Knowledge that Transforms

I explore the nature of analysts’ climate-related discussion in their reports. Focusing on industries most exposed to climate change, I find very few reports (less than 2 percent) and a minority of analysts (less than 11 percent) discuss climate-related topics. Analysts concentrate climate-related discussion among utilities, mostly discussing renewable energy and regulatory issues. These discussions exhibit no significant association with short-term earnings forecasts and a weak association with more pessimistic long-term growth forecast revisions. Climate-related discussion is also associated with more optimistic target prices when analysts do not issue long-term growth forecasts, suggesting the development of a long-term perspective correlates with views on climate-related issues. Discussions of solar-, emissions-, and automotive-related topics are associated with this greater target price optimism. These findings highlight how analysts’ climate-related discussion relates to long-term expectations and concentrates among highly exposed firms. Data Availability: Data are available from the public sources cited in the text. A detailed listing of how each large language model (LLM) classified each climate-related report, a document describing the details of this listing, a firm-year summary of climate-related discussion and subtopical classifications, and a description document of this firm-year summary are available upon request.

We examine whether audit partners’ ownership stakes in affiliated non-audit businesses are related to audit quality. We argue that non-audit ownership is a relatively sharp measure of auditor-client economic bonding, which can impair auditor independence. Using a unique setting in China where we observe partners’ equity stakes in both audit and non-audit businesses, we find that audit adjustments are significantly smaller when engagement partners hold larger ownership stakes in non-audit businesses. Audit adjustments are further reduced when the entire audit partnership holds greater ownership in affiliated non-audit businesses, suggesting that non-audit ownership matters at the audit firm level as well. Additional analyses suggest that these results are driven by impaired independence, rather than partner distraction or endogenous partner-client matching. Our study informs ongoing policy debates on the structuring of audit and non-audit businesses as well as the investments of non-audit entities in accounting practices. Data Availability: The authors have nondisclosure and confidentiality agreements for their use of proprietary data, which were provided to the authors for independent academic research only. Nonproprietary data are available from sources identified in the text.

I examine how the use of sales performance measures in CEO incentive contracts affects the operations of a firm and its suppliers. A growing number of firms are evaluating and compensating their CEOs based on sales performance. However, because sales performance measures are narrow measures that do not incentivize cost control, they can influence operational decisions that affect not only the firm but also its suppliers. I show that the use of sales performance measures in CEO bonus contracts is associated with inventory fluctuations that increase the bullwhip effect, a phenomenon in which a firm exhibits greater volatility in production than in demand, thereby increasing the order volatility faced by its suppliers. Instrumental variable tests using the firm’s network connections through compensation consultants mitigate concerns that the results are driven by omitted factors. Collectively, my findings illuminate spillover effects of CEO incentive contracts on economically linked firms. Data Availability: Data are available from the sources cited in the text.

I propose a mechanism through which institutional investors’ correlated demand shocks provide a source of market risk in asset pricing. Institutional investors have mandates to beat a similar market index. During periods of strong stock market performance, their incentive to outperform intensifies as more of them fall short of the market index. This incentive induces procyclical risk-taking behavior, generating correlated demand that elevates the market betas and risk premia of exposed stocks. Quasi-experiments using exogenous changes in index membership support a causal interpretation of the mechanism. Elevated betas are associated with a higher perceived cost of capital and reduced firm investment.

This paper analytically and empirically investigates managerial investment responses to negative shocks in firm value. In the model, managers are privately informed about the shocks’ persistence, and those facing transitory shocks strategically underinvest to boost earnings and signal financial strength to investors. The model also predicts counter-signaling: firms with strong fundamentals do not need to cut investment to convey strength. We exploit the 2003 mutual fund trading scandal as a plausibly exogenous source of price pressure. Consistent with signaling, we find that firms with greater tainted-fund ownership are more likely to meet or narrowly beat analyst forecasts by cutting R&D, and that this behavior is associated with more favorable earnings announcement returns and better long-run performance. Consistent with counter-signaling, these firms are less likely to cut R&D when they beat analyst forecasts by a wide margin. Cross-sectional tests also support the model’s comparative statics. Data Availability: All data used in the study are publicly available from the sources cited in the text.