Investment funds that claim to focus on socially responsible stocks have proliferated in recent times. In this paper, we verify whether ESG mutual funds actually invest in firms that have stakeholder-friendly track records. Using a comprehensive sample of self-labelled ESG mutual funds (as identified by Morningstar) in the United States from 2010 to 2018, we find that these funds hold portfolio firms with worse track records for compliance with labor and environmental laws, relative to portfolio firms held by non-ESG funds managed by the same financial institutions in the same years. Relative to other funds offered by the same asset managers in the same years, ESG funds hold stocks that are more likely to voluntarily disclose carbon emissions performance but also stocks with higher carbon emissions per unit of revenue. Despite these findings, ESG funds hold portfolio firms with higher average ESG scores. We show that ESG scores are correlated with the quantity of voluntary ESG-related disclosures but not with firms’ compliance records or actual levels of carbon emissions. Finally, ESG funds appear to underperform financially relative to other funds within the same asset manager and year, and to charge higher fees. Our findings suggest that socially responsible funds do not appear to follow through on proclamations of concerns for stakeholders.

We introduce CRISK, a financial statement–based measure, to assess the systemic risk contribution of a financial firm. CRISK measures the capital shortfall of a financial firm conditional on severe distress in the entire system. Our measure complements the market‐based measure, SRISK, introduced by Acharya et al. (2012, American Economic Review , 102 (3), 59–64) and Brownlees and Engle (2017, Review of Financial Studies , 30 (1), 48–79), in identifying systemically risky financial firms. While SRISK provides a timelier assessment using real‐time stock market data, CRISK offers a more nuanced approach using accounting information and is tailored to the distinct characteristics of insurance firms and commercial banks. Our empirical analysis shows that (1) compared to CRISK, SRISK tends to overestimate capital shortfalls for insurance firms and for banks that hold a substantial portion of Federal Deposit Insurance Corporation–insured deposits while underestimating capital shortfalls for banks heavily reliant on uninsured deposits; (2) CRISK estimates of capital shortfall closely align with the actual capital injections received by financial firms during the financial crisis of 2007–2009; and (3) CRISK exhibits a significant positive correlation with short interest. Based on our findings, we recommend using SRISK as an initial screening tool to identify potential systemically risky financial firms, followed by refining the list and validating the expected capital shortfall using CRISK.

Before directly addressing the Response to critique and further elaboration (hereafter “Comment”), written by Patrick Bolton and Marcin Kacperczyk (BK), a few thanks are in order. First, we thank the editor, Alex Edmans, both for providing BK the opportunity to directly comment on our paper as well as giving us the opportunity to respond. We believe that open intellectual debate is vital especially given the topic at hand. Directly facilitating such a conversation in conjunction with the paper’s publication in RF seems to us a good way to showcase various perspectives with equal prominence. Second, we thank BK for taking up the offer to engage with us within this context. We believe direct engagement is the best way to advance scholarly debate on whether and how investors consider carbon emissions information. In what follows, we write our rejoinder to BK’s Comment in the format of a response memo, that is, we reproduce BK’s main points (with some paraphrasing) and respond to each individually in turn. We believe this is the clearest—and, importantly, most parsimonious—way to provide our thoughts.

An influential emerging literature documents strong correlations between carbon emissions and stock returns. We re-examine those data and conclude that these associations are driven by two factors. First, stock returns are correlated only with unscaled emissions estimated by the data vendor, but not with unscaled emissions actually disclosed by firms. Vendor-estimated emissions systematically differ from firm-disclosed emissions and are highly correlated with financial fundamentals, suggesting that prior findings primarily capture the association between such fundamentals and returns. Second, unscaled emissions, the variable typically used in academic literature, is correlated with stock returns but emissions intensity (emissions scaled by firm size), an equally important measure used in practice, is not. While unscaled emissions represent an important metric for society, we argue that, for individual firms, emissions intensity is an appropriate measurement choice to assess carbon performance. The associations between emissions and returns disappear after accounting for either of the issues above.

We develop a composite firm‐year earnings quality score ( EQSCORE ) that uses signals based on fundamental analysis. We obtain a proprietary data set of 613 reports about aggressive reporting practices over 2004–2009 for 230 unique firms from a research firm (RF). From these reports, we identify red flags of poor earnings quality relating to (1) sales quality, (2) margin quality, (3) cash flow quality, (4) corporate governance, (5) audit, and (6) others. We construct the EQSCORE using 51 signals employed by the RF and a novel approach that imitates the RF's process for discovering earnings quality. The EQSCORE outperforms existing composite models of earnings quality in identifying accounting and auditing enforcement releases and restated firm‐years and predicts future stock returns. The corporate governance–related and audit‐related red flags included in the EQSCORE complement accounting‐based red flags and enhance the ability of the EQSCORE to identify firms with poor earnings quality.

From 2008 to 2020, 180 of S&P 1500 have disclosed employee diversity targets. We conduct the first analysis of firms’ employee diversity targets and ask three research questions: (i) who announces diversity targets? (ii) do firms deliver on their diversity targets? (iii) what are the implications of disclosure of such targets for employee hiring and investors? We find that firms with a greater willingness (proxied by past ESG penalties, higher CEO-to-median employee pay ratio, more media coverage, and after #MeToo and Black Lives Matter movements) and ability (proxied by financial strength, a blue-collar heavy labor force, and gender and ethnic minorities on boards) to improve employee diversity are more likely to disclose diversity targets. Exploiting the Revelio dataset of 15,639 firm-years for 1,203 distinct firms from 2008 to 2020, we observe that firms that disclosed a diversity target have indeed hired more diverse employees, but such diversity levels had already increased substantially prior to the target disclosure. Firms with numerical, forward-looking, and rank-and-file employee-targeted goals are associated with greater employee diversity relative to firms that announce other types of diversity goals. Moreover, improved diversity performance does not appear to occur at the cost of employee quality, as measured by Revelio. Overall our results have practical implications for how investors and stakeholders might want to interpret corporate diversity targets.

We conduct a field survey to investigate whether current mid-level and future entry-level managers (collectively managers) subjectively value stock options and restricted stock consistent with economic theory. We find that managers, on average, subjectively value stock options at greater than their Black-Scholes value and greater than fair-value equivalent restricted stock. This result contrasts with conventional economic wisdom that risk-averse employees discount the Black-Scholes value of an option. With respect to stock options, our results also reveal that managers, on average, have a lottery ticket mentality when subjectively valuing options, they value shorter vesting periods, and they value longer terms to maturity. With respect to stock options and restricted stock, we find that managers tend to extrapolate recently rising stock price trends to arrive at their subjective values. Overall, our results suggest that in some cases standard economic theory does not accurately reflect how managers appear to subjectively value stock options and restricted stock.