Knowledge that Transforms

ABSTRACT We assemble and describe a sample of 174,782 lawsuits filed against 218,437 public‐company lawsuit‐defendants in federal district court from 2006 to 2021. These lawsuits involve an array of allegations, including product liability, civil rights discrimination, contract breaches, improper compensation and labor practices, antitrust violations, corruption, securities violations, pollution, and intellectual property infringement. The sample exhibits rich variation across firms, industries, time, suit type, plaintiffs, and outcomes—reflecting not only firm activities but also social, political, and regulatory trends. Although many claims matter very little, some are important individually or in aggregate. We observe 23% of defendants experience a market value decline exceeding 10% of current assets around the lawsuit filing. Consistent with the notion that even low‐stakes claims, when numerous or persistent, can introduce frictions or reflect underlying issues, we find that aggregate legal exposure is associated with increased return volatility and decreased profitability. Subsequent tests indicate that materiality, public and private enforcement, and firms’ information environments (as well as other firm traits) are associated with managers’ decisions to disclose these claims. Collectively, our descriptive evidence establishes a foundation for further research into underexplored types of corporate litigation that represent a broad range of alleged wrongdoing and socially irresponsible behavior.

ABSTRACT This study examines the spillover effect of bank financial misconduct on the uninsured deposits of peer banks within local markets. We first validate that misconduct banks experience an increase in deposit spreads and a corresponding outflow of deposits following the misconduct. We then show local peer banks exhibit divergent deposit responses, contingent on how misconduct is perceived by information recipients in different economic contexts. During normal periods, depositors receiving a negative signal about bank misconduct reallocate their funds from misconduct banks to local peers, a local reallocation effect that decreases deposit spreads and increases deposit inflows for peer banks. Cross‐sectional analysis further reveals that this local reallocation effect is more pronounced for financially sophisticated depositors, amplified when peer banks have strong fundamentals, but attenuated when misconduct banks are financially sound. During financial crisis periods, however, bank misconduct leads to withdrawals from both misconduct banks and their peer banks, a local contagion effect whereby local peer banks face increased deposit spreads and deposit outflows following the misconduct.

ABSTRACT This paper hypothesizes that information flows from target firms to large shareholders during activist campaigns and that these flows have governance consequences. Focusing on actively managed mutual fund families, we find that informed trading by large‐holding fund families increases during activist campaigns relative to smaller‐holding fund families invested in the same firms. The effect is stronger for firms that attend more invitation‐only investor events, face greater threats from activist campaigns, and are harder to value. Consistent with information flowing from management to large‐holding fund families, the effect strengthens when Regulation Fair Disclosure enforcement is lax and when the information is favorable to the firm. Furthermore, the increased information advantage is associated with more management‐friendly voting behavior by these investors and a higher likelihood of target firms winning activist campaigns and retaining board seats. Overall, our findings are consistent with a potential quid pro quo in which investors’ access to information from management is associated with more pro‐management behavior.

ABSTRACT We investigate the monitoring quality of accountants with ties to the Mafia in their role as auditors for “clean” firms—those with no known ties to organized crime. Using a proprietary government database, we identify Italian firms with alleged ties to the Mafia through their executives, directors, or shareholders. We define “suspect accountants” as those who serve as auditors for these Mafia‐connected firms, acknowledging their potential associations with criminal entities. We predict and find evidence that “clean” clients (treatment group) monitored by suspect accountants are more likely to engage in earnings management practices that reduce taxable income, compared with a control sample of “clean” firms monitored by accountants with no known Mafia ties (control group). Our findings suggest that accountants with ties to the Mafia act as low‐quality monitors in the “clean” economy.

ABSTRACT This paper explores the influence of two fixed payment arrangements—time‐based and output‐based wages—on worker behavior and performance in a multidimensional task setting. We examine how these wages affect the time workers spend on individual units of a task and their work quality. We contend that fixed compensation schemes can implicitly communicate standards of acceptable work. Our empirical evidence from MTurk experiments and a laboratory experiment indicates that workers on output‐based wages deliver higher quality and spend more time on individual units than their time‐based counterparts. These findings are consistent with output‐based wages, implying a standard of acceptable quality—without a conflicting standard of speed—to which workers respond. Our results emphasize the power of implicit cues from fixed compensation schemes and offer insights for employers, suggesting the choice between output‐ and time‐based wages should be informed by whether quality or turnaround time is valued more.

ABSTRACT This study examines how the subjectivity in measuring fair values of assets without readily observable market prices affects investment efficiency and shareholder value. When fair values are objective measures of asset value, they facilitate efficient investment decisions that align with shareholder interests. In contrast, firms' reliance on subjective valuation inputs causes underinvestment in long‐term projects. If fair values are highly subjective, they may lead firms to favor less profitable short‐term projects with objectively measurable fair values. When project returns are positively correlated, subjectivity in valuing long‐term projects induces overinvestment in short‐term projects with objective fair values. Regardless of these distortions, fair value measurement can add shareholder value. Not measuring fair values altogether leads to underinvestment, which moderately subjective fair values can alleviate.

ABSTRACT Women often lack the opportunity to join exclusive social clubs, limiting the benefits they derive from their social networks. We investigate whether, when given the opportunity to interact with the right people in a professional setting, women gain greater advantages from these connections for career performance and advancement compared to men. Using a unique data set that documents when, where, and with whom financial analysts interact at investor conferences, we find that female analysts show greater improvement in earnings forecast accuracy than their male counterparts after interacting with a firm's executives. Further evidence suggests that female analysts overcome homophily in conference interactions with executives and that they sustain their gains, enhancing forecast accuracy for up to three years. In addition, both the capital and labor markets recognize women's superior gains from conference connections. Our findings suggest that women capitalize on professional connections, highlighting the importance of promoting structured networking opportunities for women in professional environments.

ABSTRACT Regulators are contemplating or mandating precise measurement of financial climate‐risk exposure to promote sustainable investments. We show that such mandates can be counterproductive in the presence of social funds that catalyze change by subsidizing the adoption of cleaner production technologies. Firms can exploit a social fund's impact motive by measuring their climate‐risk exposure imprecisely. This strategic imprecision prevents the fund from distinguishing between firms that require subsidies and those that would switch to clean technologies for financial reasons alone, thereby increasing the ex ante subsidies firms can extract. A by‐product of this rent‐seeking behavior is that firms adopt clean technologies more frequently than would be jointly efficient under precise measurement. Our analysis suggests that the regulatory push for precise climate‐risk measurement can reduce social funds' impact and the frequency of green transitions.

ABSTRACT This paper studies how partisan alignment between city leaders and state governors shapes information processing and bond pricing in the municipal bond market. Using a novel data set on 1,045 U.S. cities from 2005 to 2019, we show that cities with the same political affiliation as the state governor face 9 basis points lower borrowing costs than misaligned cities. The effect is stronger for riskier bonds, in states where governors hold greater authority, and for fiscally dependent cities. Aligned cities also receive more aid during fiscal distress. Partisan alignment shapes how investors interpret and respond to financial information: Nondisclosure and adverse audit findings raise borrowing costs primarily for misaligned cities, while penalties for aligned cities are markedly smaller.

ABSTRACT We examine the labor market consequences of the 2020 Regulation S‐K requiring human capital disclosure in 10K filings. Using large‐sample job‐level data and a Generative Large Language Model (GLLM), we observe that public firms subject to the regulation increase their disclosure of diversity, equity, and inclusion (DEI) information in job postings relative to a matched sample of large private firms. The increase in job‐posting disclosure is more pronounced among firms facing greater external pressure to increase their workforce diversity. These findings suggest a shift in demand for diverse candidates by public firms following the regulation. Yet, consistent with short‐term inelastic labor supply, this demand shift lengthens the recruitment period, with noticeable increases in workplace gender diversity emerging one year after the regulation, particularly among firms that demonstrate a credible commitment to DEI. Our study documents how securities regulations can impact labor market practices and underscores the challenges involved in shaping workforce diversity.