Knowledge that Transforms

ABSTRACT This paper studies the consequences of regulating executive compensation at financial institutions by examining the introduction of the UK Remuneration Code in 2010, which aimed to change the decision‐making horizon and risk‐taking incentives of bank executives. We find that, although both banks and nonbanks show increased contribution and sensitivity to systemic risk in the United Kingdom post‐2010, this increase is lower for UK banks, in line with the intent of the regulation. However, UK banks also experience higher unforced CEO turnover when compared to other UK firms. Therefore, while the regulation may have had the desired effect on systemic risk, it may also have given rise to some unintended consequences.

ABSTRACT We offer a novel perspective on the role of sell‐side analysts as information intermediaries in capital markets by documenting a flow of information in a new direction, namely, from analysts to the firms they cover. We use analyst coverage overlaps and patent citations to examine analyst‐induced information spillovers about technology and industry trends. Consistent with analyst coverage–related information flows, firms are more likely to cite another firm's patent if that firm is covered by the same analyst. The effect varies with analysts' specialization, experience, and level of activity. Firms with more analyst‐based connections to peers also show greater corporate innovation. Collectively, our evidence indicates that financial analysts not only reduce information asymmetries between firms and capital market participants but also facilitate the production of business intelligence through feedback and interfirm information spillovers.

ABSTRACT We exploit the staggered introduction of CPA Mobility provisions in the United States to study the effects of spatial licensing requirements on the labor market for accounting professionals. Specifically, we examine whether the removal of licensing‐induced geographic barriers affects CPA wages and employment levels, as well as the pricing and quality of professional services. We find that, subsequent to the adoption of CPA Mobility provisions, wages of accounting professionals decrease, whereas employment levels are unaffected. The documented wage effect stems from smaller CPA firms, is more pronounced for CPAs holding senior positions, and persists over time. We also find that service prices decline and that this effect is concentrated in local CPA firms. Moreover, we document that the increased wage and price pressure is not associated with deteriorating service quality. Collectively, our results suggest that the removal of occupational licensing barriers has sizable effects on labor supply and service prices. Our findings inform the current regulatory debate on occupational licensing.

ABSTRACT Does managing the production of information add value in economic environments where a manager may claim to be uninformed and withhold unfavorable news? We examine this question by nesting an optimal persuasion mechanism, controlling how evidence is organized, within a voluntary disclosure framework. Information has productive consequences because the firm uses it to make a continuous operating decision. The optimal reporting strategy features coarse information at the most unfavorable reported event if and only if the firm bears penalties for nondisclosure or positive disclosure costs. The model demonstrates the optimality of imprecise information over bad news in a voluntary disclosure environment, and that such imprecision increases the quality of public signals after considering strategic disclosure effects.

ABSTRACT The SEC prohibits the presentation of non‐GAAP measures before corresponding GAAP measures; however, a large proportion of non‐GAAP reporters present non‐GAAP EPS before GAAP EPS in their earnings announcements. This noncompliance raises questions about whether firms use prominence to highlight higher or lower quality non‐GAAP information. For firms reporting non‐GAAP EPS between 2003 and 2016, prominent non‐GAAP EPS is associated with higher quality non‐GAAP reporting. Further tests reveal that nonregulatory incentives, rather than regulatory costs, explain this relation. Specifically, prominence is associated with higher quality non‐GAAP reporting in settings where prominence is not regulated, investors ignore prominence when non‐GAAP reporting quality is lower, and the minority of firms using prominence to mislead exhibit characteristics associated with weaker investor monitoring. Overall, we provide evidence that regulatory noncompliance can reflect an intent to inform, and that most firms use prominence to highlight higher quality non‐GAAP information despite prohibitive regulation.

ABSTRACT Crowdsourced financial information platforms often allow content contributors to publish equity research anonymously. This study examines whether investors value or discount information in anonymous equity research. In the short window around research releases, we find that investors’ stock price reaction to anonymous research is muted in comparison to nonanonymous research. Consistent with credibility concerns influencing investor response, we document that this discount to anonymous research dissipates as the monitoring of content contributors intensifies and as authors develop a reputation for high‐quality reporting. In addition, we perform a content analysis on the research reports and find that the muted market reaction to anonymous equity research is robust to controlling for textual attributes of information content, further supporting our inference that investors’ are concerned about the credibility of anonymous equity research.

ABSTRACT This study provides evidence on the role of public firms’ financial reports in the state‐bond secondary market. I investigate the informational role of corporate earnings announcements and find that public firms’ monthly earnings signals aggregated to the state level are positively associated with contemporaneous state‐bond returns. Further analyses reveal that public firms’ earnings announcements predict traditional economic indicators and contain incremental information that is independent of the traditional economic indicators. In cross‐sectional analyses, I show that the earnings–returns relation is especially pronounced when bondholders face longer investment horizons and higher credit risks. Taken together, the evidence indicates a positive externality of corporate financial reports in alleviating the opacity in the municipal bond secondary market.

ABSTRACT Implied equity duration was originally developed to analyze the sensitivity of equity prices to discount rate changes. We demonstrate that implied equity duration is also useful for analyzing the sensitivity of equity prices to pandemic shutdowns. Pandemic shutdowns primarily impact short‐term cash flows, thus they have a greater impact on low‐duration equities. We show that implied equity duration has a strong positive relation to U.S. equity returns and analyst forecast revisions during the onset of the 2020 COVID‐19 shutdown. Our analysis also demonstrates that the underperformance of “value” stocks during this period is a rational response to their lower durations.

ABSTRACT We document that stocks that have optimistic (pessimistic) consensus recommendations and are currently held by many short‐term institutions exhibit large stock‐return reversals: Their large past outperformance (underperformance) is followed by large negative (positive) future alphas. The predictable return reversals originate from overreaction to past recommendation releases and the correction of these overreactions around future releases. Results are stronger when earnings news is released and at firms with higher fundamental uncertainty. Further, firms with more short‐term institutions show stronger announcement returns and price drift after recommendation changes. Our results are consistent with models of higher order beliefs where short‐term institutions coordinate trading around public signals.