Knowledge that Transforms

Complaints from institutional investors suggest that principles‐based disclosure regimes that rely on financial materiality standards produce inadequate nonfinancial environmental and social (E&S) information. Using the staggered introduction of 40 country‐level regulations that mandate disclosure, I document that reporting E&S information relates to increased investment from institutional owners and has material effects on firms’ investment and financing decisions. Firms mandated to disclose E&S information allocate more investment toward long‐term, innovative projects and raise more equity capital. Evidence indicates that disclosure attracts long‐term–oriented institutional clientele with E&S preferences, which then feeds back on firm decision making. Although the effects of nonfinancial disclosure are similar to those of improved financial disclosure, this clientele mechanism is unique. Taken together, these results suggest that jurisdictions that rely solely on financial materiality disclosure standards create nonfinancial information frictions with material effects on investors and firm decision making.

This paper investigates the role of corporate financial reports in the Environmental Protection Agency's (EPA) regulatory activities. By tracking the EPA's direct retrieval of SEC filings, we identify three key findings. First, the EPA retrieves a large volume of financial reports, especially from firms in high‐pollution industries. Second, the EPA is more likely to access financial reports during enforcement investigations and significant rule proposals, but less so during compliance monitoring, with patterns varying predictably across firms. Third, the EPA's reliance on financial reports is potentially driven by its demand for information on firm liquidity, solvency, and profitability. Overall, our study highlights the usefulness of financial reports for the EPA as an environmental regulator.

I examine how investors’ search for different types of information affects managers’ reporting decisions. I distinguish investors’ search for information about firm fundamentals (“fundamental search”) from their search for information about managers’ incentives (“incentive search”). Based on a parsimonious model of misreporting, I predict that fundamental search reduces the earnings response coefficient, which reduces managers’ benefits from misreporting, resulting in less misreporting. In contrast, incentive search increases the earnings response coefficient, which increases the benefits from misreporting, resulting in more misreporting. I test these predictions using an empirical technique that classifies EDGAR downloads as fundamental search or incentive search. Consistent with my theoretical predictions, I find that fundamental (incentive) search is negatively (positively) related to the earnings response coefficients and intentional restatements. I confirm my findings in two distinct empirical settings where the costs of information search exogenously changed: the adoption of XBRL and the electronic filing mandate of Form 4s. Collectively, the results show that investors’ information demand can shape managers’ reporting decisions, and its effects can vary depending on the type of information investors search for.

We document significant increases in bond market liquidity around earnings announcements. These increases are attributed to decreased search and bargaining costs, which arise from the over‐the‐counter (OTC) nature of bond markets and outweigh increases in information asymmetry during these periods. Our evidence traces reductions in search and bargaining costs to two sources around earnings announcements: (1) improved access to dealers and (2) increased participation from institutional investors, who can more easily transact with multiple dealers. Overall, our findings highlight a novel channel through which firm‐specific information affects asset prices.

Many firms use relative stock performance to evaluate and incentivize their CEOs. We document that such firms routinely disclose information that harms their peers' stock prices, and sometimes explicitly mention the harmed peers, by name, in these disclosures. Consistent with deliberate sabotage, peer‐harming disclosures appear to be aimed at peers whose stock price depressions are most likely to benefit the disclosing firms' CEOs. The pricing effect of these disclosures does not reverse, suggesting that the disclosures contain legitimate information regarding peers' prospects. In sum, our results suggest that relative performance evaluation in CEO pay motivates CEOs to internalize the externalities of their disclosures, and strategically disclose information that harms peers' stock prices, in order to improve their firms' relative standing within their peer group.

We show that information complementarities play an important role in the spillover of transparency shocks. We exploit the revelation of financial misconduct by S&P 500 firms, and in a “Stacked Difference‐in‐Differences” design, find that the implied cost of capital increases for “close” industry peers of the fraudulent firms relative to “distant” industry peers. The spillover effect is particularly strong when the close peers and the fraudulent firm share common analyst coverage and common institutional ownership, which have been shown to be powerful proxies for fundamental linkages and information complementarities. We provide evidence that increase in the cost of capital of peer firms is due, at least in part, to “beta shocks.” Disclosure by close peers—especially those with co‐coverage and co‐ownership links—also increases following fraud revelation. Although disclosure remains high in the following years, the cost of equity starts to decrease.

We find that foreign‐born CEOs are more inclined than domestic‐born ones to acquire across borders, and that this inclination is explained by their preference for targets in their birth country. This preference is motivated by foreign‐born CEOs’ information advantage in their birth country and by these CEOs’ desire to give back to the birth country. CEOs’ desire to help their birth country also influences target location, increasing the likelihood of a target in countries that colonized the CEO birth country. The motives that drive acquisitions in acquirer CEOs’ birth countries measurably affect the returns of acquirers’ shareholders, target premium, and acquisition synergy. Both acquirers’ returns and synergy but not target premium are abnormally positive when the motive for an acquisition is a CEO's information advantage in the birth country. Targets premiums but not acquirers’ returns and synergy are abnormally positive when the motive for an acquisition is the desire to give back to the CEO's birth country.

We explore how a supervisor's hierarchical rank affects the extent to which employees’ targets reflect their past performance. Literature documents that supervisors do not fully ratchet targets for past performance, arguably because the commitment not to penalize successful employees with more difficult targets alleviates the severity of the ratchet effect. We argue that commitment is less credible in organizational hierarchies where a middle manager sets employees’ targets. Using data from an organization comprised of three hierarchical layers, we consistently find that a middle manager's exposure to performance pressure is positively associated with the ratcheting of the employees’ targets. Moreover, we show that management at headquarters reduces a middle manager's performance pressure when most of her employees missed their targets in the previous period. Overall, the results imply that the hierarchical rank is an important determinant of the credibility of a supervisor's commitment to deemphasize past performance in target setting.

During the revelation of the Harvey Weinstein scandal and the reemergence of the #MeToo movement, firms with a nonsexist corporate culture, proxied by having women among the five highest‐paid executives, earn excess returns of 1.3% relative to firms without female top executives. These returns are driven by changes in investor preferences toward firms with a nonsexist culture. Institutional ownership increases in firms with a nonsexist culture after the Weinstein/#MeToo events, particularly for investors with larger holdings and investors with a lower ESG focus ex ante. Firms without female top executives improve gender diversity after these events, particularly in more sexist states and in industries with few women executives. Our evidence attests to the value of having a nonsexist corporate culture and indicates that changes in societal norms toward women are permeating into capital markets and corporations.

This study examines whether mandatory increase in reporting frequency exacerbates agency problems. Utilizing the setting of the 2004 SEC mandate on increased reporting frequency of mutual fund holdings, we show that increased reporting frequency elevates window dressing (buying winners or selling losers shortly before the end of the reporting period). This effect is driven by low‐skill fund managers’ incentives to generate mixed signals. Funds managed by low‐skill managers experience lower returns, more outflows, and a higher collapse rate when their window dressing is elevated after the 2004 rule change. These results suggest that, although higher reporting frequency on agents’ actions can exacerbate signal manipulations, the related manipulation costs improve sorting among agents in the longer term.