Center for Financial Markets and Policy

Corporate Attorneys and Firm Financial Disclosure

Preeti Choudhary Jason D. Schloetzer Jason D. Sturgess

McDonough School of Business

Georgetown University

October 28, 2011

http://finpolicy.georgetown.edu

Corporate attorneys and firm financial disclosure

Preeti Choudhary

McDonough School of Business Georgetown University pc299@georgetown.edu

Jason D. Schloetzer McDonough School of Business

Georgetown University jds99@georgetown.edu

Jason D. Sturgess McDonough School of Business

Georgetown University jds224@georgetown.edu

October 28, 2011 This study has benefited from the helpful comments of Reena Aggarwal, Jim Angel, Bill Baber, Jon Davis, Patricia Fairfield, Don Langevoort, Ron Masulis workshop participants at Georgetown University, University of Wisconsin-Madison, the Washington, DC Area Accounting Symposium, the 2011 AAA Management Account Section meeting, the 2011 AAA Mid-Atlantic Region meeting, and the 2011 AAA Annual Meeting. We appreciate Feng Li’s assistance with the Form 10-K readability measures. The study was greatly improved through detailed discussions with an attorney regarding the costs and benefits of corporate disclosure within U.S. securities regulations and a Big N audit partner regarding the role of auditors and corporate attorneys in the preparation, review, and filing of Form 12b-25. The authors acknowledge the generous funding received from the McDonough School of Business, Center for Financial Markets and Policy.

Corporate attorneys and firm financial disclosure

ABSTRACT

Regulators identify corporate attorneys as important gatekeepers involved in the preparation and

review of financial information released to investors. However, there is scant empirical evidence

regarding attorney influence on firm financial disclosure. We obtain a unique dataset that

identifies a firm’s corporate attorney to examine the relation between top-tier corporate

attorneys, measured using law firm size and partner compensation data, and aspects of the annual

reporting process. Larger firms with greater financial reporting complexity, a Big N auditor,

greater volatility of operations, Delaware incorporation, and firm-specific legal needs are more

likely to retain top-tier attorneys. After controlling for firm, industry, and year fixed effects, and

time-varying firm characteristics, we find that corporate attorneys influence Form 10-K

readability, measured using lexical properties of Form 10-K. We also find that firms with top-tier

corporate attorneys are less likely to file a mandatory annual reporting disclosure that provides

investors with reasons for a late Form 10-K. Overall, the evidence indicates that corporate

attorneys influence the content and amount of financial information released to investors.

Keywords: monitoring; corporate governance; mandatory disclosure; gatekeepers

Data Availability: The data used in this study are available from the sources indicated in the text. Please contact the authors regarding corporate attorney data.

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I. INTRODUCTION

The Securities and Exchange Commission (SEC) and American Bar Association (ABA)

view corporate attorneys as important “gatekeepers” involved in the preparation and review of

financial information released to investors.1 Consistent with this perspective, Section 307 of the

Sarbanes-Oxley Act requires corporate attorneys to report “up-the-ladder” to the board of

directors if there is evidence of a material violation of federal or state securities laws. By mid-

2005, the SEC had used Section 307 to file nearly 80 enforcement actions against corporate

attorneys for their role in promulgating false or misleading financial disclosures to investors

(Lowenfels et al. 2006).2

Legal scholars frequently compare the market for legal services and the role of corporate

attorneys in the preparation and review of disclosure documents to that of the auditor. Coffee

(2006, 192-244; 348) views the outside corporate attorney as “disclosure counsel” who has the

unique ability to assess the accuracy of the firm’s disclosures in SEC periodic reports. In

particular, corporate attorneys are likely to be involved in the preparation of forward-looking

disclosures and risk assessments (conveyed in the Management, Discussion, and Analysis

While research shows that other gatekeepers, such as corporate

directors, influence aspects of financial disclosure (Eng and Mak 2003; Ajinkya et al. 2005;

Karamanou and Vafeas 2005; Frankel et al. 2010), there is little systematic evidence of attorney

influence on financial disclosure. This study uses a unique dataset that identifies a firm’s

corporate attorney to examine the determinants of corporate attorney retention and their

subsequent influence on firm financial disclosure.

1 The ABA Task for on Corporate Responsibility (2003) identifies corporate attorneys, shareholders, external auditors, and corporate directors as key monitors of the financial reporting process. 2 Steven M. Cutler, then-Director of the SEC’s Division of Enforcement, emphasized the new environment of attorney scrutiny in his September 20, 2004 address at the UCLA School of Law: “Consistent with Sarbanes-Oxley’s focus on the important role of attorneys as gatekeepers, we have stepped up our scrutiny of the role of attorneys in the corporate frauds we investigate.”

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(MD&A) section), contingent liability disclosures, and information about the firm’s accounting

policies and their impact on the firm.3

While corporate attorneys are likely involved in the disclosure process, their influence

within the process is unclear. The “gatekeeper perspective,” based on Smigel’s (1969, 6)

influential study of Wall Street lawyers who “use their positions as advisors to guide their clients

into proper and moral legal positions,” views attorneys as a fundamental force for compliance

(Coffee 2006, 193). Other studies argue that agency costs in the manager-attorney relationship

create opportunities for attorneys’ incentives to influence their legal advice (Bebchuk 2003).

Given investors’ joint reliance on forward-looking

statements and past financial results, Coffee (2006, 349) argues that the SEC should require that

all disclosure documents be signed by the attorney who prepared and reviewed the filing,

creating a similar certification process for corporate attorneys as currently exists for auditors.

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In this study, we examine whether corporate attorneys influence firm financial disclosure.

In particular, we focus on top-tier corporate attorneys retained by the firm for on-going legal

advice. We define top-tier corporate attorneys as one included in the top 100 in American

This “attorney hypothesis” views corporate attorneys as advisors who weigh the costs and

benefits of alternative courses of action on a case-by-case basis with the aim of retaining client

business. This hypothesis has been used to explain the influence of major law firms on firms’

corporate governance choices (Coates 2001; Daines 2002; Bebchuk and Cohen 2003). Attorneys

could also have little influence on disclosure, as management and other gatekeepers, such as

auditors and corporate directors, could mitigate attorney influence.

3 For example, the SEC states in Regulation S-K, Act 303, that filers use the MD&A to “Discuss registrant's financial condition, changes in financial condition and results of operations.” Further, “The discussion and analysis shall focus specifically on material events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future operating results or of future financial condition. This would include descriptions and amounts of (A) matters that would have an impact on future operations and have not had an impact in the past, and (B) matters that have had an impact on reported operations and are not expected to have an impact upon future operations.” 4 Other studies have advanced similar arguments, including Gilson (1990) and Langevoort and Rasmussen (1997).

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Lawyer’s annual law firm ranking, which uses gross revenue to identify the 100 largest U.S. law

firms.5

The research setting we use to examine the relation between top-tier corporate attorneys

and financial disclosure is the firm’s annual reporting process. We focus on the annual reporting

process for several reasons. First, the firm’s prominent gatekeepers (auditor, board of directors,

corporate attorney) are involved in the preparation, review, and filing of Form 10-K. Second, the

SEC has brought enforcement actions against corporate attorneys for their participation in the

filing of false and misleading Form 10-Ks (Lowenfels et al. 2006). This indicates that the SEC

monitors corporate attorneys who are involved in the Form 10-K process. Third, corporate

attorneys often advise firms preparing non-routine SEC disclosures such as Form NT 10-K

(known as Form 12b-25), which provides investors with potentially sensitive details for why the

firm cannot file a timely Form 10-K. Shortly after passage of Section 307, the SEC brought a

high-profile enforcement action against a top-tier corporate attorney for its role in preparing false

Prior studies use similar methods to identify top-tier attorneys in merger and acquisition

(e.g., Krishnan and Masulis 2011) and initial public offering settings (e.g., Beatty and Welch

1996). Studies that relate top-tier rankings with expertise argue that higher-ranked experts

possess specific knowledge that enables them to influence corporate outcomes. Thus, we view

top-tier corporate attorneys retained by the firm for on-going legal advice as providing valuable

legal expertise to their clients. Using a broad sample of approximately 11,000 firm-year

observations, we document that 47 percent of firms retain a top-tier corporate attorney.

5 While in-house legal counsel is likely involved in the disclosure process, corporate attorneys are important advisors to officers and directors about SEC disclosure rules and routinely prepare and review the language in Form 10-K and other SEC period reports. For example, Cooley Godward LLP, ranked among the top 100 law firms by American Lawyer, describes its securities regulation practice as: “Our Securities Regulation attorneys are considered among the nation's thought leaders in the public securities arena. Some of them were previously employed by the SEC and currently chair or participate in committees focused on driving change in the post-Enron world of intense regulation. This experience and familiarity with federal and state securities laws enable us to be strategic advisors to both seasoned and newly public companies. Clients look to us for advice on a wide-range of matters, including the preparation and review of filings made with the SEC and other regulatory agencies (e.g., annual and quarterly reports, current reports on Form 8-K, insider filings).”

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and misleading Form 12b-25s.6

We use three measures of financial disclosure associated with the annual reporting

process in our empirical analysis. We extend Li (2008) to examine the relation between a firm’s

corporate attorney and both the Fog index and the length of the MD&A section and entire Form

10-K. The Fog index proposes that more syllables per word or more words per sentence render a

document more difficult to read, all things equal. The length of the MD&A section and the entire

Form 10-K reflects the number of words contained in the document. Li (2008) argues that

longer, more complex documents require higher information-processing costs for investors, and

documents that Form 10-K readability is associated with current earnings and earnings

persistence. Discussions with corporate attorneys indicate that they are significantly involved in

preparing Form 10-K content. Our third measure of financial disclosure captures whether firms

that are unable to file Form 10-K by the SEC deadline comply with Form 12b-25 disclosure

rules. We document that 40 percent of late Form 10-Ks do not have a corresponding Form 12b-

25 and examine the determinants of noncompliance.

This indicates that corporate attorneys can be involved in filing a

particular disclosure that forms an important part of the annual reporting process.

This study contributes to prior literature on the role of gatekeepers in firm financial

disclosure in three ways. There is limited prior literature that investigates the determinants of

top-tier corporate attorney retention. Our first contribution establishes that larger firms with

greater financial reporting complexity, higher volatility of operations, Delaware incorporation,

and firm-specific legal needs are more likely to retain top-tier corporate attorneys. In addition,

firms with a Big N auditor are more likely to retain a top-tier corporate attorney, indicating a

6 A court-ordered examiner’s report filed in SEC v. Spiegel, Inc. found that a top-tier corporate attorney knowingly prepared multiple Form 12b-25s that conveyed false and misleading statements to investors regarding the reason for its client’s late Form 10-K. A Big N partner independently confirmed high awareness of SEC v. Spiegel, Inc. among auditors and attorneys involved in the annual reporting process.

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positive relation between attorney and auditor expertise. These statistical associations are also

economically important; for example, Delaware incorporation (Big N auditor) increases the

likelihood of top-tier corporate attorney retention by 71 (41) percent.

Our second contribution provides fresh evidence regarding the interplay between

corporate attorneys and Form 10-K readability and is consistent with attorneys influencing

financial disclosure content. We estimate how much of the observed variation in the Fog index

and length of both the MD&A section and Form 10-K can be attributed to corporate attorney

fixed effects. Specifically, we examine a fixed effects specification that includes corporate

attorney, firm, industry, and year fixed effects, and the time-varying firm characteristics used in

Li (2008) to explain Form 10-K readability augmented with a control for the presence of a Big N

auditor. This analysis is in the spirit of Bertrand and Schoar (2003) and Bamber et al. (2010),

which use a similar empirical design to examine the influence of managers on the investment,

financial, organization, and voluntary disclosure practices of the firm.

The results of this analysis show that corporate attorney fixed effects are economically

and statistically important to explain the observed variation in Form 10-K readability.

Specifically, including corporate attorney fixed effects increases the explanatory power of a

benchmark model similar to Li (2008) by 200 percent for the MD&A Fog index, 80 percent for

MD&A length, 167 percent for the Form 10-K Fog index, and 75 percent for Form 10-K length.

The results also show that corporate attorneys are economically more important in explaining our

measures of Form 10-K readability than industry effects. Further, corporate attorney fixed effects

remain important in explaining Form 10-K readability after including firm fixed effects,

indicating that attorneys do not simply comply with manager requests and have a distinct

influence on disclosure beyond that of in-house legal counsel.

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We extend this contribution by providing new evidence on the relation between top-tier

corporate attorneys and annual reporting financial disclosure compliance. When a firm files

Form 10-K late, the firm must disclose in Form 12b-25 potentially sensitive information about

the reason for late filing (e.g., pending going concern audit opinion, on-going renegotiation of

debt). These disclosures generate negative attention to the late Form 10-K and thereby enhance

the potential for SEC scrutiny (Bartov et al. 2011). It is likely that any adverse consequences that

arise because of corporate attorney advice concerning the preparation of Form 12b-25 will be

attributed directly to those attorneys, increasing the likelihood that the attorney will lose a

valuable client. In contrast, with the exception of firms in need of capital, the typical cost of not

filing Form 12b-25 is a cease and desist letter from the SEC and the potential for scrutiny from

the firm’s monitors (e.g., institutional investors, lenders). Thus, Form 12b-25 compliance is a

setting that likely involves both the “gatekeeper perspective” and “attorney hypothesis.”

We find robust evidence that firms that retain a top-tier corporate attorney are less likely

to file Form 12b-25 compared with when other attorneys are involved. We interpret this evidence

as inconsistent with the “gatekeeper perspective” and consistent with the “attorney hypothesis,”

which views corporate attorneys as advisors who weigh the costs and benefits of alternative

courses of action on a case-by-case basis. We also find that firms with greater institutional

ownership, recent accounting restatements, higher leverage, and greater near-term financing

needs are more likely to file Form 12b-25, indicating that shareholder, lender, and financing

needs influence compliance. Overall, the evidence indicates that corporate attorneys influence

the content and amount of financial disclosure released to investors.

Section 2 describes the sample, provides variable definitions, and analyzes top-tier

corporate attorney retention. Section 3 reports the main results and section 4 concludes.

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II. DATA AND VARIABLE DEFINITIONS

2.1 Sample

Table 1, Panel A documents the sample formation process for our analysis of the

determinants of corporate attorney retention and the relation between corporate attorneys and

Form 10-K readability. We obtain a dataset that identifies a firm’s corporate attorney between

1998 and 2006 from a provider of competitive intelligence to major law firms. We merge the

attorney dataset with CSRP-COMPUSTAT and follow Li (2008) to calculate the Fog index and

the number of words in the Management Discussion and Analysis (MD&A) section and the

entire Form 10-K. Next, we omit observations missing CSRP-COMPUSTAT data and delete

firm-year observations with market value of equity or total assets less than $1 million. This

process yields the main sample of 10,918 firm-year observations for 3,443 unique firms. Four

two-digit SIC codes (12, 21, 76, and 86) lack variation in top-tier corporate attorney, reducing

the sample size by 28 observations for our corporate attorney retention analysis.

Table 1, Panel B reports sample formation details for our analysis of the relation between

corporate attorneys and Form 12b-25 compliance. We obtain all Form 10-Ks submitted to the

SEC from 1998 to 2008 that were filed after the mandatory reporting deadline.7

7 We extend the time period to 2008 to increase our sample size by approximately 25 percent. We assume that the firm retains the same corporate attorney in 2007 and 2008 that was used in 2006. All results remain qualitatively similar if we restrict the sample to 1998 through 2006.

We use

10kWIZARD to obtain the firm’s filing status (Large Accelerated, Accelerated, or Non-

accelerated Filer) and the date Form 10-K is filed with the SEC to identify late Form 10-Ks. This

selection process yields 7,188 late Form 10-Ks. Next, we omit observations missing CSRP-

COMPUSTAT data and delete firm-year observations with market value of equity or total assets

less than $1 million. Because the SEC rules require firms to file Form 12b-25 within one day of

the reporting deadline, we delete firm-year observations in which Form 10-K was filed the day

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after the expiration of the reporting deadline. This yields a sample of 2,289 firm-year

observations from 1,603 unique firms for the analysis.8

2.2 Top-tier corporate attorneys

Six two-digit SIC codes (16, 19, 31, 41,

53, and 60) lack variation in Form 12b-25 compliance, reducing the sample size by 30

observations for this analysis.

We use three measures to identify top-tier corporate attorneys. Our primary measure is an

indicator variable equal to one when the corporate attorney is ranked among the top 100 in

American Lawyer magazine’s annual ranking. The ranking uses gross revenue to identify the 100

largest U.S. law firms. Prior studies use rankings and market share data to identify top-tier

advisors in a variety of contexts. For example, Krishnan and Masulis (2011) and Beatty and

Welch (1996) examine the influence of law firms in mergers and acquisitions and initial public

offerings (IPO), Megginson and Weiss (1991) investigates lead underwriters in IPOs, while Rau

(2000) and Walter, Yawson, and Yeung (2008) study investment bank influence in mergers and

acquisitions. These studies equate top-tier rankings with expertise and argue that top-tier experts

possess valuable, specific knowledge that enables them to influence corporate outcomes. Hence,

top-tier corporate attorneys likely offer valuable legal expertise to their clients.

The second measure we use to identify top-tier corporate attorneys is the natural

logarithm of the average law firm profits per equity partner (logPPP). This is an alternative

measure of lawyer expertise, as experts likely seek to work for law firms that offer higher

compensation and/or law firms likely pay higher compensation to retain more qualified

attorneys. One advantage of using this measure over annual rankings is that compensation is

arguably a more direct measure of attorney expertise compared with law firm gross revenue. The

8 We test the sensitivity of our results to requiring corporate attorney data by repeating the analysis on the sample of 5,168 firm-year observations that meet the remaining sample restrictions. All results remain similar in direction and statistical significance.

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third measure we use to identify top-tier corporate attorneys is the natural logarithm of the total

number of attorneys employed by the law firm (ATTORNEYS). This approach replicates the

National Law Journal’s methodology of ranking top law firms. A disadvantage of both

alternative measures is reduction in sample size. We obtain compensation and employment data

from American Lawyer rankings, which limits the sample to American Lawyer-rated law firm,

while our corporate attorney dataset identifies a broader set of law firms.

2.3 Summary statistics

Table 2, Panel A presents summary statistics of the sample. The sample contains firms of

varying size; the mean (median) book value of assets and market value of common equity is

$1,765 million ($239 million) and $1,424 million ($242 million), respectively. Overall, 47

percent of firm-year observations include a top-tier corporate attorney (TOPTIER), measured

using American Lawyer annual rankings of U.S. law firms. The remaining observations consist

of law firms either not ranked in the top 100 or the name of an individual attorney.9

Table 2, Panel A also reports summary statistics for Form 10-K readability. Following Li

(2008), we examine the Fog index and length of the MD&A section and entire Form 10-K as our

primary measures of Form 10-K readability. The Fog index is a function of syllables per word

and words per sentence, reflecting the number of years of formal education the average reader

The

percentage of firms that employ a top-tier corporate attorney range from 43 percent to 50 percent

during the sample period (untabulated). The alternative measures of top-tier corporate attorneys

have a mean (median) natural logarithm of law firm profits per equity partner (logPPP) and total

number of attorneys in the law firm (ATTORNEYS) of 13.60 (13.56) and 6.42 (6.43),

respectively. This translates to an average profit per equity partner of approximately $775,000

and an average law firm size of 620 attorneys.

9 We interpret this name as identifying the firm’s in-house legal counsel.

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would need to understand the text on a first reading. It is calculated as: Fog=0.4*(Words per

Sentence+Percent of Complex Words), where complex words have at least three syllables. All

reported results remain qualitatively similar when using alternative measures of readability (i.e.,

the Kincaid Index, Flesch-Reasing Ease Index; untabulated). We measure length as the natural

logarithm of the number of words in the MD&A section and entire Form 10-K.

Table 2, Panel A highlights that the Form 10-K of firms in our sample are difficult to

read. The mean (median) Fog index of the entire Form 10-K (10-K Fog) is 19.69 (19.51), which

is considered to be “unreadable” using the standard interpretation of the index.10 The mean Form

10-K length (10-K Length) is 10.17, which corresponds to approximately 26,100 words. The

MD&A section of the Form 10-K is modestly easier to read compared with the document as a

whole, with a mean (median) Fog index of 18.21 (18.02) and has larger variation in readability

compared with the entire Form 10-K (standard deviation of 2.19 compared with 1.63 for the

entire Form 10-K). The MD&A section accounts for approximately 26 percent of total Form 10-

K length, with a median number of words of 6,768 compared with 26,370 for the entire report.11

Table 2, Panel B provides summary statistics for various firm characteristics for the

subsample of 5,112 firm-year observations with a top-tier corporate attorney (TOPTIER=1)

versus the 5,806 observations without such an attorney (TOPTIER=0). Firms with top-tier

corporate attorneys are of similar size to those firms without one, as there is no significant

difference between the book value of assets and market value of equity of the two subsamples.

However, firms with a top-tier corporate attorney tend to have longer, more complex Form 10-

10 The relation between the Fog index and reading ease is as follows: Fog≥14-18 (difficult); 12-14 (ideal); 10-12 (acceptable); and 8-10 (childish). 11 For comparison, Li (2008; Table 1, Panel A) reports a mean (median) Fog index for the entire Form 10-K for a sample of Form 10-Ks filed from 1994 through 2006 of 19.4 (19.2) and a mean (median) Form 10-K length of 10.08 (10.05). For the MD&A section, Li (2008) reports a mean (median) Fog index of 18.23 (17.98) and a mean (median) length of 8.03 (8.11).

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Ks. This can be seen from the significant differences between firms with and without a top-tier

corporate attorney for each Form 10-K readability measure (10-K Fog, p<0.01; 10-K Length,

p<0.01; MD&A Fog, p<0.05; MD&A Length, p<0.01). Panel C documents positive and

significant correlations between TOPTIER and logPPP (ρ=0.46, p<0.01) and TOPTIER and

ATTORNEYS (ρ=0.66, p<0.01), lending support to using logPPP and ATTORNEYS as alternative

measures of TOPTIER in the subsequent empirical analysis.

2.4 Determinants of top-tier corporate attorney retention

This section examines the determinants of top-tier corporate attorney retention. Ex ante,

there are several factors that might affect top-tier corporate attorney retention. Because there is

limited related literature, it is important to document the determinants and to account for them in

our subsequent tests of the relation between top-tier corporate attorneys and firm financial

disclosure. The determinants we investigate include the following variables:

• Size: Size captures many aspects of a firm’s legal environment. For example, larger firms could be more likely to have a large internal legal department, reducing the need for outside legal counsel (Coates 2001). On the other hand, larger firms could have more complex legal needs, creating a demand for more sophisticated outside counsel. We include SIZE measured as the natural logarithm of the market value of common equity at the end of the fiscal year.

• Performance and volatility of business operations: Firms with higher performance are

different from firms with lower performance in many aspects, including differences in bankruptcy risk, shareholder litigation, and potential financing needs. We include ROA, measured as EBITDA divided by total assets, as a variable to explain top-tier corporate attorney retention. Greater volatility in operations could indicate great risk and, thus, a need for quality legal advice. We proxy for operating volatility using firm-specific stock return volatility measured as the standard deviation of monthly stock returns in the prior year (RETVOL) and the standard deviation of operating earnings during the prior five fiscal years (EARNVOL).

• Firm age: Older firms could be less likely to retain a top-tier corporate attorney as they likely

possess experience filing a variety of routine (i.e., Form 10-K) and non-routine (i.e., Form

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12b-25) disclosures. We proxy for firm age using the number of years since a firm’s first appearance in the CRSP monthly stock return files (AGE).

• Financial and operating complexity: Firms with more complex financial reporting and

business operations could be more likely to have more complex regulatory compliance and legal needs. We measure financial reporting complexity using the natural logarithm of the number of non-missing items in COMPUSTAT (NITEMS). We use the natural logarithm of the number of business segments (NBSEG) and the natural logarithm of the number of geographic segments (NGSEG) from the COMPUSTAT segment files at the end of the fiscal year to capture complexity of business operations.

• Advisors: Firms that retain one expert advisor could be more likely to retain other expert

advisors. We use the presence of a Big N audit firm (BIGN) to capture the firm’s retention of an expert auditor.

• Firm-specific legal needs: Most prominent U.S. law firms specialize in Delaware corporate

law for a variety of reasons, including economies of scale (Bebchuk 2003). We include a dummy equal to one if the firm has Delaware incorporation (DELW). Firms that require legal advice to manage complex transactions could be more likely retain a top-tier corporate attorney. We include the ratio of research and development to total assets as a proxy for the demand for patent filing and protection needs (RD). Further, we create two dummy variables to capture firm-year specific seasoned equity offerings (SEO) and merger and acquisition (MA) activity. SEO equals one for a year in which a firm has a common equity offering in the secondary market. MA equals one for a year in which a firm appears in the SDC Platinum M&A database.

Our main specification to examine the determinants of top-tier corporate attorney

retention is:

TOPTIERit = β0 + β1SIZEit + β2ROAit + β3AGEit + β4NITEMSit + β5NBSEGit + β6NGSEGit + β7BIGNit + β8RELVOLit + β9EARNVOLit + β10DELWit + β11RDit + β12SEOit + β13MAit + ɛit (1)

Equation (1) includes year and industry fixed effects as potential determinants of top-tier

corporate attorney retention. We estimate equation (1) as a probit regression because TOPTIER

is a binary variable and verify the robustness of the probit estimation using OLS (Angrist and

Pischke 2009).

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Table 3 presents the results of regressing TOPTIER on its potential determinants.

Columns 1 and 2 of Panel B include two-digit SIC industry fixed effects. Columns 3 and 4

present regressions without industry controls. We discuss the probit results reported in column 2,

which includes all independent variables of interest with year and industry fixed effects, as the

pattern of results across all columns is similar. Larger firms with greater financial reporting

complexity, greater volatility of operations, Delaware incorporation, and firm-specific legal

needs are more likely to retain top-tier corporate attorneys. These results can been seen from the

positive and significant coefficient estimates on SIZE (ϐ=0.093, p<0.01), NITEMS (ϐ=0.083,

p<0.05), RETVOL (ϐ=0.856, p<0.01), EARNVOL (ϐ=0.214, p<0.05), DELW (ϐ=0.332, p<0.01),

and RD (ϐ=0.727, p<0.01), respectively. Firms with a Big N auditor (BIGN; ϐ=0.214, p<0.01)

are more likely to retain a top-tier corporate attorney, indicating a positive relation between

attorney and auditor expertise.12

Table 3, Panel C presents the economic importance of the determinants results.

Specifically, Panel C reports the percentage change in odds ratios based on the probit estimates

tabulated in column 2 of Panel B. For continuous variables, the percentage change represents a

one standard deviation increase in each variable. For discrete variables, the percentage change

The result that AGE is negatively associated with TOPTIER

suggests that older firms are more likely to rely on in-house legal counsel for legal needs. ROA

and operating complexity, measured by NBSEG and NGSEG, are not associated with retention,

suggesting that performance and diversification are not related to attorney retention, on average.

When industry fixed effects are excluded from the analysis (column 4), the adjusted R2 decreases

by 3 percentage points, indicating that industry effects explain some variation in top-tier

corporate attorney retention.

12 The Pearson correlation coefficient between TOPTIER and BIGN is 0.15, significant at the one percent level (untabulated).

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represents a move from zero to one. Panel C, Row A reports that Delaware incorporation is

associated with the largest percentage change in odds ratio (71.0%), consistent with Bebchuk’s

(2003) claim that large law firms typically specialize in Delaware corporate law. Row A also

shows that the presence of a Big N audit firm (41.1%) is associated with the next largest

percentage change in odds ratio, providing added support for the relation between auditor and

attorney expertise. Row A reports the change in odds ratios for the remaining independent

variables included in the determinants analysis. Overall, the determinants of top-tier corporate

attorney retention appear statistically and economically important.

III. EMPIRICAL RESULTS

This section examines potential consequences of corporate attorney retention for firm

financial disclosure. We select the firm’s annual reporting process as our research setting

because prominent gatekeepers (auditor, board of directors, corporate attorney) are involved in

the preparation, review, and filing of Form 10-K. In addition, the SEC has brought enforcement

actions against corporate attorneys for their participation in the filing of false and misleading

Form 10-K disclosures. Our disclosure measures capture the readability of the MD&A section

and entire Form 10-K and whether firms file an NT 10-K (known as Form 12b-25) to announce

the pending late annual report. If corporate attorneys influence financial disclosure then we

expect attorneys to explain variation in Form 10-K readability and the likelihood of complying

with an SEC disclosure rule that often involves attorney assistance (Form 12b-25). Conversely,

management, auditors and corporate directors, could mitigate attorney influence and, thus,

attorneys would not influence disclosure after controlling for firm-level characteristics.

3.1 Corporate attorneys and Form 10-K readability

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The empirical approach we use to examine the relation between corporate attorneys and

Form 10-K readability is in the spirit of Bertrand and Schoar (2003) who implement a fixed

effects framework to investigate whether an individual manager influences investment, financial,

and operating practices of the firm.13

Specifically, we examine whether corporate attorneys explain Form 10-K readability

using the following regression:

We seek to quantify how much of the observed variation in

Form 10-K readability can be attributed to corporate attorneys. Our empirical design controls for

observable and unobservable differences across firms because corporate attorney influence is

likely to be correlated with time-varying firm characteristics, and firm, industry, and time fixed

effects.

READABILITYit = αt + γt + γIND + γATTORNEY + βXit + ɛit (2)

where READABILITY is a measure of Form 10-K readability (MD&A Length, MD&A Fog, 10-K

Length, 10-K Fog) for firm i in year t, αt are year fixed effects, γt are firm fixed-effects, γIND are

industry fixed-effects, and Xit is a vector of time-varying firm characteristics. The remaining

variable, γATTORNEY, represents corporate attorney fixed effects. This approach examines whether

corporate attorneys explain Form 10-K readability rather than positing directional predictions.

To evaluate whether corporate attorneys explain READABILITY we develop a benchmark

regression similar to Li (2008) that contains αt, γIND, and Xit. We then compare alternative model

specifications that include corporate attorney fixed effects with this benchmark model to assess

whether attorneys explain Form 10-K readability. The benchmark regression incorporates the

time-varying firm-specific characteristics that Li (2008) argues are related to Form 10-K

readability, including measures used previously to predict the retention of top-tier corporate 13 Bamber, Jiang, and Wang (2010) apply a similar methodology to examine whether managerial style influences voluntary disclosure.

16

attorneys: SIZE, AGE, NITEMS, NBSEG, NGSEG, BIGN, RELVOL, EARNVOL, DELW, SEO,

MA. Following Li (2008), Xit also includes market-to-book ratio (MTB), defined as the market

value of equity plus book value of liability and divided by the book value of total assets at the

end of the fiscal year end, and special items (SI), defined as the amount of special items scaled

by book value of assets. We augment Xit with BIGN, defined previously. After estimating the

benchmark regression, we introduce firm fixed effects (γt) and corporate attorney fixed effects

(γATTORNEY) separately and collectively, allowing us to test the statistical significance and

economic importance of the groups of fixed effects.

We begin the analysis by estimating the benchmark regression that examines the relation

between time-varying firm characteristics and Form 10-K readability. In untabulated analysis,

we document empirical results that are qualitatively similar to Li (2008) for each measure of

Form 10-K readability (MD&A Length, MD&A Fog, 10-K Length, 10-K Fog). For brevity, we

discuss results for the benchmark estimation of MD&A Length. Consistent with Li (2008), the

MD&A section is longer for larger firms (SIZE; ϐ=0.079, p<0.01), value firms (MTB; ϐ=-0.044,

p<0.01), younger firms (AGE; ϐ=-0.004, p<0.01), firms with larger negative special items (SI;

ϐ=-0.190, p<0.01), when stock market returns are exhibit greater uncertainty (RETVOL;

ϐ=0.964, p<0.01), for firms with more diverse operations (NBSEG; ϐ=0.081, p<0.01; NGSEG;

ϐ=0.093, p<0.01), and for firms with Delaware incorporation (DELW; ϐ=0.147, p<0.01). There is

a modest influence of capital issuance (SEO; ϐ=0.061, p<0.10) on MD&A Length. In addition,

we find that firms with a Big N auditor have longer MD&A sections (BIGN; ϐ=0.120, p<0.01),

but not longer annual reports.

Next, we estimate the benchmark regression with groups of fixed effects to test the

statistical and economic importance of the relation between corporate attorneys and the Form 10-

17

K readability measures. Table 4 reports F-tests and adjusted R2 from regressions including no

fixed effects, and groups of industry, firm, and corporate attorney fixed effects. For each

readability measure we report in Row 1 of the panel the fit of a specification with only time-

varying firm characteristics and year fixed effects. In Row 2 we report F-tests and adjusted R2

for the benchmark specification that includes only industry and year fixed effects, and time-

varying firm characteristics. Rows 3 and 4 report results in which we replace industry fixed

effects with firm and corporate attorney fixed effects, respectively. Rows 5 and 6 include two

groups of fixed effects at a time―industry and corporate attorney, and firm and corporate

attorney―and Row 8 includes industry, firm, and corporate attorney fixed effects. Throughout,

the adjusted R2 measures explanatory power and the F-tests statistically test the null hypothesis

that all fixed effects are zero.

Table 4 documents that the relation between corporate attorneys and our measures of

Form 10-K readability is important in statistical and economic terms. Panel A reports F-tests and

adjusted R2 for MD&A Length. Adding individual groups of fixed effects shows that industry

fixed effects increase the adjusted R2 by 2 percentage points (from 13% in Row 1 to 15% in Row

2), firm fixed effects increase the adjusted R2 by 37 percentage points (from 13% in Row 1 to

39% in Row 3), and corporate attorney fixed effects increase the adjusted R2 by 12 percentage

points (from 13% in Row 1 to 25% in Row 4). In each case the F-test rejects the null hypothesis

that fixed effects are zero.

One concern when including groups of fixed effects individually is that corporate

attorney fixed effects could capture an element of industry or firm effects. Rows 5 through 7

demonstrate that corporate attorney effects are economically and statistically important after

controlling for industry or firm effects. In particular, including corporate attorney fixed effects

18

increases the explanatory power of the benchmark model (Row 2) by 80 percent ([27% in Row 6

minus 15% in Row 2]/[15% in Row 2]). Row 8 includes industry, firm, and corporate attorney

fixed effects. For all three groups, the F-tests reject the null hypothesis of no joint effect in all

cases. The adjusted R2 is two percentage points higher after including corporate attorney fixed

effects compared with jointly including industry and firm effects (54% in Row 8 compared with

52% in Row 5), indicating that corporate attorney effects are statistically and economically

important in determining MD&A Length after controlling for time-varying firm characteristics

and firm, industry, and year effects.

Table 4, Panel B reports F-tests and adjusted R2 for MD&A Fog. Similar to the evidence

in Panel A for MD&A Length, we find that corporate attorneys influence MD&A Fog. The

adjusted R2 is two percentage points higher after including corporate attorney fixed effects

compared with jointly including industry and firm effects (66% in Row 8 compared with 64% in

Row 5), indicating that corporate attorney effects are statistically and economically important in

determining MD&A Fog after controlling for time-varying firm characteristics and firm,

industry, and year effects. In addition, including corporate attorney fixed effects increases the

explanatory power of the benchmark model (Row 2) by 200 percent ([27% in Row 6 minus 9%

in Row 2]/[9% in Row 2]).

Table 4, Panels C and D report F-tests and adjusted R2 for 10-K Length (Panel C) and 10-

K Fog (Panel D). Similar to the evidence of corporate attorney influence on the length and Fog

index of the MD&A section, we find that attorneys explain variation in the readability of the

entire Form 10-K. Panel C reports that the adjusted R2 is one percentage point higher after

including corporate attorney fixed effects compared with jointly including industry and firm

effects (51% in Row 8 compared with 50% in Row 5). In addition, including corporate attorney

19

fixed effects increases the explanatory power of the benchmark model (Row 2) by 75 percent

([28% in Row 6 minus 16% in Row 2]/[16% in Row 2]). Panel D reports that the adjusted R2 is

one percentage point higher after including corporate attorney fixed effects compared with

jointly including industry and firm effects (45% in Row 8 compared with 44% in Row 5).

Including corporate attorney fixed effects increases the explanatory power of the benchmark

model (Row 2) by 167 percent ([16% in Row 6 minus 6% in Row 2]/[6% in Row 2]).

Overall, the evidence reported in Table 4 indicates that corporate attorneys influence

Form 10-K readability, indicating that attorneys do not simply comply with manager’s requests

and have a distinct influence on disclosure beyond that of in-house legal counsel.

3.2 Top-tier corporate attorneys and Form 12b-25 Compliance

This section examines whether the presence of a top-tier corporate attorney is associated

with a firm’s compliance with a specific annual reporting disclosure―Form NT 10-K (known as

Form 12b-25). When preparing Form 12b-25, firms must disclose “in reasonable detail” the

reason(s) Form 10-K cannot be submitted without unreasonable effort and expense.14 From the

corporate attorneys’ perspective, Form 12b-25 presents the firm with a challenge for at least two

reasons. First, it requires the firm to disclose potentially sensitive internal details about the

reasons for filing late. Second, Form 12b-25 increases the firm’s duty to update its investors and

the SEC regarding the status of a late Form 10-K.15

14 Firms must file Form 12b-25 within one business day following the expiration of the Form 10-K filing deadline. Form 10-K filing deadlines have been shortened since 2003 (2006) from 90 days (75 days) for an Accelerated filer (Large Accelerated filer) to 75 days (60 days); the deadline remains 90 days for a Non-Accelerated filers. The SEC typically grants a 15 calendar day extension for the firm to file Form 10-K after Form 12b-25 has been received.

Sensitive disclosures could generate negative

attention to the late Form 10-K and thereby enhance the potential for SEC scrutiny. It is likely

15 Discussions with an attorney indicate that it is likely difficult to write the Form 12b-25 ‘reasonable details’ paragraph due to the need to balance disclosure requirements with the potential for SEC or investor action. Cox et al. (1991, 729-730; 743-747) indicates that firms have an affirmative duty to update prior material disclosures that have become in doubt. Specifically, if investors rely on a disclosure, the firm has a duty to refrain from speaking in “half-truths” and to revise or update the original disclosure. The half-truth doctrine implies that “…it is as improper to omit a fact necessary to make a fact stated not misleading as it is to tell a bald-faced lie” Cox et al. (1991, 703).

20

that any adverse consequences that arise because of attorney advice will be attributed directly to

the corporate attorneys who advised the Form 12b-25 filing, enhancing the likelihood that the

attorneys will lose a client. In contrast, with the exception of firms in need of capital, the typical

cost of not filing Form 12b-25 is that the firm receives a “cease and desist” letter from the

SEC.16 In addition, various monitors might question why the firm did not file the mandatory

disclosure. Hence, given the costs and benefits of compliance, corporate attorneys can have

incentives to recommend that some clients not file Form 12b-25.17

We estimate the following regression to examine whether corporate attorneys influence

Form 12b-25 compliance:

COMPLY = β0 + β1TOPTIER/logPPP/ATTORNEYSit + β2INSTit + β3LEVit + β4CASHit + β5RESTATEit + β6STATUSit + β7VERYLATEit + ɛit (3)

where COMPLY equals one when a firm has a late Form 10-K and files Form 12b-25, zero

otherwise. Our primary variable of interest is TOPTIER, defined previously as equal to one when

the firm retains a top-tier corporate attorney for on-going advice, zero otherwise. Because we are

interested in the sign and statistical significant of TOPTIER, we use firm fixed effects and two-

stage least squares (2SLS) to address the potential endogeneity of this variable in equation (3).

We control for the influence other gatekeepers could have on Form 12b-25 compliance.

Specifically, we include the percentage of the firm’s aggregate common stock held by

16 In untabulated analysis, we find that the cumulative abnormal return around the Form 10-K reporting deadline for firms with late Form 10-Ks that do and do not file Form 12b-25 is not significantly different. This suggests that there is no additional market penalty for firms that do not file Form 12b-25. 17 Discussions with an attorney familiar with the costs and benefits of Form 12b-25 compliance indicate that a firm that does not file Form 12b-25 likely receives an SEC sanction. However, this sanction represents a minor cost when compared with the potential benefits that arise from reducing the likelihood of SEC or investor action against the firm related to disclosures that subsequently become untrue. While the firm could file Form 12b-25 without disclosing the reason for a late Form 10-K, the “half-truth” doctrine implies that the firm would be speaking in half-truths. See Rogers and Van Buskirk (2009) for evidence of a decrease, rather than an increase, in disclosure following shareholder litigation.

21

institutional investors (INST) as a measure of corporate governance.18

Equation (3) also includes STATUS, which equals one if the firm was permitted more

days to file Form 10-K in the prior fiscal year as compared with the current fiscal year to control

for changes in Form 10-K reporting deadlines.

We include firm leverage

(LEV) as a proxy for monitoring intensity of lenders, and CASH as a proxy for the firm’s

financing requirements, as Easterbrook (1984) and Jensen (1986) argue that excess cash affords

firms flexibility and freedom from capital market monitoring. CASH captures the firm’s

industry-adjusted cash/assets ratio, measured as the sum of cash and cash equivalents divided by

average total assets for each 3-digit SIC code across the prior ten year period (Rajan and

Zingales 1998). To measure the intensity of shareholder monitoring, we include RESTATE,

which equals one if the firm announced a restatement in the reporting year as identified by

Hennes, Leone, and Miller (2008), zero otherwise.

19

Table 5 provides summary statistics for various firm characteristics for the subsample of

1,373 cases in which the firm complies with Form 12b-25 disclosure rules (COMPLY = 1) versus

the 916 cases in which the firm files a late Form 10-K without a corresponding Form 12b-25

(COMPLY = 0). Forty percent of firms (916/2,289) do not comply with Form 12b-25 disclosure

rules in our sample, which is less than the 68 percent noncompliance rate documented by Alford

We include VERYLATE, which equals one if the

firm files Form 10-K more than 15 calendar days after the SEC reporting deadline, to account for

the potential varying incentives to disclose the reason for late Form 10-Ks among firms that

expect to miss the Form 12b-25 extension.

18 In untabulated analysis, we replace INST with the measure of corporate governance derived from ISS/RiskMetrics data used in Aggarwal, Schloetzer, and Williamson (2011). While the results remain qualitatively similar, the sample size is reduced by nearly 50 percent. 19 Changes in permitted days to file can arise because the public float increases substantially to warrant a change in the firm’s filing status, which corresponds to fewer permitted days to file, and/or the SEC decreased the filing time permitted for a particular filing status.

22

et al. (1994) between 1978 and 1985. Firms that do not comply with Form 12b-25 rules

(“noncompliance firms”) tend to have on average higher market value of equity, but similar total

assets compared with firms that do comply (“compliance firms”). Noncompliance firms have

higher mean return on assets (ROA of 2 percent compared with -6 percent for the noncompliance

sample) and are more likely to have a top-tier corporate attorney (TOPTIER of 59 percent

compared with 45 percent for the compliance sample), an attorney with higher profit per equity

partner (logPPP of 13.79 compared with 13.73 for the compliance sample), and retain a law firm

that employs more lawyers (ATTORNEYS of 6.47 compared with 6.41 for the compliance

sample). Table 5 also reports summary statistics for the remaining independent variables

included in this analysis.

Table 6 reports the results from examining the relation between top-tier corporate

attorneys and Form 12b-25 compliance. The regressions include variables from equation (3) and

equation (1). We include variables from equation (1) as they likely influence the retention of top-

tier corporate attorneys, discussed previously. To the extent that variables from equation (1) also

explain COMPLY, it is important they be retained for the subsequent 2SLS analysis. Column 1

reports that INST, LEV, CASH, RESTATE, STATUS, and VERYLATE are statistically significant

and have the expected sign. Column 2 reports a negative and significant coefficient estimate on

TOPTIER (ϐ=-0.062, p<0.01), indicating that firms with a top-tier corporate attorneys are less

likely to comply with Form 12b-25 disclosure rules prior to accounting for endogeneity.

Columns 1 and 2 also report that SIZE, NITEMS, NBSEG, BIGN, EARNVOL, DELW, and MA are

not associated with Form 12b-25 compliance.20

20 Discussions with a Big N audit partner who has experience with firms that file late Form 10-Ks indicate that auditors are typically not involved in the Form 12b-25 process and do not monitor whether firms that have a pending

We use these variables as instruments in our

2SLS regressions.

23

The results reported in column 2 for TOPTIER and the remaining variables could be

associated with correlated omitted variables, including management, in-house legal counsel, and

corporate director characteristics. To assess the influence of these factors, column 3 includes

firm fixed effects in the analysis. Consistent with evidence presented in column 2, there is a

negative and significant coefficient estimate on TOPTIER (ϐ=-0.148, p<0.01). This evidence is

inconsistent with the “gatekeeper perspective” and consistent with the “attorney hypothesis,”

which views corporate attorneys as advisors who weigh the costs and benefits of alternative

courses of action on a case-by-case basis.

Corporate attorneys have incentives to recommend that some of their clients not file

Form 12b-25. Filing Form 12b-25 can generate investor attention to the late Form 10-K, increase

the need for firms to disclose potentially sensitive details to investors regarding the reasons for

late filing, and increase the firm’s requirements to update investors about the status of a late

Form 10-K. In contrast, with the exception of firms that require capital, when the firm does not

file Form 12b-25, the main noncompliance costs are a “cease and desist” letter from the SEC and

that the firm’s monitors (e.g., institutional investors, lenders) could question the reasons for

noncompliance with mandatory disclosure rules. Hence, given the net costs and benefits in the

Form 12b-25 setting, it is possible that attorneys could recommend that some clients not file

Form 12b-25.

Column 3 also reports coefficient estimates for the remaining variables of interest after

including firm fixed effects. Institutional investor (INST; ϐ=0.202, p<0.01) and shareholder

(RESTATE; ϐ=0.186, p<0.01) monitoring intensity enhances disclosure compliance. Despite its

statistical significance in column 2, the result for LEV (ϐ=0.039, p=0.67) in column 3 is

late Form 10-Ks submit Form 12b-25. Rather, firms consult their corporate attorneys for advice regarding compliance with SEC rules and regulations, particularly for advice on less routine filings such as Form 12b-25.

24

insignificant after adding firm fixed effects. As discussed previously, the SEC requires firms that

do not comply with certain disclosure rules to use a time consuming and, thus, potentially costly

process to register public securities. We find a negative relation between CASH and COMPLY

(ϐ=-0.179, p<0.01), indicating that firms with greater near-term financing needs (lower CASH)

are more likely to file Form 12b-25. Firms that change Form 10-K filing status are less likely to

file Form 12b-25 (STATUS; ϐ=-0.313, p<0.01), suggesting that compliance is influenced by

related changes in SEC rules. Firms that are unable to file in the 15 day extension period are

more likely to comply (VERYLATE; ϐ=0.170, p<0.01), perhaps reflecting the importance of

communicating significant reporting delays to investors.

To assess the robustness of the fixed effects results, Table 7 reports the results of 2SLS

regressions, which help to account for the endogenous nature of TOPTIER in the analysis.

Column 1 reports OLS estimates from a 2SLS regression, while column 2 reports 2SLS probit

estimates. As the pattern of results is similar using either specification, we discuss the results in

column 3 for brevity. The negative coefficient estimate on TOPTIER (ϐ=-0.149, p<0.10)

indicates that firms with top-tier corporate attorneys are less likely to comply with Form 12b-25

disclosure rules compared with firms that employ non-top-tier attorneys. The results for the

remaining variables of interest are consistent with the fixed effects analysis, with the exception

that LEV becomes positive and significant, indicating that lender monitoring enhances

compliance with Form 12b-25 disclosure rules.

Columns 3 and 4 of Table 7 present results using two alternative measures of top-tier

corporate attorneys―logPPP and ATTORNEYS. The coefficient estimates on these alternative

measures are negative and significant (logPPP; ϐ=-0.057, p<0.05; ATTORNEY; ϐ=-0.044,

p<0.05), consistent with the firm fixed effects and 2SLS analysis results. Overall, the evidence

25

indicates that firms with top-tier corporate attorneys find compliance with Form 12b-25

disclosure rules to be less costly compared with when other attorneys are involved, providing

additional evidence that corporate attorneys influence firm financial disclosure.21

IV. SUMMARY AND CONCLUSIONS

We study an over-looked yet influential advisor to the firm’s directors and officers with

respect to firm financial disclosure―the corporate attorneys that firms use for on-going legal

expertise. The Securities and Exchange Commission (SEC) and American Bar Association

(ABA) view corporate attorneys as important “gatekeepers” in the preparation, review, and filing

of financial disclosures released to investors, and legal scholars refer to such attorneys as

“disclosure counsel” (Coffee 2006, 192-244; 348). We obtain a unique dataset that identifies a

firm’s outside corporate attorney to examine the relation between top-tier corporate attorneys,

measured using law firm size and partner compensation data, and aspects of a firm’s annual

reporting process. Collectively, the results indicate that corporate attorneys influence the content

and amount of firm financial disclosure released to investors.

We contribute to prior literature on the role of gatekeepers in firm financial disclosure in

the following ways. Few studies investigate the determinants of firms’ retention of top-tier

corporate attorneys. We find that larger firms with greater financial reporting complexity, higher

volatility of operations, Delaware incorporation, and firm-specific legal needs are more likely to

21 We conduct additional robustness tests in untabulated analysis. The results in Table 6 are robust to using a more stringent definition of Form 12b-25 compliance that requires both filing a Form 12b-25 and providing a reason for the late filing (i.e., some firms file a Form 12b-25 that does not disclose reasons for the pending late Form 10-K). The results are qualitatively similar after: (1) including a measure of litigation risk, defined using the Francis, Philbrick, and Schipper (1994) approach, (2) including a measure of regulated industry, defined as membership in the following 4-digit SIC codes: 4812, 4813, 4833, 4841, 4899, 4811, 4922, 4924, 4931, 4941, 6021, 6023, 6035, 6036, 6141, 6311, or 6331, (3) controlling for whether the firm filed a late Form 10-K in the prior year, (4) controlling for whether the firm is issued a going concern opinion in the year of late filing, (5) controlling for the natural logarithm of analyst following, (6) controlling for whether the year of late filing is the first year of a new auditor, and (7) replacing VERYLATE with the natural logarithm of the number of days between the Form 10-K filing deadline and the day the late Form 10-K is filed.

26

retain top-tier corporate attorneys. In addition, firms with a Big N auditor and younger firms are

more likely to retain a top-tier corporate attorney.

Next, we provide new evidence regarding the interplay between corporate attorneys and

the readability of a firm’s Form 10-K, which appears consistent with corporate attorneys

influencing the content of financial disclosures released to investors. We estimate how much of

the observed variation in the Fog index and length of the MD&A section and entire Form 10-K

can be attributed to corporate attorney fixed effects, after controlling for firm, industry, and time

fixed effects, and the time-varying firm characteristics used in Li (2008) augmented with a

control for the presence of a Big N auditor. Among other evidence, we document that corporate

attorney fixed effects explain Form 10-K readability after including firm fixed effects, indicating

that attorneys do not simply comply with a manager’s requests and have a distinct influence on

disclosure beyond that of in-house legal counsel.

Finally, we provide new evidence concerning the relation between top-tier corporate

attorneys and SEC disclosure compliance by examining a potentially sensitive mandatory

disclosure that likely requires the assistance of corporate attorneys―filing an NT 10-K (known

as Form 12b-25) to disclose the reasons for a late Form 10-K. We find robust evidence that firms

that retain a top-tier corporate attorney are less likely to comply with Form 12b-25 disclosure

rules compared with when other attorneys are involved. We interpret this evidence as

inconsistent with the “gatekeeper perspective” and consistent with the “attorney hypothesis,”

which views corporate attorneys as advisors who weigh the costs and benefits of alternative

courses of action on a case-by-case basis. We also show that monitoring by institutional

investors, shareholders, and lenders enhances compliance with Form 12b-25 disclosure rules,

providing some insight into the determinants of mandatory disclosure compliance. Taken

27

together, the results presented in the study are important given the SEC’s increased scrutiny of

corporate attorneys in the promulgation of false and misleading financial reporting information

to investors.

28

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TABLE 1

Sample Selection

Panel A: Sample Selection Criteria for Determinants and Readability Analysis

Sample Selection Criteria Number of Observations

Firm-year observations with corporate attorney, CRSP-COMPUSTAT data 1998 and 2006, Form 10-K readability data, and market value of equity and book value of total assets greater than $1M for our sample period

10,918

Firm-year observations with variation in top-tier corporate attorney by two-digit industry code (SIC) 10,890 Panel B: Sample Selection Criteria for Form 12b-25 Compliance Analysis

Sample Selection Criteria Number of Observations

Firm-year observations with late Form 10-Ks between 1999 and 2008 7,188 Firm-year observations with CRSP-COMPUSTAT data market value of equity and book value of total assets greater than $1M

5,741

Firm-year observations with Form 10-K filing more than one day late 5,168 Firm-year observations with corporate attorney data 2,289 Firm-year observations with variation in Form 12b-25 compliance by two-digit industry code (SIC) 2,259 Firm-year observations with data on profit per equity partner and number of attorneys 1,428

This table describes the sample formation process. Panel A documents the sample formation process for our analysis of the determinants of corporate attorney retention and the relation between corporate attorneys and Form 10-K readability. We obtain a dataset that identifies a firm’s corporate attorney between 1998 and 2006. We merge the attorney dataset with CSRP-COMPUSTAT and follow Li (2008) to calculate the Fog index and the number of words in the MD&A section and the entire Form 10-K. We omit observations missing CSRP-COMPUSTAT data and delete observations with market value of equity or total assets less than $1 million. This process yields the main sample of 10,918 firm-year observations for 3,443 firms. Four two-digit SIC codes (12, 21, 76, and 86) lack variation in top-tier corporate attorney, reducing the sample size by 28 observations for our corporate attorney retention analysis. Panel B reports sample formation details for our analysis of the relation between corporate attorneys and Form 12b-25 compliance. We obtain all Form 10-Ks submitted to the SEC from 1998 to 2008 that were filed after the mandatory reporting deadline. We use 10kWIZARD to obtain the firm’s filing status and the date Form 10-K is filed with the SEC to identify late Form 10-Ks. This selection process yields 7,188 late Form 10-Ks. We omit observations missing CSRP-COMPUSTAT data and delete

32

observations with market value of equity or total assets less than $1 million. We also delete observations in which Form 10-K was filed one calendar day after the expiration of the reporting deadline because SEC rules require firms to file Form 12b-25 by this day. This yields a sample of 2,289 firm-year observations from 1,603 firms for the analysis. Six two-digit SIC codes (16, 19, 31, 41, 53, and 60) lack variation in Form 12b-25 compliance, reducing the sample size by 30 observations for this analysis.

33

TABLE 2

Summary Statistics for Determinants of Corporate Attorney Retention and Form 10-K Readability

Panel A: Summary Statistics

Variable N Mean Median Standard Deviation

25th Percentile

75th Percentile

Book value of assets ($MM) 10,918 1,765 239 5,889 67 846 Market value of equity ($MM) 10,918 1,424 242 4,115 66 844 Market-to-Book 10,918 2.12 1.48 2.80 1.09 2.31 TOPTIER 10,918 0.47 0 - - - logPPP 1,428 13.60 13.56 0.50 13.28 13.88 ATTORNEYS 1,428 6.42 6.43 0.61 6.01 6.80 10-K Fog 10,918 19.69 19.51 1.63 18.70 20.47 10-K Length 10,918 10.17 10.18 0.71 9.84 10.54 MD&A Fog 10,918 18.21 18.02 2.19 16.93 19.22 MD&A Length 10,918 8.71 8.82 0.92 8.39 9.20

Panel B: Summary Statistics for Top-tier Corporate Attorneys

TOPTIER = 1

N=5,112 TOPTIER = 0

N=5,806

TOPTIER = 1 versus

TOPTIER = 0

Mean Median Standard Deviation Mean Median Standard

Deviation t-statistic

Book value of assets ($MM) 1,818 239 6,292 1,717 238 5,503 0.89 Market value of equity ($MM) 1,486 288 4,224 1,369 210 4,016 1.48 Market-to-Book 2.22 1.60 1.98 2.03 1.39 3.35 3.62*** 10-K Fog 19.79 19.61 1.62 19.60 19.42 1.62 5.73*** 10-K Length 10.23 10.23 0.68 10.12 10.13 0.72 8.19*** MD&A Fog 18.27 18.11 2.14 18.17 17.95 2.24 2.12** MD&A Length 8.78 8.88 0.90 8.63 8.76 0.94 7.97***

34

Panel C: Correlation Matrix

Variables Assets Market Value of Equity

Market-to-Book TOPTIER logPPP

Book Value of Assets ($MM) 1.00 Market Value of Equity ($MM) 0.82 1.00 Market-to-Book -0.19 0.12 1.00 TOPTIER 0.05 0.08 0.04 1.00 logPPP 0.23 0.27 -0.01 0.46 1.00 ATTORNEYS 0.15 0.13 -0.05 0.66 0.47

Panel A presents summary statistics. Panel B presents summary statistics for firms that do (TOPTIER=1) and do not (TOPTIER=0) have a top-tier corporate attorney. Panel C presents a Pearson correlation matrix. Correlations in bold indicate statistical significance at the 10 percent level or better. Assets is book value of total assets. Market Value of Equity is the market value of common equity at the end of the fiscal year. Market-to-Book is the market value of equity plus book value of liability and divided by the book value of total assets at the end of the fiscal year end. TOPTIER is an indicator variable equal to one when the corporate attorney is ranked among the top 100 in American Lawyer magazine’s annual ranking, zero otherwise. logPPP is the natural logarithm of the average law firm profits per equity partner. ATTORNEYS is the natural logarithm of the total number of attorneys employed by the law firm. MD&A Length and 10-K Length are the natural logarithm of the number of words in the MD&A section and entire Form 10-K, respectively. MD&A Fog and 10-K Fog are the Fog index, which measures the readability of a document as a function of syllables per word and words per sentence, reflecting the number of years of formal education the average reader would need to understand the text on a first reading. It is calculated as: Fog=0.4*(Words per Sentence+Percent of Complex Words), where complex words have at least three syllables. *, **, and *** indicate two-tailed statistical significance at the 10 percent, 5 percent, and 1 percent levels, respectively.

35

TABLE 3

Determinants of Top-tier Corporate Attorney Retention

PANEL A: Summary Statistics

Variable N Mean Median Standard Deviation

25th Percentile

75th Percentile

SIZE 10,918 5.57 5.48 1.86 4.20 6.74 ROA 10,918 0.02 0.08 0.25 0.00 0.15 AGE 10,918 14.62 10.59 12.64 6.26 18.93 NITEMS 10,918 5.36 5.43 0.35 5.40 5.46 NBSEG 10,918 0.39 0.00 0.63 0.00 1.09 NGSEG 10,918 0.51 0.00 0.67 0.00 1.10 BIGN 10,918 0.81 - - - - RETVOL 10,918 0.20 0.18 0.11 0.12 0.26 EARNVOL 10,918 0.11 0.05 0.24 0.02 0.11 DELW 10,918 0.29 - - - - RD 10,918 0.07 0.00 0.13 0.00 0.09 SEO 10,918 0.06 - - - - MA 10,918 0.14 - - - -

36

PANEL B: OLS and Logistic Regressions

TOPTIERit = β0 + β1SIZEit + β2ROAit + β3AGEit + β4NITEMSit + β5NBSEGit + β6NGSEGit + β7BIGNit + β8RELVOLit + β9EARNVOLit + β10DELWit + β11RDit + β12SEOit + β13MAit + ɛit

(1) OLS

TOPTIER

(2) Probit

TOPTIER

(3) OLS

TOPTIER

(4) Probit

TOPTIER

SIZE 0.035*** [0.001]

0.093*** [0.017]

0.022*** [0.006]

0.059*** [0.015]

ROA 0.001 [0.045]

0.003 [0.120]

0.039 [0.045]

0.111 [0.119]

AGE -0.003*** [0.001]

-0.008*** [0.002]

-0.003*** [0.001]

-0.007*** [0.002]

NITEMS 0.028* [0.015]

0.083** [0.040]

0.085*** [0.015]

0.242*** [0.047]

NBSEG -0.007 [0.014]

-0.017 [0.037]

0.007 [0.014]

0.020 [0.037]

NGSEG 0.015 [0.014]

0.040 [0.038]

0.021 [0.013]

0.054 [0.035]

BIGN 0.073*** [0.021]

0.214*** [0.059]

0.122*** [0.020]

0.337*** [0.055]

RETVOL 0.323*** [0.107]

0.856*** [0.287]

0.485*** [0.101]

1.261*** [0.277]

EARNVOL 0.073*** [0.027]

0.214** [0.095]

0.077*** [0.028]

0.239** [0.108]

DELW 0.126*** [0.027]

0.332*** [0.072]

0.108*** [0.019]

0.285*** [0.051]

RD 0.279*** [0.093]

0.727*** [0.250]

0.282*** [0.089]

0.736*** [0.239]

SEO 0.040 [0.027]

0.114 [0.074]

0.062** [0.027]

0.167** [0.073]

MA 0.010 [0.017]

0.025 [0.044]

0.027 [0.017]

0.070 [0.044]

37

Intercept 0.309 [0.188]

-0.505 [0.621]

-0.360*** [0.103]

-2.380*** [0.300]

Year FE Yes Yes Yes Yes Industry FE Yes Yes No No

Adjusted R2 11% 9% 8% 6% N 10,918 10,890 10,918 10,890

Panel C: Economic Importance Row Variable SIZE ROA AGE NITEMS NBSEG NGSEG BIGN RETVOL EARNVOL DELW RD SEO MA A (%) TOPTIER 32.9 n.s. -16.0 4.8 n.s. n.s. 41.1 17.6 9.1 71.0 16.9 n.s. n.s. B (%) TOPTIER 20.1 n.s. -13.6 15.1 n.s. n.s. 72.1 27.1 10.8 58.2 17.0 31.2 n.s. 0 1 Prob(y|x) 0.53 0.47

Panel A presents summary statistics. Panel B reports results from OLS and probit regressions of the determinants of top-tier corporate attorney retention. Panel C presents the change in odds ratio with industry fixed effects (Row A) and without industry fixed effects (Row B) for the probit regressions reported in columns 2 and 4 of Panel B, respectively. TOPTIER is an indicator variable equal to one when the corporate attorney is ranked among the top 100 in American Lawyer magazine’s annual ranking, zero otherwise. SIZE is the natural logarithm of the market value of common equity at the end of the fiscal year. ROA is EBITDA divided by total assets. AGE is the number of years since a firm’s first appearance in the CRSP monthly stock return files. NITEMS is the natural logarithm of the number of non-missing items in COMPUSTAT. NBSEG is the natural logarithm of the number of business segments and NBSEG is the natural logarithm of the number of geographic segments, each obtained from the COMPUSTAT segment files at the end of the fiscal year. BIGN is an indicator variable equal to one when the firm has a Big N auditor, zero otherwise. RETVOL is the standard deviation of monthly stock returns in the prior year. EARNVOL is the standard deviation of operating earnings during the prior five fiscal years. DELW is an indicator variable equal to one if the firm has Delaware incorporation. RD is the ratio of research and development to total assets. SEO is an indicator variable equal to one for a year in which a firm has a common equity offering in the secondary market. MA is an indicator variable equal to one for a year in which a firm appears in the SDC Platinum M&A database. The specifications in columns 1 and 2 of Panel B include year and industry fixed effects, while columns 3 and 4 include only year fixed effects. Standard errors are clustered by firm. *, **, and *** indicate two-tailed statistical significance at the 10 percent, 5 percent, and 1 percent levels, respectively.

38

TABLE 4

Fixed Effects Analysis of Corporate Attorneys and Form 10-K Readability

Panel A: Corporate Attorneys and MD&A Length

Row

Fixed Effects F-Tests on Fixed Effects

N Adjusted R2 Industry Firm Corporate Attorney

1 MD&A Length None

10,918 13%

2 MD&A Length Industry F(66, 10830) = 6.18 Prob > F = 0.0000

10,918 15%

3 MD&A Length Firm

F(3442, 7454) = 3.61 Prob > F = 0.0000

10,918 52%

4 MD&A Length Corporate Attorney

F(1132, 9764) = 2.62 Prob > F = 0.0000 10,918 25%

5 MD&A Length Industry & Firm F(66, 7415) = 2.78 Prob > F = 0.0000

F(3415, 7415) = 3.46 Prob > F = 0.0000

10,918 52%

6 MD&A Length Industry & Corporate Attorney

F(66, 9698) = 4.09 Prob > F = 0.0000

F(1132, 9698) = 2.49 Prob > F = 0.0000

10,918 27%

7 MD&A Length Firm & Corporate

Attorney F(3442, 7167) = 3.57

Prob > F = 0.0000 F(287, 7167) = 2.17 Prob > F = 0.0000 10,918 54%

8 MD&A Length Industry, Firm &

Corporate Attorney

F(66, 7128) = 1.65 Prob > F = 0.0007

F(3415, 7128) = 3.45 Prob > F = 0.0000

F(287, 7128) = 2.16 Prob > F = 0.0000 10,918 54%

39

Panel B: Corporate Attorneys and MD&A Fog Index

Row

Fixed Effects F-Tests on Fixed Effects

N Adjusted R2 Industry Firm Corporate Attorney

1 MD&A Fog None 10,918 3%

2 MD&A Fog Industry F(66, 10830) = 10.41 Prob > F = 0.0000

10,918 9%

3 MD&A Fog Firm F(3442, 7454) = 6.40

Prob > F = 0.0000 10,918 64%

4 MD&A Fog Corporate Attorney

F(1132, 9764) = 3.38 Prob > F = 0.0000 10,918 22%

5 MD&A Fog Industry & Firm F(66, 7415) = 3.65 Prob > F = 0.0000

F(3415, 7415) = 5.95 Prob > F = 0.0000

10,918 64%

6 MD&A Fog Industry & Corporate Attorney

F(66, 9698) = 10.30 Prob > F = 0.0000

F(1132, 9698) = 3.37 Prob > F = 0.0000

10,918 27%

7 MD&A Fog Firm & Corporate

Attorney F(3442, 7167) = 6.12

Prob > F = 0.0000 F(287, 7167) = 1.97 Prob > F = 0.0000 10,918 66%

8 MD&A Fog Industry, Firm &

Corporate Attorney

F(66, 7128) = 2.10 Prob > F = 0.0000

F(3415, 7128) = 5.74 Prob > F = 0.0000

F(287, 7128) = 1.95 Prob > F = 0.0000 10,918 66%

40

Panel C: Corporate Attorneys and Form 10-K Length

Row

Fixed Effects F-Tests on Fixed Effects

N Adjusted R2 Industry Firm Corporate Attorney

1 10-K Length None

10,918 11%

2 10-K Length Industry F(66, 10830) = 9.15 Prob > F = 0.0000

10,918 16%

3 10-K Length Firm

F(3442, 7454) = 3.41 Prob > F = 0.0000

10,918 50%

4 10-K Length Corporate Attorney

F(1132, 9764) = 2.68 Prob > F = 0.0000 10,918 25%

5 10-K Length Industry & Firm F(66, 7415) = 2.40 Prob > F = 0.0000

F(3415, 7415) = 3.16 Prob > F = 0.0000

10,918 50%

6 10-K Length Industry & Corporate Attorney

F(66, 9698) = 7.13 Prob > F = 0.0000

F(1132, 9698) = 2.58 Prob > F = 0.0000

10,918 28%

7 10-K Length Firm & Corporate

Attorney F(3442, 7167) = 3.29

Prob > F = 0.0000 F(287, 7167) = 1.66 Prob > F = 0.0000 10,918 51%

8 10-K Length Industry, Firm &

Corporate Attorney

F(66, 7128) = 2.01 Prob > F = 0.0000

F(3415, 7128) = 3.05 Prob > F = 0.0000

F(287, 7128) = 1.67 Prob > F = 0.0000 10,918 51%

41

Panel D: Corporate Attorneys and Form 10-K Fog Index

Row

Fixed Effects F-Tests on Fixed Effects

N Adjusted R2 Industry Firm Corporate Attorney

1 10-K Fog None 10,918 3%

2 10-K Fog Industry F(66, 10830) = 7.20 Prob > F = 0.0000

10,918 6%

3 10-K Fog Firm F(3442, 7454) = 3.35

Prob > F = 0.0000 10,918 44%

4 10-K Fog Corporate Attorney

F(1132, 9764) = 2.23 Prob > F = 0.0000 10,918 14%

5 10-K Fog Industry & Firm F(66, 7415) = 2.10 Prob > F = 0.0000

F(3415, 7415) = 3.16 Prob > F = 0.0000

10,918 44%

6 10-K Fog Industry & Corporate Attorney

F(66, 9698) = 5.36 Prob > F = 0.0000

F(1132, 9698) = 2.14 Prob > F = 0.0000

10,918 16%

7 10-K Fog Firm & Corporate

Attorney F(3442, 7167) =3.15 Prob > F = 0.0000

F(287, 7167) = 1.33 Prob > F = 0.0002 10,918 45%

8 10-K Fog Industry, Firm &

Corporate Attorney

F(66, 7128) = 1.84 Prob > F = 0.0000

F(3415, 7128) = 2.99 Prob > F = 0.0000

F(287, 7128) = 1.34 Prob > F = 0.0001 10,918 45%

The table reports F-tests and adjusted R2 from estimations of Form 10-K readability in a fixed-effects framework. READABILITY is a measure of Form 10-K readability (MD&A Length, MD&A Fog, 10-K Length, 10-K Fog). MD&A Length and 10-K Length are the natural logarithm of the number of words in the MD&A section and entire Form 10-K, respectively. MD&A Fog and 10-K Fog are the Fog index, which measures the readability of a document as a function of syllables per word and words per sentence, reflecting the number of years of formal education the average reader would need to understand the text on a first reading. It is calculated as: Fog=0.4*(Words per Sentence+Percent of Complex Words), where complex words have at least three syllables. For MD&A Length (Panel A), MD&A Fog (Panel B), 10-K Length (Panel C), 10-K Fog (Panel D), Row 1 of the panel reports the fit of a specification with only time-varying firm characteristics and year fixed effects. Row 2 reports F-tests and adjusted R2 for the benchmark specification that includes only industry and year fixed effects, and time-varying firm characteristics. This is the specification reported in Table 4. Rows 3 and 4 report results for which industry fixed effects are replaced with firm and corporate attorney fixed effects, respectively. Rows 5 and 6 include industry and corporate attorney and firm and corporate attorney fixed effects

42

and Row 8 includes industry, firm, and corporate attorney fixed effects. Throughout, the F-tests statistically test the null hypothesis that all fixed effects are zero and adjusted R2 measures explanatory power.

43

TABLE 5

Summary Statistics for Compliance with Form 12b-25 Disclosure Rules

This table presents summary statistics for the sample of firms that do (COMPLY=1) and do not (COMPLY=0) comply with Form 12b-25 disclosure rules. See Table 1, Panel B for details concerning the sample formation process. COMPLY is indicator variable equal to one if the firm has a late Form 10-K and files Form 12b-25 within one business day of the Form 10-K reporting deadline, zero otherwise. Assets is the natural logarithm of the book value of total assets at the end of the fiscal year. SIZE is the natural logarithm of the market value of common equity at the end of the fiscal year. ROA is EBITDA divided by book value of total assets. TOPTIER is an indicator variable equal to one when the corporate attorney is ranked among the top 100 in American Lawyer magazine’s annual ranking, zero otherwise. logPPP is the natural logarithm of the average law firm profits per equity partner. ATTORNEYS is the natural logarithm of the total number of attorneys employed by the law firm. BIGN is an indicator variable equal to one when the firm has a Big N auditor, zero otherwise. INST is the percentage of the firm’s aggregate common stock held by institutional investors. LEV is (total long-term debt+notes payable-cash and short term investments)/(market value of equity at fiscal year end+total long-term debt+notes payable). CASH is the firm’s industry-adjusted cash/assets ratio, measured as the sum of cash and cash equivalents divided by average total assets for each 3-digit SIC code across the prior ten year period. RESTATE is an indicator variable equal to one if the firm files a restatement in the reporting year as identified by Hennes, Leone, and Miller (2008), zero otherwise. STATUS is an indicator variable equal to one if the firm was permitted more days to file Form 10-K in the prior fiscal year as compared with the current fiscal year. VERYLATE is an indicator variable equal to one if the firm files Form 10-K more than 15 calendar days after the SEC reporting deadline. *, **, and *** indicate two-tailed statistical significance at the 10 percent, 5 percent, and 1 percent levels, respectively.

COMPLY = 1

N=1,373 COMPLY = 0

N=916

COMPLY = 1 versus

COMPLY = 0

Median Mean Standard Deviation Median Mean Standard

Deviation t-statistic

Assets 4.98 5.06 1.90 5.08 5.14 1.62 -1.04 SIZE 4.61 4.58 1.89 5.34 5.43 1.39 -11.66*** ROA 0.02 -0.06 0.31 0.07 0.02 0.26 -6.91*** TOPTIER 0 0.45 0.50 1 0.59 0.49 -6.44*** logPPP 13.71 13.73 0.51 13.47 13.79 0.50 -4.20*** ATTORNEYS 6.42 6.41 0.60 6.46 6.47 0.56 -2.81*** BIGN 1 0.67 0.64 1 0.71 0.45 -2.15** INST 0.22 0.34 0.33 0.30 0.35 0.28 -0.87 LEV 0.17 0.27 0.29 0.05 0.16 0.22 10.09*** CASH -0.02 0.00 0.20 0.03 0.11 0.24 -11.48*** RESTATE 0 0.15 0.36 0 0.04 0.20 8.39*** STATUS 0 0.07 0.26 0 0.30 0.45 -14.96*** VERYLATE 0 0.30 0.46 0 0.11 0.31 11.13***

44

TABLE 6

Top-tier Corporate Attorneys and Compliance with Form 12b-25 Disclosure Rules

COMPLY = β0 + β1TOPTIER/logPPP/ATTORNEYSit + β2INSTit + β3LEVit + β4CASHit + β5RESTATEit + β6STATUSit + β7VERYLATEit + ɛit

(1)

COMPLY (2)

COMPLY (3)

COMPLY

TOPTIER -0.062*** [0.020]

-0.148*** [0.055]

INST 0.194*** [0.041]

0.197*** [0.041]

0.259** [0.112]

LEV 0.189*** [0.042]

0.186*** [0.042]

0.039 [0.092]

CASH -0.178*** [0.047]

-0.176*** [0.046]

-0.259** [0.127]

RESTATE 0.194*** [0.029]

0.190*** [0.029]

0.098** [0.049]

STATUS -0.306*** [0.027]

-0.309*** [0.027]

-0.200*** [0.037]

VERYLATE 0.176*** [0.022]

0.174*** [0.022]

0.163*** [0.040]

SIZE -0.004 [0.009]

-0.001 [0.009]

0.032 [0.037]

ROA -0.286*** [0.040]

-0.290*** [0.041]

-0.221** [0.097]

AGE 0.006*** [0.001]

0.005*** [0.001]

-0.006 [0.019]

NITEMS -0.003 [0.016]

-0.002 [0.016]

-0.001 [0.030]

NBSEG 0.010 [0.019]

0.008 [0.019]

0.010 [0.044]

NGSEG 0.040** [0.019]

0.042** [0.018]

0.014 [0.039]

BIGN -0.037 [0.024]

-0.033 [0.024]

0.053 [0.059]

RETVOL 0.678*** [0.083]

0.681*** [0.082]

0.095 [0.149]

EARNVOL 0.028 [0.025]

0.030 [0.026]

0.023 [0.018]

DELW -0.031 [0.033]

-0.022 [0.032]

-0.507 [0.355]

RD -0.467*** [0.103]

-0.449*** [0.103]

-0.599** [0.293]

SEO -0.149*** [0.027]

-0.144*** [0.027]

-0.067 [0.062]

MA 0.028 0.032 0.102

45

[0.028] [0.028] [0.151]

Intercept 0.213*** [0.067]

0.192*** [0.067]

0.708** [0.308]

Year FE Yes Yes Yes Industry FE Yes Yes Yes Firm FE No No Yes Adjusted R2 41% 42% n.a. N 2,289 2,289 2,289

The table reports results of OLS regression that do and do not include firm fixed effects of the relation between corporate attorneys and Form 12b-25 compliance. COMPLY is indicator variable equal to one if the firm has a late Form 10-K and files Form 12b-25 within one business day of the Form 10-K reporting deadline, zero otherwise. TOPTIER is an indicator variable equal to one when the corporate attorney is ranked among the top 100 in American Lawyer magazine’s annual ranking, zero otherwise. logPPP is the natural logarithm of the average law firm profits per equity partner. ATTORNEYS is the natural logarithm of the total number of attorneys employed by the law firm. INST is the percentage of the firm’s aggregate common stock held by institutional investors. LEV is (total long-term debt+notes payable-cash and short term investments)/ (market value of equity at fiscal year end+total long-term debt+notes payable). CASH is the firm’s industry-adjusted cash/assets ratio, measured as the sum of cash and cash equivalents divided by average total assets for each 3-digit SIC code across the prior ten year period. RESTATE is an indicator variable equal to one if the firm files a restatement in the reporting year as identified by Hennes, Leone, and Miller (2008), zero otherwise. STATUS is an indicator variable equal to one if the firm was permitted more days to file Form 10-K in the prior fiscal year as compared with the current fiscal year. VERYLATE is an indicator variable equal to one if the firm files Form 10-K more than 15 calendar days after the SEC reporting deadline. SIZE is the natural logarithm of the market value of common equity at the end of the fiscal year. ROA is EBITDA divided by total assets. AGE is the number of years since a firm’s first appearance in the CRSP monthly stock return files. NITEMS is the natural logarithm of the number of non-missing items in COMPUSTAT. NBSEG is the natural logarithm of the number of business segments and NBSEG is the natural logarithm of the number of geographic segments, each obtained from the COMPUSTAT segment files at the end of the fiscal year. BIGN is an indicator variable equal to one when the firm has a Big N auditor, zero otherwise. RETVOL is the standard deviation of monthly stock returns in the prior year. EARNVOL is the standard deviation of operating earnings during the prior five fiscal years. DELW is an indicator variable equal to one if the firm has Delaware incorporation. RD is the ratio of research and development to total assets. SEO is an indicator variable equal to one for a year in which a firm has a common equity offering in the secondary market. MA is an indicator variable equal to one for a year in which a firm appears in the SDC Platinum M&A database. All estimations include year and industry fixed effects with standard errors clustered by firm. *, **, and *** indicate two-tailed statistical significance at the 10 percent, 5 percent, and 1 percent levels, respectively.

46

TABLE 7

Robustness of Top-tier Corporate Attorneys and Compliance with Form 12b-25 Disclosure Rules

COMPLY = β0 + β1TOPTIER/logPPP/ATTORNEYSit + β2INSTit + β3LEVit + β4CASHit + β5RESTATEit +

β6STATUSit + β7VERYLATEit + ɛit

(1)

OLS 2SLS TOPTIER COMPLY

(2) Probit 2SLS

TOPTIER COMPLY

(3) OLS

COMPLY

(4) OLS

COMPLY

TOPTIER -0.149* [0.086]

-0.620* [0.362]

logPPP -0.057** [0.025]

ATTORNEYS -0.044** [0.020]

INST 0.051 [0.048]

0.202*** [0.041]

0.057 [0.048]

0.837*** [0.151]

0.167*** [0.049]

0.168*** [0.050]

LEV -0.049 [0.052]

0.184*** [0.038]

-0.038 [0.052]

0.788*** [0.180]

0.200*** [0.057]

0.201*** [0.058]

CASH 0.033 [0.056]

-0.179*** [0.045]

0.039 [0.055]

-0.572*** [0.181]

-0.198*** [0.060]

-0.194*** [0.061]

RESTATE -0.074** [0.037]

0.186*** [0.028]

-0.077** [0.036]

0.675*** [0.130]

0.207*** [0.035]

0.212*** [0.035]

STATUS -0.062** [0.031]

-0.313*** [0.027]

-0.058** [0.030]

-1.040*** [0.102]

-0.279*** [0.036]

-0.278*** [0.036]

VERYLATE -0.034 [0.024]

0.170*** [0.022]

-0.038 [0.024]

0.658*** [0.105]

0.153*** [0.030]

0.149*** [0.030]

SIZE 0.065*** [0.011]

0.063*** [0.010]

0.004 [0.011]

0.003 [0.011]

ROA -0.055 [0.055]

-0.298*** [0.039]

-0.059 [0.054]

-1.379*** [0.212]

-0.315*** [0.058]

-0.317*** [0.058]

AGE -0.005*** [0.001]

0.005*** [0.001]

-0.005*** [0.001]

0.016*** [0.006]

0.007*** [0.001]

0.007*** [0.001]

NITEMS 0.021 [0.015]

0.019 [0.014]

-0.001 [0.021]

0.000 [0.021]

NBSEG -0.036 [0.023]

-0.037 [0.024]

-0.002 [0.027]

-0.002 [0.027]

NGSEG 0.038 [0.024]

0.046*** [0.017]

0.039 [0.025]

0.195*** [0.073]

0.055** [0.024]

0.055** [0.024]

BIGN 0.086*** [0.029]

0.089*** [0.029]

-0.015 [0.035]

-0.020 [0.035]

RETVOL 0.048 [0.096]

0.704*** [0.078]

0.057 [0.094]

2.765*** [0.353]

0.674*** [0.105]

0.675*** [0.105]

EARNVOL 0.027 [0.033]

0.025 [0.031]

0.047 [0.038]

0.050 [0.039]

DELW 0.144*** 0.143*** 0.008 -0.005

47

[0.044] [0.043] [0.047] [0.048]

RD 0.286** [0.140]

-0.443*** [0.106]

0.295** [0.139]

-2.197*** [0.534]

-0.489*** [0.135]

-0.512*** [0.135]

SEO 0.073** [0.031]

-0.138*** [0.027]

0.073** [0.030]

-0.465*** [0.107]

-0.164*** [0.031]

-0.167*** [0.031]

MA 0.068** [0.034]

0.066** [0.034]

0.018 [0.034]

0.022 [0.034]

Intercept -0.047 [0.115]

0.434*** [0.089]

-0.051 [0.114]

-0.205 [0.329]

1.252*** [0.379]

0.731*** [0.203]

Year FE Yes Yes Yes Yes Yes Yes Industry FE Yes Yes Yes Yes Yes Yes Adjusted R2 19% 41% n.a. n.a. 44% 44% N 2,289 2,289 2,259 2,259 1,428 1,428

The table reports results of 2SLS and OLS regressions that use alternative measures of top-tier corporate attorneys to examine the relation between corporate attorneys and Form 12b-25 compliance. COMPLY is indicator variable equal to one if the firm has a late Form 10-K and files Form 12b-25 within one business day of the Form 10-K reporting deadline, zero otherwise. TOPTIER is an indicator variable equal to one when the corporate attorney is ranked among the top 100 in American Lawyer magazine’s annual ranking, zero otherwise. logPPP is the natural logarithm of the average law firm profits per equity partner. ATTORNEYS is the natural logarithm of the total number of attorneys employed by the law firm. INST is the percentage of the firm’s aggregate common stock held by institutional investors. LEV is (total long-term debt+notes payable-cash and short term investments)/ (market value of equity at fiscal year end+total long-term debt+notes payable). CASH is the firm’s industry-adjusted cash/assets ratio, measured as the sum of cash and cash equivalents divided by average total assets for each 3-digit SIC code across the prior ten year period. RESTATE is an indicator variable equal to one if the firm files a restatement in the reporting year as identified by Hennes, Leone, and Miller (2008), zero otherwise. STATUS is an indicator variable equal to one if the firm was permitted more days to file Form 10-K in the prior fiscal year as compared with the current fiscal year. VERYLATE is an indicator variable equal to one if the firm files Form 10-K more than 15 calendar days after the SEC reporting deadline. SIZE is the natural logarithm of the market value of common equity at the end of the fiscal year. ROA is EBITDA divided by total assets. AGE is the number of years since a firm’s first appearance in the CRSP monthly stock return files. NITEMS is the natural logarithm of the number of non-missing items in COMPUSTAT. NBSEG is the natural logarithm of the number of business segments and NBSEG is the natural logarithm of the number of geographic segments, each obtained from the COMPUSTAT segment files at the end of the fiscal year. BIGN is an indicator variable equal to one when the firm has a Big N auditor, zero otherwise. RETVOL is the standard deviation of monthly stock returns in the prior year. EARNVOL is the standard deviation of operating earnings during the prior five fiscal years. DELW is an indicator variable equal to one if the firm has Delaware incorporation. RD is the ratio of research and development to total assets. SEO is an indicator variable equal to one for a year in which a firm has a common equity offering in the secondary market. MA is an indicator variable equal to one for a year in which a firm appears in the SDC Platinum M&A database. All estimations include year and industry fixed effects with standard errors clustered by firm. *, **, and *** indicate two-tailed statistical significance at the 10 percent, 5 percent, and 1 percent levels, respectively.