Knowledge that Transforms

Abstract Form 10-K offers a setting for studying how users process complex, multi-layered disclosures: managerial narratives in the main file alongside separate exhibits, such as contracts and certifications, that provide unfiltered detail. Drawing on rational inattention theory, we investigate how users allocate limited attention across these components. Users typically begin with the main file and selectively access exhibits when the main file appears shorter, less readable, or less confident, indicating higher perceived information loss. This pattern strengthens for exhibits that offer more detail on topics discussed in the main file and among institutional investors and time-constrained users. Exhibit access persists beyond the initial filing window and increases around subsequent firm events, especially when external monitoring strengthens and event-related information asymmetry grows. Collectively, our findings underscore the active, discerning nature of user attention in navigating multi-layered disclosures and reveal the often-overlooked informational value of exhibits in Form 10-K.

Abstract This study investigates the effect of national security-related foreign investment screening laws on managers’ investment choices. These laws weaken takeover markets by granting regulators broad new powers to revise or reject foreign takeovers of firms in national security-related industries. I identify exogenous variation in national security-related foreign investment screening laws using the enactment of a U.S. national security-related foreign investment screening law known as the Foreign Investment and National Security Act (FINSA). Consistent with managerial entrenchment theory, I document that, following the enactment of FINSA, national security firms’ inefficient investment increases. Event-time tests corroborate and cross-sectional tests demonstrate that results strengthen with treatment strength. Results generalize to seven alternative investment efficiency measures. Stacked panel tests exploiting regulators’ staggered enforcement of FINSA across 66 industries over time between 2008 and 2021 further corroborate. Overall, this study documents the unintended consequences of national security-related foreign investment screening laws on managers’ investment choices.

Abstract We survey public company executives and directors to understand what audit clients want from their auditor in today’s regulated environment. Our results provide at least three important takeaways. First, executives and directors view elements of auditors’ service quality (e.g., timeliness of communications) as at least as important as auditors’ technical competence. Second, we find no evidence that stakeholders’ preferences for service quality replaces their expectation for technical competence. Third, we find that 57% of executives and 67% of directors feel they can very accurately assess audit quality after an audit’s completion, but we are unable to identify clear determinants of participants’ self-reported ability to assess quality. Our results highlight the challenges facing auditors as they attempt to please clients, protect shareholders, and comply with regulations, all while offering a product whose quality is inherently challenging for others to assess. Our findings motivate future research and inform regulatory efforts.

Abstract We document that firms vary in their timeliness of support for the Black Lives Matter (BLM) movement following the death of George Floyd in May 2020, and that timeliness is an indicator of authenticity. We predict that firms that speak out quickly in support of BLM (via Twitter or their websites) have made more investments in diversity and inclusion, relative to firms that speak out slowly (via conference calls or annual reports) or that remain silent. Consistent with this prediction, quick -disclosing firms have greater workforce diversity, have boards with greater ethnic diversity, and are more likely to tie executive compensation to diversity and inclusivity. Furthermore, quick -disclosing firms increase their hiring of both Black American employees and Black directors relative to firms that stay silent. We also document that quick-disclosing firms are part of more supportive stakeholder networks. We develop an inclusivity index and show that firms with higher index levels are more likely to speak out on the Capitol Riots, the Asian Spa Shootings, and voting rights.

This paper examines the consequences of adopting ASC 606, a new revenue recognition standard, on revenue uncertainty and debt contracting, using a quasi-natural experiment surrounding its adoption. We find that affected firms experience an increase in revenue uncertainty, as indicated by both higher analyst forecast dispersion and absolute analyst forecast error. Consequently, the cost of debt rises for affected firms, as covenants are used less in debt contracts reflecting a decreased effectiveness of earnings-based covenants. The effect is mitigated by relationship lending. We also show that the decreased use of earnings-based covenants as well as the increased cost of debt dissipate over time, while the increase in revenue uncertainty persists. Our analyses document a costly transition toward a more principles-based accounting standard but also suggest that some costs are transient.

We examine how removing user anonymity affects social media’s ability to generate value-relevant information for the stock market. Using a difference-in-differences design that exploits the differential timing of adopting real-name verification policies by the two most popular investment-related social media websites in China, we find that content on the treated site becomes significantly more informative about future stock returns and earnings after the policy takes effect. This effect is primarily driven by continuing users who post more actively in the pre-period. Although these users post less after the policy, the informational content of their posts increases, suggesting greater prudence in expressing opinions. Our results strengthen for firms that attract regulatory scrutiny. Overall, our study suggests that real-name verification policies can discipline internet users and potentially improve the informativeness of investment-related social media, particularly in emerging markets where retail investors predominate.

Abstract This study documents the performance and career outcomes of sell-side analysts with prior accounting education or experience. Analysts with accounting work experience—especially former auditors—issue more accurate earnings forecasts and more profitable sell recommendations. In contrast, analysts with only accounting education or CPA credentials do not outperform. Former auditors also ask more accounting-focused questions during earnings calls, and the firms they cover exhibit higher earnings quality and more conservative reporting, consistent with improved monitoring. In terms of labor market outcomes, these analysts have longer tenures, are marginally more likely to attain all-star recognition, and are more often assigned to firms with complex financial reporting and greater analyst competition, suggesting strategic deployment. Overall, our findings highlight the value—but also the limits—of accounting expertise in sell-side research, particularly as it relates to information processing, capital market intermediation, and professional advancement.

Abstract We examine the role of algorithmic trading in transmitting intra-industry information. Using a comprehensive U.S. sample, we find that algorithmic trading amplifies the stock price reactions of non-announcing firms to the earnings announcements of industry peers that report earlier in the same fiscal quarter. Further analyses reveal that sector exchange-traded funds serve as an important channel through which algorithmic trading facilitates the diffusion of industry information. Moreover, the effect of algorithmic trading strengthens when peers’ information is more relevant to the focal firm and of higher reporting quality. Finally, our evidence suggests that these effects reflect enhanced price discovery rather than temporary overreaction. Overall, our findings illuminate the informational role of algorithmic trading and its implications for market efficiency.

Abstract We analyze how incentives affect the reporting of fair values using mutual funds’ valuations of Level 3 equity holdings. We conjecture that the observed stickiness of reported values arises because funds defer revaluation until they can make a sufficiently compelling and objective case to avoid costly accusations of aggressive valuation. Consistent with our conjecture, we find that funds’ revaluations of the same security are clustered in time and tightly distributed, and revaluations of non-traded securities are more likely when market returns are larger and the source of those returns is less subjective. In addition, consistent with a greater concern for overvaluation, we document that funds are more likely to reduce valuations of these holdings when market returns are negative. Finally, given the stickiness of valuations, we provide evidence that funds exploit valuation discretion to improve performance rankings through the timing of revaluations rather than through the levels of new values.