Knowledge that Transforms

This paper considers how far private adaptation may reduce future vulnerability to climate risks. Using data on monthly firm-to-firm transactions from Pakistan, we find that flood-affected firms are more likely to relocate to safer ground and shift purchases toward suppliers in less flood-prone regions and reached via less flood-prone roads. The results indicate that firms are imperfectly informed about flood risk and update their beliefs following floods. We quantify aggregate impacts using a spatial model of endogenous production network formation. The findings suggest that firms' learning will shape the economic impact of increasingly frequent climate-related disasters.

Schools across the U.S. have sharply restricted student use of phones during the school day. We evaluate one type of restriction—lockable phone pouches—using nationwide data combining a large-scale teacher survey, GPS pings, standardized test scores, and school administrative records, along with sales records from the largest pouch provider. Using a staggered difference-in-differences design, we find that pouch adoption substantially reduces phone use as measured by GPS pings and teacher reports. In the first year after adoption, disciplinary incidents increase, and we find suggestive evidence that student subjective well-being falls, consistent with short-term disruption. However, disciplinary effects fade, while the estimated effects on well-being appear to recover and become positive in later years. For academic achievement, average effects on test scores are consistently close to zero. High schools see modest positive effects, particularly in math, while middle schools see small negative effects. We find little evidence of effects on school attendance and no clear evidence of improvements in self-reported classroom attention or perceived online bullying.

Theory posits that mandatory disclosure influences peer firms' learning from stock prices in two non‐mutually exclusive ways: intra‐industry information transfers and the reallocation of information acquisition efforts. Using mandatory segment disclosure as our setting, we document a decrease in investment‐ q sensitivity for peers of disclosing firms. This effect is stronger among peers with greater economic links to disclosing firms and peers with the greatest incentives to glean information from prices. Our findings provide novel evidence that mandatory disclosure can have significant negative externalities on peer firms' investment efficiency via a managerial learning from the stock price channel. These insights inform regulators assessing the economic consequences of mandatory disclosure, while also assisting managers who rely on information from stock prices to guide investment decisions.

Companies have widely adopted a system of work‐product reviews whereby the work of one individual is subsequently reviewed by another to ensure its quality. We examine how managers can effectively implement a review of employee work to improve performance. Organizations review employees' work to identify mistakes and improve work quality. However, reviews may also reduce employees' effort and initiative if they expect reviewers to identify and correct their errors for them. We use an experiment to examine how employee performance depends on who conducts the review and how feedback is provided. Specifically, participants' work was reviewed by either a superior or a peer, and the reviewer provided either general, high‐level guidance (autonomy‐oriented) or specific corrective information about errors (dependency‐oriented). Employees performed best when superiors provided high‐level guidance or when peers provided specific corrective feedback, with these benefits emerging over time. Guidance from a superior increased employees' sense of responsibility, whereas corrective help from a peer strengthened feelings of teamwork and cohesion. Review approaches that did not fit these combinations offered no clear performance benefit relative to having no review. The findings show that review effectiveness depends on matching the feedback approach to the reviewer's organizational rank. These results have important implications for managers, accountants responsible for internal controls, and audit professionals involved in designing and implementing the review process.

We show that a structural model incorporating firms’ real options and financial leverage decisions can generate forward-looking equity distributions of various shapes, resulting in highly flexible implied volatility surfaces. In contrast, exogenously specified models with stochastic volatility and jumps can only generate smiles and downward-sloping curves. We explain the observed negative relationship between downward sloping implied volatility surfaces and the value of real options: real options contribute positively to equity skewness, and more so the more convex their payoff, which is the case when the real option is “at-the-money” and has the lowest value.

Experimental asset markets provide a controlled approach to studying financial markets. We attempt to replicate 17 key results from four prominent studies, collecting new data from 166 markets with 1,544 participants. Only three of the 14 original results reported as statistically significant were successfully replicated. We fail to replicate findings on emotions, self‐control, and gender differences in bubble formation but confirm that experience reduces bubbles and cognitive skills explain trading success. Our study demonstrates the importance of replications in enhancing the credibility of scientific results in this field.

We examine how strengthened anti-money laundering (AML) enforcement affects the U.S. banking sector. Heightened enforcement disproportionately raises compliance costs for small banks, especially in counties more exposed to money laundering. In these areas, small banks contract while large banks expand, increasing standardized, government-supported, and secured lending. While aggregate county-level credit does not decline differentially, local outcomes improve. Small establishments grow, non-tradable employment and wages rise, and real estate prices increase. The evidence is consistent with a reallocation mechanism in which AML enforcement shifts activity toward large banks, potentially improving intermediation quality through changes in the composition of local financial intermediation.

We examine whether PCAOB inspection deficiencies related to management review controls (MRCs) affect financial reporting decisions. Using the goodwill impairment setting, we find that firms are more likely to record goodwill impairments when their auditors have received more PCAOB inspection deficiencies related to goodwill MRCs. The association is stronger when inspection deficiencies are more likely to lead to changes to the design or implementation of an internal control (repeat deficiencies and deficiencies related to MRC precision). We observe some evidence that MRC inspection deficiencies increase the likelihood of goodwill impairment even when unrelated to goodwill, indicating that improving the audit of MRCs can broadly affect financial reporting. Our findings provide evidence that PCAOB inspections affect not only auditor behavior but also the financial reporting behavior of audit clients. Specifically, inspection feedback appears to influence reporting outcomes through changes in the audit and evaluation of MRCs, identifying a channel through which regulatory oversight affects issuers. The results have implications for audit firms seeking to remediate inspection deficiencies, for management and audit committees responsible for overseeing significant estimates and impairment analyses, and for regulators evaluating the broader effectiveness of the PCAOB inspection process.

We investigate a dynamic oligopoly model with two phases: a normal phase where an essential input is available, and a disruption phase where firms must rely on inventories. Disruptions create an overcutting pricing incentive arising from the option to forgo sales and monopolize the market once rivals stock out. This monopoly option causes the price to jump to a supracompetitive level at the advent of the disruption and to remain above the competitive price path throughout. Price caps raise welfare, but reduce inventory investment. Government reserves reduce prices and raise buffer stocks, as do reserve mandates when financially feasible.

We propose a novel approach to synthesize presumably information-driven insider trading signals for the cross section of stocks. We find that the resulting straightforward composite strategy can often forecast returns in a global sample. This predictability is strongest in equal-weighted portfolios, short holding periods, and insider-buying signals, and it improves further with global diversification. Cross-country analysis reveals that varying insider trading restrictions between countries have limited explanatory power for the performance of the composite strategy. Overall, the results are consistent with a short-term informational advantage of insiders, which might be due to the skillful interpretation of non-private news.