Knowledge that Transforms

Substantial evidence suggests that regulatory agencies in the United States can be captured by the politicians who oversee them. We provide novel evidence of a federal agency in which capture is limited: the United States Patent and Trademark Office. Although patent applications from politically connected applicants are slightly more likely to be approved despite being of lower ex post quality, additional analyses suggest these outcomes are not indicative of capture. In particular, the disclosure quality of connected patents' legal claims increases more than unconnected patents during the review process, narrowing the scope of the patents and constraining the intellectual property rights. Furthermore, connected patents are no more likely than others to be litigated ex post, suggesting these patent grants are not spurious. Our findings provide insights into how the design of a regulator can limit the benefits that accrue to politically connected firms.

The Organization for Economic Cooperation and Development introduced country‐by‐country reporting (CbCR) for multinational enterprises (MNEs) to help tax authorities combat tax‐motivated income shifting. This study uses confidential U.S. tax administrative data from 2011 to 2018 to examine the effect of U.S. CbCR adoption on the tax‐motivated income shifting and real activities of U.S. MNEs. We first document that while U.S. CbCR provides the Internal Revenue Service with incremental information about the location of U.S. MNEs’ global activities relative to existing U.S. tax return disclosures, substantial overlap exists between U.S. CbCR and existing disclosures. In contrast with prior CbCR studies in cross‐country settings, we fail to find evidence of a change in U.S. MNEs’ tax‐motivated income shifting or a reallocation of real activities based on tax incentives in response to U.S. CbCR using multiple empirical approaches. Overall, our study leverages U.S. tax administrative data to provide insights into the impact of the CbCR initiative on U.S. MNEs.

Technology acquirers face significant information asymmetry when identifying appropriate acquisition targets. We exploit plausibly exogenous variation in the costs of gathering technological information as the result of patent library openings. We find that, after local patent libraries open, firms become more active in technological acquisitions, acquirers prefer targets that are geographically or technologically close to a lesser extent, completion rates for technology M&A increase, and performance improves. Post‐merger innovation output is enhanced through more collaboration between inventors of acquirers and their targets. Overall, our study sheds new light on the importance of information‐gathering costs in corporate takeovers and on the search for human capital synergies.

This study examines the capital market implications of common investor relations (IR) representation, a phenomenon in which multiple public firms share the same external IR representative. Using a difference‐in‐differences research design, I document that common IR representation is associated with greater overlap in institutional ownership and sell‐side analyst coverage as well as similarities in disclosure practices among clients—even those operating in different industries. These effects culminate in heightened return comovement among firms sharing IR representation. My findings provide insight into the role of IR companies as capital market gatekeepers and suggest that when a firm outsources its IR function, the IR company influences its capital market connectivity.

We explore whether firms internalize the product market concerns of their economically linked peers by examining merger and acquisition decisions in the context of customer–supplier relations. Given the extensive transfer of capital, knowledge, and information between merging parties, we hypothesize that customers’ competition concerns discourage their suppliers from engaging in vertically conflicted transactions (i.e., acquisitions of their customers’ rivals or suppliers to those rivals). Consistent with our hypothesis, we find that suppliers are less likely to engage in such transactions when their customers are subject to higher product market competition. Moreover, the effect is more pronounced when suppliers and customers have greater relationship‐specific investments and when customers face heightened proprietary information concerns. Using plausibly exogenous variation in common ownership between customers and their rivals as a shock to customers’ competition concerns, we conclude that the link between customers’ competition concerns and supplier acquisitions is likely causal. Our findings suggest that firms alter their investment and strategic decisions in response to the product market competition concerns of their economically related peers.

Visionary CEOs have strong beliefs about the right course of action for their firms. How should a board of directors that does not necessarily share the visionary CEO's confidence advise and monitor the CEO? We consider a model in which the board can acquire costly information about the firm's optimal strategic direction. The board not only advises the CEO on strategy, but also must approve it, and the CEO exerts effort to implement the strategy. We find that the board gathers less information when the CEO believes more strongly in his vision. Further, depending on the strength of the CEO's belief bias, the board either plays an advisory role, a monitoring role, or a rubberstamping role. The model predicts that in firms that are led by highly visionary CEOs, boards are passive in that they acquire little information and rubberstamp the visionary's proposal. Nevertheless, shareholders prefer the visionary over an unbiased manager in industries in which obtaining information about the correct course of action is difficult and costly.

To what extent does the narrative context surrounding the numbers in financial statements alter the informativeness of these numbers, that is, contextualize them? Answering this question empirically presents a methodological challenge. Leveraging recent advances in deep learning, we propose a method to uncover the value of contextual information learned from the (deep) interactions between numeric and narrative disclosures. We show that the contextualization of accounting numbers makes them substantially more informative in shaping beliefs about a firm's future, especially when numeric data are less reliable. In fact, the informational value of interactions dominates the direct informational value of the narrative context. We corroborate this finding by showing that stock markets and financial analysts incorporate the interactions between narrative and numeric information when making forecasts. We also demonstrate the value of our approach by identifying rich firm‐year–specific heterogeneity in earnings persistence. We discuss a number of avenues for future research.

Formal theory and empirical research are complementary in building and advancing the body of knowledge in accounting in order to understand real‐world phenomena. We offer thoughts on opportunities for empiricists and theorists to collaborate, build on each other's work, and iterate over models and data to make progress. For empiricists, we see room for more descriptive work, more experimental work on testing formal theories, and more work on quantifying theoretical parameters. For theorists, we see room for theories explicitly tied to descriptive evidence, new theories on individuals' decision making in a data‐rich world, theories focused on accounting institutions and measurement issues, and richer theories for guiding empirical work and providing practical insights. We also encourage explicitly combining formal theory and empirical models by having both in one paper and by structural estimation.

This paper examines the role of peer firm disclosures in shaping corporate research and development (R&D) investments. Drawing on models of two‐stage R&D races, I hypothesize that a firm could be either deterred or encouraged by peer disclosure of interim R&D success, depending on peer firms’ R&D strength in the race. Using granular, project‐level data on clinical trials in the drug development process, I find that a firm's R&D investments in a specific therapeutic area are deterred by disclosures of early‐phase trial initiation from strong rivals in the same area but encouraged by disclosures from weak rivals. Cross‐sectional analyses show that focal firm strength and disclosure relevance moderate the effects of peer firm disclosure. Overall, my evidence suggests that peer firms’ R&D disclosures can have both proprietary costs and deterrence benefits.