Knowledge that Transforms

This paper provides evidence that the mean and dispersion of manufacturers’ inventory growth, as reflected in accounting disclosures, convey valuable information about subsequent changes in economic output growth. At the same time, I find that although government statistical agencies and professional forecasters incorporate mean inventory growth in their estimates or forecasts, they fail to account for its dispersion. I develop and calibrate a heterogeneous-firm model to show that the leading information embedded in macro-level inventory moments arises from firms’ asymmetric responses to news shocks at the micro level. The model also suggests that the failure to incorporate dispersion is likely due to the noise in the dispersion signal used by statistical agencies and forecasters. Data Availability: Data are available from the public sources cited in the text.

We examine whether accrual accounting loses relevance with the rise of knowledge firms. Investigating a large sample of U.S. firms from 1990 to 2022, we compare magnitudes, components, quality, and pricing of accruals across knowledge- and physical-asset firms. Knowledge firms report lower accruals and poorer accrual quality, but the gap is concentrated in small knowledge firms. Their low-quality accruals reflect largely innate, volatile, uncertain, early-stage operations, not discretionary reporting. As these firms scale, their accrual magnitudes and quality converge to those of similarly sized physical firms. These life-cycle dynamics reconcile the 1990s decline and post-2000 improvement in aggregate accrual quality through offsetting “new-list” and “maturation” effects. Accrual accounting remains decision-useful in a knowledge economy, as the market prices, and thus seems to recognize, the information risk emanating from poor accrual quality, especially for knowledge firms.

We examine whether mandatory tax information exchange agreements between governments have real effects on firms’ physical trade in tangible goods. We posit that some of the physical trade in tangible goods flowing through low-tax jurisdictions is intended to facilitate income shifting. As such, shocks to enforcement via mandatory information exchange agreements could cause firms to change the physical flow of goods. Using firm-level shipping container data, we find that adoption of bilateral tax information exchange agreements (TIEAs) between the U.S. and foreign jurisdictions is associated with significant decreases in the volume of imports by U.S. firms from those jurisdictions. We also find reallocation effects: U.S. firms increase imports from jurisdictions in the same subregion as the treated jurisdiction, resulting in minimal overall change in total imports. To our knowledge, ours is the first study to document a connection among enforcement-related tax disclosure, income shifting, and physical trade flows. Data Availability: The data used in this study are available from the sources cited in the paper.

Existing measures of valuation uncertainty are indirect or available for limited samples. We use an accounting-based valuation model to estimate a set of hypothetical intrinsic equity values and measure uncertainty by their spread. We show that our measure reflects both cash flow and discount rate uncertainty, explains price ranges in IPO prospectuses and M&A fairness opinions, and incrementally predicts various future outcomes indicative of uncertainty. An application of our measure to a popular asset pricing context yields new insights into the properties of the value premium. Overall, our paper demonstrates how accounting information can be used to summarize uncertainty about intrinsic equity value. Data Availability: Data used in the article are available from public sources cited in the text.

We study the effects of mandatory environmental reporting on greenwashing. Our setting is a regulation in the United Kingdom requiring firms to report carbon emissions, or mandatory carbon reporting (MCR). Measuring greenwashing as the discrepancy between companies’ external carbon-related discussions in corporate social responsibility (CSR) reports and their underlying carbon performance, we find MCR leads to a decline in three types of greenwashing: excessive length, over-optimism, and vague commitments, relative to performance. MCR also curtails greenwashing in other (noncarbon) environmental disclosures, suggesting a spillover from MCR to firms’ broader environmental reporting. Drivers are shown to include higher expected reputational and regulatory risks for noncarbon issues after MCR, and a governance spillover, where the governance resources allocated to MCR also benefit noncarbon reporting. Data Availability: Data are publicly available from sources indicated in the text.

Banks often adjust their financial reporting in response to supervisory intervention. However, many banks operate under multiple supervisors with varying preferences. We examine how banks respond to such conflicting oversight within the European Banking Union, where the European Central Bank (ECB) is the central authority. The ECB’s Asset Quality Review revealed that its preferred asset valuations diverged from many banks’ IFRS-compliant practices that were previously accepted by local supervisors. Banks voluntarily aligned their reporting with the nonbinding preferences of the new central supervisor, although the adjustments varied across jurisdictions. Alignment was weaker when central and local supervisory objectives conflicted and stronger when joint supervision mitigated regulatory capture. Overall, these adjustments enhanced the informativeness of loan loss provisioning. With aligned reporting preferences across supervisory layers, the introduction of a central supervisor can thus significantly improve bank reporting and transparency, even without formal enforcement. Data Availability: The data used in this study are available from the sources identified in the manuscript.

We investigate how incentives provided by whistleblowing programs affect the likelihood of whistleblowing, firm value, and social welfare in the presence of endogenous internal communication. Specifically, we focus on a myopic manager’s ex post decision on internal communication with the employee. An informed employee plays a dual role: working to fix the defect internally or acting as a whistleblower to expose the misconduct if the manager withholds defect information from the public. We find that, when the whistleblowing reward is relatively small, providing stronger incentives increases the likelihood of whistleblowing and can help improve firm value and social welfare. However, once rewards become excessively large and compromise internal communication, contrary to conventional wisdom, the likelihood of whistleblowing declines and both firm value and social welfare decline too. We also characterize the optimal whistleblowing rewards designed by strategic regulators seeking to maximize firm value or social welfare.

We model two competing firms, each operating through their controlled subsidiaries while also holding a minority financial stake in their rival’s subsidiary. Under such cross-ownership, we derive the firms’ optimal disclosure policies, showing how they are affected by technological spillovers, competitive intensity, and the nature of product markets. The results demonstrate that cross-ownership induces more disclosures, benefiting the firm because disclosures promote the profit of its subsidiary (at low spillover values) or the rival’s subsidiary (at high spillover values). The increased transparency under cross-ownership can generate Pareto gains, improving consumer surplus and firm profits relative to separate ownership. This unifying finding holds under quantity and price competition, challenging the view that cross-ownership leads firms to collude, harming consumers. Additionally, with cross-ownership, high-spillover disclosures occur more under price than quantity competition. Thus, price competition can generate Pareto gains, contradicting the view that it favors consumers at the expense of firms.

Relying on the frequency of typos in engagement partners’ graduate theses to measure their conscientiousness, we find that more conscientious partners conduct higher-quality audits, evident in that they are more likely to require an audit adjustment. Our core results hold for both upward and downward adjustments, implying that being conscientious is not equivalent to being overly conservative. Consistent with DeAngelo’s (1981) theory, cross-sectional evidence suggests that the role that partner conscientiousness plays in audit quality comes through both the auditor competence and independence channels. Additionally, we find that the frequency of partner thesis typos is negatively associated with auditor effort. Collectively, our evidence implies that engagement partner conscientiousness plays a major role in shaping audit outcomes. Data Availability: Data are available from the public sources cited in the text.

We investigate whether prior employment connections influence the strictness of the Securities and Exchange Commission (SEC) filing review process. Using novel data on over 250 accountants at the SEC, we define connected examiners as accountants reviewing financial statements audited by their former employer. We find that SEC review teams with a higher percentage of connected examiners are less likely to detect financial statement errors, raise fewer substantive issues, and are less likely to push back on registrants’ responses to comment letters. Our estimates also indicate that the effect of examiners’ prior employment connections is strongest earlier in their SEC tenure and attenuates with time. Our findings provide important practical insights on the boundaries of the revolving door between regulators and the regulated, suggesting that even indirect connections can impact oversight.