Knowledge that Transforms

Earlier studies have shown that reputational concerns tend to reduce agents' opportunistic behavior. However, a recent study by Morris argued that analysts' (experts') reputational concerns may discourage truthful communication when they try to avoid being perceived as being misaligned with investors. In this paper, I examine the effect of reputational concerns on communication in a setting where analysts can choose their precision endogenously. Because both misaligned and aligned analysts want investors to trust their reports in the future, both will aim to build a reputation for being aligned. In equilibrium, aligned analysts will acquire more information than misaligned analysts. As a result, investors may favorably update their beliefs about the analysts' type when the report is proven to be accurate. Therefore, both types of analysts will have reputational incentives to communicate truthfully. The paper also derives conditions under which the analysts' reputational concerns have a nonmonotonic impact on aligned analysts' equilibrium precision choices and investors' welfare.

We investigate whether the media plays a role in corporate governance by disseminating news. Using a comprehensive data set of corporate and insider news coverage for the 2001–2012 period, we show that the media reduces insiders’ future trading profits by disseminating news on prior insiders’ trades available from regulatory filings. We find support for three economic mechanisms underlying the disciplining effect of news dissemination: the reduction of information asymmetry, concerns regarding litigation risk, and the impact on insiders’ personal wealth and reputation. Our findings provide new insights into the real effect of news dissemination.

We examine tone dispersion, or the degree to which tone words are spread evenly within a narrative, to evaluate whether narrative structure provides insight into managers’ voluntary disclosures and users’ responses to those disclosures. We find that tone dispersion is associated with current aggregate and disaggregated performance and future performance, managers’ financial reporting decisions, and managers’ incentives and actions to manage perceptions. Furthermore, we find that tone dispersion is associated with analysts’ and investors’ responses to conference call narratives. Our results suggest that tone dispersion both reflects and affects the information that managers convey through their narratives.

There is a debate in the literature as to whether employee selection is a substitute or complement to incentive contracting. We argue that incentive contracts and selection can be both complements and substitutes conditional on the contracting difficulty faced by the firm. We examine these control choices in a setting where contracting difficulties arise due to the firm's choice of strategy and from the volatility created by the firm's external environment. We select a firm's commitment to organizational learning (OL) as our strategic choice variable as this provides a useful proxy for identifying settings where explicit incentive contracting is difficult. The results show that, as firms become increasingly committed to OL, incentive contracts and employee selection operate as complements. However, with a high commitment to OL and an increasing level of external volatility, contracting on performance measures will become less effective. In this context, our results indicate that there is a substitution effect toward employee selection.

Our objective is to penetrate the “black box” of sell‐side financial analysts by providing new insights into the inputs analysts use and the incentives they face. We survey 365 analysts and conduct 18 follow‐up interviews covering a wide range of topics, including the inputs to analysts’ earnings forecasts and stock recommendations, the value of their industry knowledge, the determinants of their compensation, the career benefits of Institutional Investor All‐Star status, and the factors they consider indicative of high‐quality earnings. One important finding is that private communication with management is a more useful input to analysts’ earnings forecasts and stock recommendations than their own primary research, recent earnings performance, and recent 10‐K and 10‐Q reports. Another notable finding is that issuing earnings forecasts and stock recommendations that are well below the consensus often leads to an increase in analysts’ credibility with their investing clients. We conduct cross‐sectional analyses that highlight the impact of analyst and brokerage characteristics on analysts’ inputs and incentives. Our findings are relevant to investors, managers, analysts, and academic researchers.

Are there times when durable spending is less responsive to economic stimulus? We argue that aggregate durable expenditures respond more sluggishly to economic shocks during recessions because microeconomic frictions lead to declines in the frequency of households' durable adjustment. We show this by first using indirect inference to estimate a heterogeneous agent incomplete markets model with fixed costs of durable adjustment to match consumption dynamics in PSID microdata. We then show that aggregating this model delivers an extremely procyclical Impulse Response Function (IRF) of durable spending to aggregate shocks. For example, the response of durable spending to an income shock in 1999 is estimated to be almost twice as large as if it occurred in 2009. This procyclical IRF holds in response to standard business cycle shocks as well as in response to various policy shocks, and it is robust to general equilibrium. After estimating this robust theoretical implication of micro frictions, we provide additional direct empirical evidence for its importance using both cross-sectional and time-series data.

We quantify the importance of trade credit chains for the propagation of corporate bankruptcies. Our results show that trade creditors (suppliers) that issue more trade credit are more exposed to trade debtor (customer) failures, both in terms of the likelihood of experiencing a debtor failure and the loss given failure. We further document that the credit loss invoked by a debtor failure imposes a substantially enhanced bankruptcy risk on the creditors. The propagation mechanism is mitigated for creditors that are less levered, cash rich, and highly profitable, and enhanced in R&D intense industries and during economic downturns.

Is African politics characterized by concentrated power in the hands of a narrow group (ethnically determined) that then fluctuates from one extreme to another via frequent coups? Employing data on the ethnicity of cabinet ministers since independence, we show that African ruling coalitions are surprisingly large and that political power is allocated proportionally to population shares across ethnic groups. This holds true even restricting the analysis to the subsample of the most powerful ministerial posts. We argue that the likelihood of revolutions from outsiders and coup threats from insiders are major forces explaining allocations within these regimes. Alternative allocation mechanisms are explored. Counterfactual experiments that shed light on the role of Western policies in affecting African national coalitions and leadership group premia are performed.

This paper studies the effects of an electronic voting technology that introduced visual aids in Brazilian elections and facilitated voting for the less educated. Estimates exploiting a regression discontinuity design embedded in its phase-in through time indicate that electronic voting reduced residual (error-ridden and uncounted) votes and generated the de facto enfranchisement of a large fraction (11%) of the electorate. This enhanced political participation of less educated (poorer) voters is then shown to have: (1) increased the number of state legislators that are themselves less educated; and (2) shifted government spending towards public health care, a policy that is particularly beneficial to the poor; leading to (3) improved health services utilization (pre-natal visits) by less educated mothers and (4) reduced occurrence of low-weight births in this group. No effects on health care utilization by more educated mothers and on the weight of their newborns are found. The results are consistent with the predictions of political economy models and demonstrate that electronic voting can promote the political empowerment of the poor and raise their living standards.

In this paper we study the least squares (LS) estimator in a linear panel regression model with unknown number of factors appearing as interactive fixed effects. Assuming that the number of factors used in estimation is larger than the true number of factors in the data, we establish the limiting distribution of the LS estimator for the regression coefficients as the number of time periods and the number of cross-sectional units jointly go to infinity. The main result of the paper is that under certain assumptions the limiting distribution of the LS estimator is independent of the number of factors used in the estimation, as long as this number is not underestimated. The important practical implication of this result is that for inference on the regression coefficients one does not necessarily need to estimate the number of interactive fixed effects consistently.