Knowledge that Transforms

We exploit two regulatory changes, one under US GAAP and the other under IFRS, that mandate improved disclosure of pension asset allocation. While the changes are otherwise similar, US GAAP retains the expected rate of return (“ERR”) on pension assets, which preparers can more easily manipulate if asset allocation remains opaque, while IFRS eliminates the ERR. We find that the IFRS standard improves pension asset transparency more than the US standard, which only mandates higher-quality disclosure without changing recognition or measurement and hence leaves unchanged preparers’ incentives to obfuscate. The US standard elicits a mixed response that reduces transparency in some respects. We isolate the relative deterioration in US firms’ transparency to firms with stronger incentives to inflate ERRs. Overall, our study highlights the potential for standard setters to learn from each other by comparing their regulatory experience on a specific accounting topic with clearly identifiable managerial incentives.

This study examines how a reduction in analysts’ visibility, resulting from brokerages’ switch to anonymous forecasts on Eikon, affects earnings forecast quality. Using a difference-in-differences design, we find that treatment analysts respond by issuing more accurate forecasts in the post-anonymization period. Treatment analysts who improve forecast quality the most can sustain visibility, as reflected in their coverage by the financial media, enhance their likelihood of being voted as star analysts, and induce greater client trading. These results are consistent with analysts’ incentives to offset the reduced visibility so as to advance their careers and increase trading commissions for their brokerages. We further show that treatment analysts use a set of visibility-enhancing strategies, including issuing broader and more frequent forecasts and setting bolder target prices. Our findings suggest that reduced visibility can prompt analysts to respond strategically in ways that can improve information quality.

We examine whether disproportionate insider control, or the divergence between insider voting and cash flow rights at dual-class firms, influences the extent to which stock price reflects information about future firm performance. We find that current returns incorporate less information about future earnings and cash flows as disproportionate insider control increases. However, monitoring by influential institutional investors, strong board oversight, and high-quality disclosure significantly attenuate this effect, such that disproportionate insider control does not result in less informative stock prices. Collectively, our findings reveal that, although the dual-class structure is associated with less informative stock prices, on average, monitoring and disclosure can alleviate investor concerns about disproportionate insider control while allowing firms to take advantage of the benefits of a dual-class ownership structure.

Anti-recharacterization laws significantly increase the rights of securitization creditors by allowing the buyers of securitized assets to exclusively and immediately seize collateral in bankruptcy. However, strengthening the rights of securitization creditors can limit other creditors’ ability to recover loans. We find that, after a state adopts an anti-recharacterization law, local banks operating in the same state accrue more loan loss provisions, tighten their loan contracts, and incur higher future loan charge-offs. These findings are consistent with the argument that a safe harbor for securitization transactions advantages Wall Street-style structured finance at the expense of Main Street-style lending.

This study investigates how audit firm-level spatial licensing requirements affect audit market competition and audit quality, focusing on small (triennially inspected) audit firms, for which licensing frictions are most relevant. Exploiting the staggered state-level adoption of CPA firm mobility provisions that remove spatial licensing barriers, we find that adoption increases competition among small audit firms, as reflected by lower market concentration and greater first-time entry by small out-of-state auditors. Firm mobility adoption also improves audit quality, as indicated by a lower likelihood of client misstatements. These effects are concentrated in less competitive audit markets and among auditors with higher PCAOB deficiency rates. Audit quality improvements extend to both incumbent auditors and new out-of-state entrants, and we find no evidence of audit fee discounting. Overall, our results suggest that removing spatial licensing barriers fosters a more competitive small audit firm market while improving audit outcomes, without increasing audit costs.

This study examines whether Freedom of Information Act (FOIA) requests to the Securities and Exchange Commission convey value-relevant information about publicly traded firms and whether sophisticated investors trade on that information. Our empirical analysis reveals heterogeneous value relevance associated with different types of requests. Specifically, requests submitted by proxy agents to probe for ongoing investigations as well as anonymous requests are negatively correlated with future returns, while requests from institutional investors and intellectual property entities are associated with positive future returns. Our results also support the direct-trading hypothesis, showing institutional investors and short sellers trade on FOIA-obtained information. Our findings add to the information-acquisition literature by highlighting the heterogeneous value signals in FOIA requests, particularly the negative value signals.

We examine whether negative news media coverage of peer audit firms affects audit quality by mitigating the contagion effect of low-quality audits. We find that when a company issues a restatement, other companies served by the same audit office or within the same city are more likely to subsequently issue a restatement. However, we find that higher negative peer firm news coverage mitigates this contagion effect, particularly when auditors have greater opportunity to improve audit quality (smaller companies) and when media attention amplifies reputational pressures (higher local news intensity). Our findings extend to litigation-related news but not to nonnegative news, suggesting that auditors respond to perceived reputational threats stemming from negative news. Additionally, negative peer news increases auditor attention, consistent with an auditor supply-side effect that improves audit quality. Our findings highlight the media’s role as an informal oversight mechanism.

We examine how labor market competition affects the quality of workplace information on social media. Using employer reviews on Glassdoor for U.S. publicly listed firms from 2011 to 2022, we find that reviews become less informative about actual workplace practices when firms face more intense competition for labor, consistent with competition inducing workplace information management. The decline in review informativeness is more pronounced when employees have narrower external networks, when firms are less unionized, and when firms have a smaller review base, suggesting that workplace information management is more likely when labor market information asymmetry is greater. Additional analyses show that positive reviews in highly competitive labor markets predict higher short-term labor inflows but greater subsequent employee turnover, indicating a gap between managed expectations and actual workplace conditions. Taken together, our evidence suggests that labor market competition potentially distorts the crowdsourced signals available to job seekers on anonymous review websites.

We study whether exogenous improvements in stock liquidity, unrelated to the information environment, affect managers’ disclosure choices. We exploit the 1997 Nasdaq reforms, which exogenously improved stock liquidity by reducing the non-information asymmetry components of the bid-ask spread, and find that Nasdaq firms reduced voluntary disclosure relative to a control group of unaffected firms. This evidence is consistent with managers substituting between components of the bid-ask spread when forming disclosure choices. Specifically, as the non-information asymmetry components decline, managers respond by decreasing disclosure, which in turn raises the information asymmetry component. Despite the reduction in disclosure and corresponding increase in information asymmetry, total stock liquidity nevertheless improves, suggesting that maintaining prior disclosure levels would have yielded minimal marginal benefits.