Knowledge that Transforms

We identify a pecuniary externality arising from corporate tax avoidance. Firms share risk with the government via taxation. The lower the tax rate applied to a firm’s earnings, the more risk its shareholders bear. As more firms avoid taxes, the variance of the market’s after-tax cash flow increases. Consequently, the covariance of a firm’s cash flow with the market cash flow and thereby its cost of capital increases. This occurs regardless of a firm’s tax avoidance. Consistent with our prediction, we find that firms’ implied cost of capital relates positively to aggregate corporate tax avoidance regardless of a firm’s level of tax avoidance. As we predict, the pecuniary externality is stronger for firms whose cash flow covaries more with the market cash flow and is driven by tax avoidance strategies that reduce a firm’s marginal tax rate (e.g., income shifting of U.S. multinationals) as opposed to reducing its tax base.

How important is equal access to mandatory disclosures? We exploit the postal strike of 1970 that caused a delay in the delivery of annual reports via mail. This strike created unequal access because certain investors (e.g., institutions) had both the incentives and ability to obtain the annual reports by other means. Theory predicts that, when differential access exists, adverse selection problems intensify, causing a decline in stock trading. Our findings support this prediction: stock trading volume decreased by approximately 28% for firms unable to deliver the annual reports to shareholders during the strike, and this trading decline gradually dissipated afterward. Further tests confirm adverse selection as the primary mechanism. Overall, our paper underscores the importance of equal access to annual reports—a key mandated disclosure—and demonstrates the value of these reports to shareholders, as evidenced by their reluctance to trade absent this information.

Against the backdrop of an increasing threat of misinformation on social media, several countries have enacted regulations to curb the spread of misinformation. This study examines how corporate social media strategy responds to misinformation regulations. Using a large cross-country dataset of corporate tweets and a stacked regression analysis, we show that misinformation regulations lead to less corporate social media disclosure. This result suggests that, by deterring misinformation, these regulations reduce firms’ need to use social media to counteract its adverse effects. Additional analyses show that the effect strengthens among countries with higher social media usage and those with stronger investor protection but weakens for firms with stronger information environments. Finally, we provide direct evidence that firms post fewer tweets refuting misinformation about themselves following the enactment of these regulations.

The Sustainability Accounting Standards Board (SASB) has classified sustainability topics as material or not material for investors. We leverage the staggered release of the SASB classifications from 2013 to 2016 to examine whether and how they prompt changes in U.S. firms' sustainability performance. We measure sustainability performance using RepRisk scores, which reflect environmental, social, and governance (ESG) incidents. We find that RepRisk scores on sustainability topics classified as material decrease following the release of SASB classifications. Conversely, incident scores on nonmaterial sustainability topics increase. This suggests that firms improve their sustainability performance on topics the SASB deems relevant for investors while simultaneously performing worse on irrelevant topics. Firms adjust their internal sustainability policies to mirror these changes. The changes in sustainability performance occur primarily through two channels. We document that higher exposure to the classifications from shareholder pressure and sustainability-linked executive compensation prompts managers to prioritize sustainability topics classified as relevant for investors over irrelevant ones.

This study examines the relation between U.S. managers’ short-term exposure to air pollution and their forecasting ability. We focus on air pollution due to PM 2.5 , a fine particulate matter that can easily penetrate an indoor, climate-controlled environment. We show that the short-term ambient PM 2.5 level at the firm’s headquarters before a management earnings forecast issuance is negatively associated with the accuracy of the forecast. Also, the short-term ambient PM 2.5 level before an earnings announcement is negatively related to the likelihood of a concurrent management forecast issuance. These relations occur at PM 2.5 levels below the U.S. air quality standard. A battery of additional tests validate these findings. These results suggest that a transitory exposure to PM 2.5 at levels common in the United States temporarily decreases managers’ forecasting ability. The temporary cognitive impairment from short-term exposure to modest levels of PM 2.5 , as documented in epidemiological studies, is presumably the reason.

The channels through which analyst research data are distributed are complex. The I/B/E/S database is the dominant source for analyst earnings estimates for academics, but there are numerous other channels, some of which are cost prohibitive for many investors. We describe the distribution of analyst research and examine whether a high-cost alternative distribution channel, TR Research, is characterized by higher quality estimates than those available from I/B/E/S. We examine analyst forecast accuracy, bias, and informativeness and find that TR Research estimates are more accurate and less biased than estimates exclusively distributed via I/B/E/S. We further find that TR Research estimates are associated with greater market reaction and lower information asymmetry, consistent with the higher quality of these estimates. Our study highlights differences in brokerage and analyst incentives regarding research distribution and documents a specific setting where a subset of investors pays for access to superior analyst research.