The Role of Gatekeepers in Capital Markets

• Author: SURAJ SRINIVASAN,SUGATA ROYCHOWDHURY
• Date: 01 May 2019
• DOI: http://doi.org/10.1111/1475-679X.12266
• Published date: 01 May 2019

DOI: 10.1111/1475-679X.12266

Journal of Accounting Research

Vol. 57 No. 2 May 2019

Printed in U.S.A.

The Role of Gatekeepers in Capital

Markets

SUGATA ROYCHOWDHURY

∗AND SURAJ SRINIVASAN

†

Received 28 January 2019; accepted 12 March 2019

ABSTRACT

Gatekeepers in financial markets have the power to provide the institutional

stability, fortitude, and direction necessary for the development and the

smooth functioning of capital markets. At the same time, they are often moti-

vated by their own private incentives. This along with the tradeoffs they face,

and the at-times unintended consequences of the regulations they propose

and enforce, can undermine their effectiveness. A thorough understanding

of gatekeepers and their roles can thus illuminate academics, the financial

community, and regulators on how such gatekeepers can be the most effec-

tive and generate the greatest benefits for capital markets. Since gatekeeping

roles and the literature they have inspired encompass a wide array of institu-

tions and agencies, our overview concentrates on those that the conference

papers appearing in this volume focus on. We conclude that collectively, the

papers contribute to significant progress, and point out some crucial areas

that call for further investigation and offer opportunities for future research.

JEL codes: D02; G18; G24; G28; G34; G38; K22; K41; M40; M41; M42;

M48

Keywords: gatekeepers; regulators; credit rating agencies; credit rating;

SEC; acquisitions; mandatory disclosures; litigation risk; courts of law; judge

ideology; auditors; audit committee; FINRA; financial advisors

∗Boston College; †Harvard University.

We thank Christian Leuz, Phil Berger and Haresh Sapra for their comments, and

Eric Gelsomin and Farzana Afrin for their assistance. An Online Appendix to this pa-

per can be downloaded at http://research.chicagobooth.edu/arc/journal-of-accounting-

research/online-supplements.

295

CUniversity of Chicago on behalf of the Accounting Research Center,2019

296 S.ROYCHOWDHURY AND S.SRINIVASAN

1. Introduction

The Call for Papers for the 2018 Annual Journal of Accounting Research

Conference announced its theme as “The Role of Gate-Keepers in Account-

ing,” inclusive of a wide range of methodological choices, including theo-

retical, empirical, field, and clinical studies. For the purposes of this dis-

cussion, we think about a gatekeeper as any entity that fulfills two condi-

tions. First, it bears fiduciary responsibilities toward capital market partic-

ipants, for example, the investing community. Second, it exercises influ-

ence directly or otherwise over corporations’ access to capital, the quan-

tity and quality of their disclosures and financial reports, their governance

practices, and/or their operational and investment decisions. Examples

of gatekeepers encompass a wide variety of regulatory and capital market

institutions and agencies such as auditors, financial analysts, regulators, in-

stitutional investors, stock exchanges, rating agencies, lenders, tax authori-

ties, and media.1

The literature increasingly recognizes the role of gatekeepers as crucial

for the effective functioning of capital markets. Almost every aspect of gate-

keeping has a substantial literature devoted to it. The six papers presented

at the conference adhere well to the central conference theme, and speak

to five different gatekeeping roles:

rCredit rating agencies (Beatty et al. (2019), Lee and Schantl (2019)).

rSEC’s mandated disclosures (Chen (2019)).

rCourts of law and in particular, federal judges and their ideology

(Huang, Hui, and Li (2019)).

rAuditors and audit committees (Bhaskar, Hopkins, and Schroeder

(2019)).

rFinancial advisors and those regulating financial advisors (Law and

Mills (2019)).

As each area is highly developed, we devote an individual section to each

of these gatekeeping roles. Within each section, we discuss existing litera-

ture, and the relevance of the specific conference papers in the context of

that literature. Readers should not view our literature reviews as exhaustive,

or our discussion of the conference papers as a critique. Some salient in-

sights that emerge from the papers and that we highlight in our discussion:

rWhen assessing the role and influence of gatekeepers, it is important

to bear in mind that they may themselves be motivated in their ac-

tions by either their ideologies or their private incentives. For exam-

ple, judges that handle corporate cases are possibly motivated by their

political ideologies (Huang, Hui, and Li [2019]), while credit rating

agencies are potentially motivated by their desire to grow the size of

1We borrow the list of examples from the Call for Papers for the Conference.