Knowledge that Transforms

We investigate whether foreign institutional investors respond to the sustainability disclosures mandated by the EU’s Non-Financial Reporting Directive and whether disclosure location affects their response. We find that foreign institutions increase ownership in companies affected by the mandate and that the increase is greater in countries that locate the sustainability disclosures within their annual reports, referred to as combined reporting. This is consistent with combined reporting reducing investors’ disclosure processing costs by providing timelier disclosure and better integration of sustainability and financial information. We further find that the increase in ownership is greater in countries that experience a larger increase in the number of firms issuing combined reports, consistent with combined reporting increasing comparability of the sustainability disclosures. Our findings suggest that the location of sustainability reporting plays an important role in cross-border investment decisions, which provides policy implications for the implementation of global sustainability disclosure regulation.

Business complexity involves important tradeoffs for managers and investors, but empirical evidence is limited by measurement issues. We construct and validate a measure of business complexity using a GPT model fine-tuned on narrative disclosures and inline XBRL tags. We first show that our measure is associated with slower price formation in capital markets, consistent with complexity increasing processing costs. Next, we apply our measure to study the complexity of debt, an economically important topic that encompasses a wide range of features. The results show that nonstandard debt features such as call and convertibility provisions underlie debt complexity. We also find that debt complexity correlates with more persistent interest expense and better performance when lending conditions worsen, suggesting it is in part an adaptive response to manage financial risk. Overall, our study underscores the tradeoffs of business complexity and provides a flexible measure of complexity for future research. Data Availability: Contact authors for data, model weights, and measure.

Cybersecurity risk is a growing concern for public companies as economic activity increasingly relies on technology. Drawing on finance theory, which posits that lenders possess private information about borrowers, I hypothesize that lenders price cybersecurity risks into loan contracts. A priori, this relation is unclear, given the unpredictable nature of cybersecurity risk and the difficulty lenders face in assessing the likelihood and magnitude of associated losses. Using the private debt market, I find a positive association between cybersecurity risk and the cost of debt. This relation is weaker for borrowers with high-quality information technology and stronger in less competitive lending markets. I also find that, following successful cyberattacks, secondary market loan prices decline (increase) for borrowers with high (low) ex ante cybersecurity risk. Overall, these results suggest that, whereas the SEC’s newly adopted cybersecurity disclosures may provide decision-useful information to retail investors, they may be less relevant for certain stakeholders. Data Availability: Data are available from the public sources cited in the text.

The world of capital markets is constantly evolving, driven by technological advancements and changing global economies, presenting challenges for accounting practitioners. Amid current dynamic capital markets, this paper proposes a pathway for generating innovative accounting research that addresses practitioners’ needs by focusing on three critical financial reporting areas: contingent claim securities, sustainability/ESG metrics, and cryptocurrencies/digital assets. Secondly, to address the complex research challenges before us, I propose that we, as accounting scholars, embrace educational changes that may enhance the early research career success of our doctoral students and junior scholars, given that the accounting industry is on the brink of a profound technological transformation. Finally, I urge us to foster academic change by leveraging our strengths within and across disciplines to meet the accounting challenges and opportunities ahead.

Local-thinking bias, wherein agents overweight information that comes readily to mind, is a prominent finding in cognitive psychology. In this study, we investigate local-thinking bias in the context of sell-side analysts and measure each analyst’s “local” information as news stemming from their individual coverage portfolio. Tests examining multiple analysts forecasting on the same focal firm at the same time find that individual analysts overweight idiosyncratic local news and underweight news from economically linked firms that are not in their coverage portfolios. Market prices track the analyst bias from local news, leading to predictable and economically significant return reversal patterns in the future. A trading strategy that adjusts for analysts’ biases earns meaningful abnormal returns. We discuss the implications of these findings for three literatures: (1) cognitive psychology, (2) analyst behavior, and (3) behavioral asset pricing.

Following securities law violations, regulators can require firms to hire a corporate monitor to implement reforms that limit future misconduct and protect investors. We examine the determinants of including a corporate monitor as equitable relief in an enforcement action, as well as their effectiveness in promoting positive change at a firm. Using a structural equation model that jointly determines monetary and nonmonetary sanctions, we find that monitor assignments are related to the nature of the offense, violation severity, and investor harm. We also find that monitors with targeted accounting oversight responsibilities are associated with improved corporate culture, a higher likelihood of financial restatements during their tenure, and enhanced financial reporting credibility at the firms they oversee relative to enforcement firms without such monitors. Although corporate monitors can foster positive change, their impact depends on the scope of their responsibilities. Data Availability: Data are available from the public sources cited in the text.