TAR-2020-0787
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  We exploit plausibly exogenous state-level variation in data breach disclosure laws to study the impact of consumer protection regulation on firms’ cost of equity capital. We find that cost of equity decreases, on average, after the staggered passage of these laws by U.S. states. This is consistent with the laws incentivizing firms to proactively invest in cybersecurity and reduce exposure to cyber risk. The beneficial impact on the cost of equity is weaker for firms that invest in information technology and cybersecurity regardless of the laws and firms with greater sensitivity to adverse consequences that are triggered if a firm were to disclose a data breach in the future. Finally, after passage of these laws, firms are more likely to have an IT security executive officer and increase investments in information technology, suggesting that these laws are effective in inducing firms to take real actions to reduce cyber risk.
• Naughton, J., Rogo, R., Sunder, J., & Zhang, R. (2018). SEC monitoring of foreign firms’ disclosures in the presence of foreign regulators. Review of Accounting Studies, 23(4), 1355–1388. doi:https://doi.org/10.1007/s11142-018-9467-x
• Sletten, E., Ertimur, Y., Sunder, J., & Weber, J. (2018). When and Why do IPO firms manage earnings?. Review of Accounting Studies, 23(3), 872-906. doi:doi.org/10.1007/s11142-018-9445-3
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  There is significant disagreement about whether, when and why IPO firms manage earnings. We contribute to the literature by precisely identifying the timing and motives behind earnings management by IPO firms. We emphasize that the period around IPO is characterized by two distinct events: the IPO itself and the lockup expiration. Both the raising of capital at the IPO and the large-scale exit by pre-IPO shareholders at lockup expiration approximately 180 days later create incentives for firms to manage earnings. To disentangle the effect of these events, we examine quarterly, rather than annual, abnormal accruals. We find no evidence of income-increasing earnings management before the IPO. However, IPO firms exhibit positive abnormal accruals in the quarter before and the quarter of the lockup expiration. Positive abnormal accruals are concentrated in less scrutinized firms and firms with high selling by pre-IPO shareholders. Moreover, we find that these accruals subsequently reverse and that such reversals contribute to long-run IPO underperformance. Our results hold after controlling for the investment of IPO proceeds in working capital and suggest that the positive abnormal accruals in the IPO year reflect earnings management in anticipation of selling around lockup expiration.
• Sunder, J., Sunder, S., & Zhang, J. (2018). Balance Sheet Conservatism and Debt Contracting. Contemporary Accounting Research, 35(1), 494-524. doi:https://doi.org/10.1111/1911-3846.12356
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  We study the role of borrowers’ balance sheet conservatism (i.e., conservatism in asset values) in debt contract design. We find that borrowing costs are decreasing in the degree of balance sheet conservatism, and this effect is stronger for firms with lower credit quality. This is consistent with balance sheet conservatism reducing lenders’ uncertainty about the liquidation value of assets, thus facilitating the ex ante screening of borrowers. We predict that better ex ante screening also reduces the need for ex post monitoring, and find that balance sheet conservatism is associated with less restrictive covenant terms. Further, we find that asymmetric timeliness in earnings is associated with lower borrowing costs only when balance sheet conservatism is not high. This result suggests that lenders appear to recognize the constraining effect of high balance sheet conservatism on future conservatism in earnings.
• John, K., Ravid, A. S., & Sunder, J. (2017). Managerial Ability and Success: Evidence from the Career Paths of Film Directors. Journal of Corporate Finance, 44, 425-439. doi:https://doi.org/10.1016/j.jcorpfin.2014.11.001
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  We use a unique hand-collected data set covering the entire career path of film directors, who are re-hired (or not) after each and every film project. Film directors manage projects which can cost hundreds of millions of dollars. We examine the inter-temporal dynamics of turnover decisions to disentangle ability revelation from effort incentives and measure the contribution of project managers to project success. We show that the probability of re-hiring is increasing in average returns over an entire career path, rather than just the outcome of the most recent project, supporting an ability revelation interpretation. We also find that promotions are increasing in directors' experience. We create an ability measure for directors, and show that directors can have a significant effect on the financial and critical success of their projects. Our evidence can inform the debate on CEO effects on their firms and projects and contribute to the CEO and executive turnover literature.
• Sunder, J., Sunder, S. V., & Zhang, J. (2017). Pilot CEOs and corporate innovation. Journal of Financial Economics, 123(1), 209-224. doi:http://dx.doi.org/10.1016/j.jfineco.2016.11.002
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  We find evidence that chief executive officers’ (CEOs’) hobby of flying airplanes is associated with significantly better innovation outcomes, measured by patents and citations, greater innovation effectiveness, and more diverse and original patents. We rule out alternative explanations, leading us to conclude that CEO pilot credentials capture the personality trait of sensation seeking. Sensation seeking combines risk taking with a desire to pursue novel experiences and has been associated with creativity. Our evidence highlights sensation seeking as a valuable personality trait that can be used to identify CEOs who are likely to drive innovation success.
• Cadman, B., & Sunder, J. (2014). Investor Horizon and CEO Horizon Incentives. The Accounting Review, 89(4), 1299-1328.
• Ertimur, Y., Sletten, E., & Sunder, J. (2014). Large Shareholders and Disclosure Strategies: Evidence from IPO Lockup Expirations. Journal of Accounting and Economics, 58, 79-95.
• Sunder, J., Sunder, S. V., & Wongsunwai, W. (2014). Debtholder Responses to Shareholder Activism: Evidence from Hedge Fund Interventions. Review of Financial Studies, 27(11), 3318-3342.
• Cadman, B. D., Rusticus, T. O., & Sunder, J. (2013). Stock option grant vesting terms: Economic and financial reporting determinants. Review of Accounting Studies, 18(4), 1159-1190.
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  Abstract: Option grant vesting terms are a contractual provision that is shaped by accounting standards and other economic factors. We examine the effect of accounting standards, specifically SFAS 123(R), on the vesting terms of stock option grants while also modeling other economic determinants of this contract feature. We document significant variation in stock option grant vesting periods and patterns suggesting that firms actively choose vesting terms. Consistent with financial reporting incentives influencing contract design, we find that firms simultaneously lengthen vesting periods and alter vesting patterns after the adoption of SFAS 123(R). The changes in vesting patterns are consistent with firms trying to defer recognition of the option expense, while limiting the incremental risk imposed on the CEO. In addition, we find that vesting schedules are longer in growth firms where lengthening the executive's investment horizon is more important and that firms with more powerful CEOs and weaker governance grant options with shorter vesting periods. © 2012 Springer Science+Business Media New York.
• Bharath, S. T., Sunder, J., & Sunder, S. V. (2008). Accounting quality and debt contracting. Accounting Review, 83(1), 1-28.
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  Abstract: We study the role of borrower accounting quality in debt contracting. Specifically, we examine how accounting quality affects the borrower's choice of private versus public debt market and how the design of debt contracts vary with accounting quality in the two markets. We find that accounting quality affects the choice of the market, with poorer accounting quality borrowers preferring private debt, i.e., bank loans. This is consistent with banks possessing superior information access and processing abilities that reduce adverse selection costs for borrowers. We also find that accounting quality has an economically significant but differential impact on contract design in the two markets consistent with differences in recontracting flexibility across the two markets. In the case of private debt, since there is greater recontracting flexibility, both the price (i.e., interest) and non-price (i.e., maturity and collateral) terms are significantly more stringent for poorer accounting quality borrowers, unlike public debt where only the price terms are more stringent. The impact of accounting quality on interest spreads of public debt is 2.5 times that of the private debt, since the price terms alone reflect the variation in accounting quality.
• Lys, T. Z., Lys, T. Z., Sunder, J., & Sunder, J. (2008). Endogenous entry/exit as an alternative explanation for the disciplining role of independent analysts. Journal of Accounting and Economics, 45(2-3), 317-323.
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  Abstract: Gu and Xue [2008. The superiority and disciplining role of independent analysts. Journal of Accounting and Economics, this issue, doi:10.1016/j.jacceco.2008.02.002] study the disciplining effect of independent analysts on the accuracy and forecast relevance of the forecasts of non-independent analysts. One of the intriguing results is that while independent analysts issue inferior forecasts, their presence appears to reduce the forecast bias, improve the forecast accuracy and increase the forecast relevance of forecasts issued by non-independent analysts. We explore alternative explanations for the Gu-Xue results. Our evidence of endogenous entry and exit of independent analysts provides a more compelling explanation for the reported results. © 2008 Elsevier B.V. All rights reserved.
• Ertimur, Y., Sunder, J., & Sunder, S. V. (2007). Measure for measure: The relation between forecast accuracy and recommendation profitability of analysts. Journal of Accounting Research, 45(3), 567-606.
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  Abstract: We examine the contemporaneous relation between earnings forecast accuracy and recommendation profitability to assess the effectiveness with which analysts translate forecasts into profitable recommendations. We find that, after controlling for expertise, more accurate analysts make more profitable recommendations, albeit only for firms with value-relevant earnings. Next, we show that conflicts of interest from investment banking activities affect the relation between accuracy and profitability. In the case of buy recommendations, more accurate forecasts are associated with more profitable recommendations only for the nonconflicted analysts. For hold recommendations, higher levels of accuracy are associated with higher levels of profitability for conflicted analysts, provided these recommendations are treated as sells. Finally, we find that regulatory reforms aimed at mitigating analyst conflicts of interest appear to have improved the relation between accuracy and profitability. Specifically, the integrity of buy and hold recommendations has improved and the change is more pronounced for analysts expected to be most conflicted. Copyright ©, University of Chicago.