Knowledge that Transforms

Analyzing a cross-country sample, we provide evidence implying that private firm disclosure transparency narrows information asymmetry, which, in turn, lowers public firms' reliance on bank debt. Channel tests help substantiate that private firm disclosure elicits this positive externality, evident in lower monitoring demand, lower borrowing costs, and higher credit rating quality. Cross-sectional results suggest that the impact of private firm transparency is larger when public firms suffer worse information opacity, private firm disclosures are more important to their public peers, and bond markets are more developed. In relying on the staggered implementation of electronic business registers as a plausibly exogenous shock and a simulated disclosure scope as the instrumental variable, we continue to find that private firm disclosures reduce public firms' bank debt reliance, helping to alleviate endogeneity threats. Data Availability Statement: The data used in this study are obtained from publicly available sources identified in the paper.

We investigate how generalized trust, a culturally rooted belief in the trustworthiness of unfamiliar others, influences board oversight. Using an ancestry-based measure of board–CEO trust based on ancestral origins and bilateral trust scores across countries, we find a significant positive relation between board–CEO trust and stock price crash risk, indicating higher bad-news hoarding. This relation remains robust across alternative crash risk measures, sample specifications, and trust measures. Firms with high board–CEO trust exhibit more asymmetric stock market reactions to good news versus bad news and a higher likelihood of material restatements. Analyses of insider trading patterns show that directors in high-trust firms are less informed than CEOs about adverse developments, supporting lax board monitoring rather than collusion between directors and CEOs. Overall, the evidence suggests that culturally inherited trust can weaken board oversight and reduce corporate transparency, consistent with an underexplored governance friction even within well-structured boards. Data Availability: Data used in this study are available from public sources identified in the study.

Public audit oversight bodies have become ubiquitous following the establishment of the U.S. PCAOB in 2002. However, despite their cost and prominence, little is known of their economic implications, if any. We examine the relation between establishment of public audit oversight bodies (POBs) and cross-border investment. Using a difference-in-differences design, we find that after a country establishes a POB, the country attracts more foreign capital. Our results suggest that total foreign portfolio investment (FPI) increases by approximately $11 billion for the average country that establishes a POB. The impact of POBs on foreign investment is dependent on the effectiveness of the POB in improving audit quality and the strength of a country’s existing institutional environment. Our study provides evidence of real economic effects of public audit oversight around the world, which adds to the literature on auditor oversight and to the broader literature on economic consequences of regulation. Data Availability: Data are available from the public sources cited in the text.

A growing literature has examined the benefits and costs of implementing new disclosure regulations. However, little is known about the consequences when regulators fail to take action. Using IFRS adoption in 2005 as the setting, we examine the costs of regulatory inactions among non-adopting countries. We find that firms located in non-adopting countries with a higher overlap of common investors with firms in IFRS-adopting countries experience a significant decline in liquidity. Employing a within-firm-time design, we further demonstrate that analysts and institutional investors shift their attention from non-IFRS firms when other firms in their portfolios adopt IFRS. Moreover, the decline in liquidity and the associated reduction in information production by analysts and institutional investors are particularly pronounced in non-adopting countries with weak reporting enforcement actions and increasing accounting distance from IFRS standards. Overall, our findings highlight the potential costs of regulatory inaction. Valuable information production resources are diverted to the new regime, resulting in a worsened information environment for companies in the old regime.

I explore the nature of analysts’ climate-related discussion in their reports. Focusing on industries most exposed to climate change, I find very few reports (less than 2 percent) and a minority of analysts (less than 11 percent) discuss climate-related topics. Analysts concentrate climate-related discussion among utilities, mostly discussing renewable energy and regulatory issues. These discussions exhibit no significant association with short-term earnings forecasts and a weak association with more pessimistic long-term growth forecast revisions. Climate-related discussion is also associated with more optimistic target prices when analysts do not issue long-term growth forecasts, suggesting the development of a long-term perspective correlates with views on climate-related issues. Discussions of solar-, emissions-, and automotive-related topics are associated with this greater target price optimism. These findings highlight how analysts’ climate-related discussion relates to long-term expectations and concentrates among highly exposed firms. Data Availability: Data are available from the public sources cited in the text. A detailed listing of how each large language model (LLM) classified each climate-related report, a document describing the details of this listing, a firm-year summary of climate-related discussion and subtopical classifications, and a description document of this firm-year summary are available upon request.

We examine whether audit partners’ ownership stakes in affiliated non-audit businesses are related to audit quality. We argue that non-audit ownership is a relatively sharp measure of auditor-client economic bonding, which can impair auditor independence. Using a unique setting in China where we observe partners’ equity stakes in both audit and non-audit businesses, we find that audit adjustments are significantly smaller when engagement partners hold larger ownership stakes in non-audit businesses. Audit adjustments are further reduced when the entire audit partnership holds greater ownership in affiliated non-audit businesses, suggesting that non-audit ownership matters at the audit firm level as well. Additional analyses suggest that these results are driven by impaired independence, rather than partner distraction or endogenous partner-client matching. Our study informs ongoing policy debates on the structuring of audit and non-audit businesses as well as the investments of non-audit entities in accounting practices. Data Availability: The authors have nondisclosure and confidentiality agreements for their use of proprietary data, which were provided to the authors for independent academic research only. Nonproprietary data are available from sources identified in the text.

I examine how the use of sales performance measures in CEO incentive contracts affects the operations of a firm and its suppliers. A growing number of firms are evaluating and compensating their CEOs based on sales performance. However, because sales performance measures are narrow measures that do not incentivize cost control, they can influence operational decisions that affect not only the firm but also its suppliers. I show that the use of sales performance measures in CEO bonus contracts is associated with inventory fluctuations that increase the bullwhip effect, a phenomenon in which a firm exhibits greater volatility in production than in demand, thereby increasing the order volatility faced by its suppliers. Instrumental variable tests using the firm’s network connections through compensation consultants mitigate concerns that the results are driven by omitted factors. Collectively, my findings illuminate spillover effects of CEO incentive contracts on economically linked firms. Data Availability: Data are available from the sources cited in the text.

This paper analytically and empirically investigates managerial investment responses to negative shocks in firm value. In the model, managers are privately informed about the shocks’ persistence, and those facing transitory shocks strategically underinvest to boost earnings and signal financial strength to investors. The model also predicts counter-signaling: firms with strong fundamentals do not need to cut investment to convey strength. We exploit the 2003 mutual fund trading scandal as a plausibly exogenous source of price pressure. Consistent with signaling, we find that firms with greater tainted-fund ownership are more likely to meet or narrowly beat analyst forecasts by cutting R&D, and that this behavior is associated with more favorable earnings announcement returns and better long-run performance. Consistent with counter-signaling, these firms are less likely to cut R&D when they beat analyst forecasts by a wide margin. Cross-sectional tests also support the model’s comparative statics. Data Availability: All data used in the study are publicly available from the sources cited in the text.

Managers can boost reported earnings to meet capital market expectations by pursuing aggressive cost-minimization strategies that violate labor laws, such as pressuring frontline employees to forgo safety protocols or work off the clock. We investigate whether labor law violations, which benefit the firm at the expense of employees, fall disproportionately on nonwhite frontline employees. Across similar locations (e.g., stores or plants) within the same firm, we predict and find that locations with a higher share of nonwhite frontline employees are more likely to experience a labor law violation. This racial inequality in labor violations is especially pronounced in settings more prone to racial discrimination and during periods of acute capital market pressure to meet earnings benchmarks, providing insight into the mechanisms underlying the observed disparity. Our evidence suggests that capital market pressure is associated not only with labor violations but also with racial inequality in exposure to those violations. Data Availability: Data are available from the sources cited in the text.

Organizations increasingly operate in uncertain environments, requiring employees to revise task strategies to remain effective. We examine how pay for performance (PFP) influences adaptive performance following unanticipated change and argue that process accountability moderates this effect. Although PFP increases effort, it hinders adaptation by reinforcing persistence with an existing task strategy. Process accountability channels PFP-induced motivation into deeper strategic deliberation, enabling adaptation. We test our predictions in an experiment manipulating compensation (PFP versus flat wage) and process accountability (absent, reflection-only, and present), with participants in the reflection-only condition privately reflecting on their decision-making to isolate the social-evaluative component. Results show that PFP, relative to a flat wage, decreases adaptive performance when process accountability is absent, has no significant effect under reflection-only, and increases it when process accountability is present. Additional analyses suggest that strategic deliberation partially explains this effect. The findings underscore pairing PFP with process accountability to foster adaptation. Data Availability: Data are available upon request.