Knowledge that Transforms

Complexity in applying financial accounting standards can have real operational effects if firms alter their actions in response to increased reporting costs. We examine whether the introduction of ASU 2017‐12, designed to reduce compliance burden and better align hedge accounting rules with risk management practices, led to more effective hedging. Using detailed hedging disclosures, we show that firms that adopt the ASU expand the use of hedge‐accounted derivatives and reduce exposures to interest rate and foreign currency risks. ASU‐adopting firms also reduce cash flow volatility, increase their use of debt, invest more, and reduce information asymmetry in the equity market. Our analyses reveal that easing hedge effectiveness tests and reliefs targeting “cash flow hedges” and “net investment hedges of foreign operations” were the most influential of the ASU's reforms. Our study is the first to integrate the effects of hedge accounting frictions on firms’ risk management activities and resulting spillovers to debt financing and investments.

This paper investigates why commercial lenders make markets for the loans that they sell on the secondary market. Using loan‐level data, I find that origination lenders with extensive borrower relationships and more reputational capital at stake are more likely to serve as market makers. Greater participation of origination lenders as market makers is associated with lower trading costs for their borrowers' loans. This association remains even in conditions where origination lenders could exploit their information advantage for market making profits. Lenders benefit from being market makers by maintaining strong subsequent lending relationships with their borrowers. Collectively, this evidence is consistent with origination lenders' participation in the secondary market being motivated by reducing trading frictions rather than market making profits.

We examine whether U.S. immigration policy, specifically the H‐1B visa program, affects the likelihood of financial misconduct. We argue that employers have leverage over employees on H‐1B visas because such employees must maintain H‐1B–eligible employment to legally reside in the United States. We posit that companies relying on H‐1B visas to hire workers in accounting roles have an increased ability to misreport their financial statements due to the greater costs H‐1B employees face if they are unexpectedly fired for not following the demands of their bosses or for blowing the whistle on misconduct. Using the sharp reduction in the H‐1B visa cap in 2004 as a shock to such employment, we find that companies that relied on this visa program for accounting roles pre‐shock experience a 2.3 percentage point decline in accounting irregularities post‐shock. Cross‐sectional tests show that the reduction in irregularities is greater in companies where H‐1B employees have (1) a greater influence on financial reporting or (2) fewer job opportunities. In addition, the relation between H‐1B visa use and irregularities is stronger in companies whose investors are more focused on near‐term earnings targets. We corroborate our findings using the outcome of H‐1B visa lotteries as shocks to such employment.

We present the first comprehensive descriptive evidence on the labor market and personal consequences for audit professionals in the United States who are named in SEC or PCAOB enforcement actions. Three key findings emerge. First, between 38% and 73% of culpable auditors depart from their firms within one year after the enforcement event. These departure rates are three to four times higher compared with a sample of non‐culpable auditors. Second, 83% of culpable auditors departing from Big 4 accounting firms exit the profession, compared with 58% of a departing non‐culpable comparison group. In contrast, about 77% of the culpable auditors leaving non–Big 4 accounting firms remain in public accounting, compared with 51% of a departing non‐culpable comparison group. Third, using novel data on personal real estate holdings, we find that culpable auditors do not appear to engage in markedly different transactions around enforcement compared with a comparison sample of non‐culpable individuals.

Patent applications often reveal proprietary information to competitors, but does such disclosure harm firms or also benefit them? We develop and empirically support a theory showing that when firms patent enhancements to incumbent, nondisruptive technologies, they can cooperate more easily on these technologies, increasing their profitability. The downside of cooperating on nondisruptive technologies is that the investment in and commitment to disruptive technologies decline. To improve their commitment to disruptive technologies, some firms rely more on trade secrecy. We provide empirical support for these predictions. We document that after a patent reform that made information about patent applications widely accessible, firms cooperate more and charge higher markups. Furthermore, the nature of patented innovation has changed, with the proportion of nondisruptive patents increasing substantially. Finally, while some firms start patenting more, others patent less and rely more on trade secrecy, with the response depending on the attractiveness of firms' innovation prospects.

Classification of financial statement elements into categories is an inherent, integral part of the financial reporting system. Although prior research documents that categories influence users’ perceptions of included items, we explore the reverse effect—how classifying items in a category can impact perceptions of the category itself and its other members. Using categorization theory from psychology and accounting literature and exploiting the classification challenges inherent to the crypto asset setting, we predict and find that classifying individual items into a category can impact equity analysts’ perceptions of the category itself and perceptions of the category's other members. We also explore the boundaries of this effect and find that categories like intangibles, with fewer common prototypical features, are more susceptible to these classification effects. Our results show several ways in which balance sheet classification could lead to unintended consequences for users.

We introduce a novel measure of CEO depression by applying machine learning models that analyze vocal acoustic features from CEOs' conference call recordings. Our research was preregistered via the Journal of Accounting Research 's registration‐based editorial process. In this study, we validate this measure and examine associated factors. We find that greater firm risk is positively associated with CEO depression, whereas higher job demands are negatively associated with CEO depression. Female and older CEOs show a lower likelihood of depression. Using this novel measure, we then explore the relationship between CEO depression and career outcomes. Although we do not find any evidence that CEO depression is associated with CEO turnover, we find some evidence that turnover‐performance sensitivity is higher among depressed CEOs. We also find limited evidence of higher compensation and higher pay‐performance sensitivity for depressed CEOs. This study provides new insights into the relationship between CEO mental health and career outcomes.

Using consumer complaints filed with the Consumer Financial Protection Bureau as a measure for the quality of financial products and services, we present evidence of racial disparities in the service quality received by consumers. Consumers in high‐minority communities file more complaints than those in low‐minority communities, and the racial gap in financial complaints increased by more than 60% during the COVID‐19 pandemic. Using a triple‐difference approach, we establish the role of corporate social attitudes, reflected in, for example, inclusive promotion practices and diversity in leadership, in mitigating the complaint racial gap and its pandemic‐period increase. Our results shed light on how inclusive corporate culture filters through an organization to benefit minority communities and underscore the effect of corporate social attitudes on important stakeholder outcomes.

We estimate the prevalence and drivers of short squeezes after short‐selling attacks. Positive returns after attacks have a disproportionate tendency to fully reverse and are accompanied by heightened short covering, consistent with the presence of short squeezes. We assess and find no support for non‐squeeze drivers of these positive return reversals and show they are more likely to be accompanied by squeeze‐related news articles, increased stock volatility, and disruptions in the stock lending market. Using positive return reversals as a proxy for short squeezes, we estimate that 15% of short attacks experience squeezes, and squeeze risk increases with short sellers’ visibility but decreases with the credibility of their evidence. Additionally, squeezes appear to be precipitated by actions of firms and investors, including insider purchases, share recalls, retail investor trading, and firm disclosures. Our findings quantify a material risk and check on activist short selling and are especially timely given recent proposed short‐selling restrictions.