Knowledge that Transforms

In this study we examine the impact of the Securities and Exchange Commission's (SEC) decision to accelerate the filing of 10-Ks. The SEC argued that the accelerated deadline would increase the relevance of the disclosures, making the reports more useful. Opponents countered that the accelerated deadline would decrease the representational faithfulness of the disclosures, especially for smaller firms. We document a significant decrease in the 10-K market reaction for smaller firms as they accelerate from 90 to 75 days. For larger firms we find no significant change in the market reaction from 90 to 75 days. However, as these larger firms accelerate their 10-K deadline to 60 days, we find a significant increase in the market reaction. We also examine changes in reporting quality, shifts in information content, and changes in 10-K filing order and clustering and find results that are consistent with accelerated filing having significant impacts on representational faithfulness and relevance.

ABSTRACT The widespread use of accounting information by investors and financial analysts to help value stocks creates an incentive for managers to manipulate earnings in an attempt to influence short‐term stock price performance. This paper examines the role of earnings management in affecting a firm's cost of capital. Using an agency model with multiple firms whose cash flows are correlated, we demonstrate that the extent of earnings manipulation varies across the business cycle. Depending on a firm's earnings profile, it can have stronger incentives to overstate its performance in good times or in bad times. Because of this dependence on the state of the economy, earnings manipulation can influence a firm's cost of capital despite the forces of diversification.

ABSTRACT In this study, we investigate the choice of performance measures in promotion decisions. In particular, we examine the extent to which managers incorporate different performance measures for different types of job assignment. Based on a simple theoretical framework, we predict that, in making promotion decisions, the weight on current job performance decreases with increases in the change in tasks upon promotion, while the weight on subjective assessments of ability increases. This result basically follows from the premise that, with increased changes in tasks between hierarchical levels, the ability to master the current job says little about the ability needed in the next job, which makes current job performance less informative and increases the emphasis on subjective assessments. Using panel data of a retail bank, we find that individual managers behave according to our predictions. By examining the choice of performance measures in promotion decisions, we are able to provide unique insights into the incentive versus sorting roles of promotions, which has important implications for performance measurement and incentive system design.

ABSTRACT We investigate the economic role of proxy advisors (PAs) in the context of mandatory “say on pay” votes, a novel and complex item requiring significant firm‐specific analysis. PAs are more likely to issue an Against recommendation at firms with poor performance and higher levels of CEO pay and do not appear to follow a “one‐size‐fits‐all” approach. PAs’ recommendations are the key determinant of voting outcome but the sensitivity of shareholder votes to these recommendations varies with the institutional ownership structure, and the rationale behind the recommendation, suggesting that at least some shareholders do not blindly follow these recommendations. More than half of the firms respond to the adverse shareholder vote triggered by a negative recommendation by engaging with investors and making changes to their compensation plan. However, we find no market reaction to the announcement of such changes, even when material enough to result in a favorable recommendation and vote the following year. Our findings suggest that, rather than identifying and promoting superior compensation practices, PAs' key economic role is processing a substantial amount of executive pay information on behalf of institutional investors, hence reducing their cost of making informed voting decisions. Our findings contribute to the literature on shareholder voting and the related policy debate.

ABSTRACT This study examines liquidity and cost of capital effects around voluntary and mandatory IAS/IFRS adoptions. In contrast to prior work, we focus on the firm‐level heterogeneity in the economic consequences, recognizing that firms have considerable discretion in how they implement the new standards. Some firms may make very few changes and adopt IAS/IFRS more in name, while for others the change in standards could be part of a strategy to increase their commitment to transparency. To test these predictions, we classify firms into “label” and “serious” adopters using firm‐level changes in reporting incentives, actual reporting behavior, and the external reporting environment around the switch to IAS/IFRS. We analyze whether capital‐market effects are different across “serious” and “label” firms. While on average liquidity and cost of capital often do not change around voluntary IAS/IFRS adoptions, we find considerable heterogeneity: “Serious” adoptions are associated with an increase in liquidity and a decline in cost of capital, whereas “label” adoptions are not. We obtain similar results when classifying firms around mandatory IFRS adoption. Our findings imply that we have to exercise caution when interpreting capital‐market effects around IAS/IFRS adoption as they also reflect changes in reporting incentives or in firms’ broader reporting strategies, and not just the standards.