Knowledge that Transforms

ABSTRACT I study how the disclosure of the liquidity coverage ratio mandated for a group of systemically important U.S. banks affects peer banks' liquidity holdings. I predict that the disclosure mitigates uncertainty about aggregate liquidity risk by providing insight into the likelihood of market‐wide liquidity shocks and specific sources of liquidity stress. This uncertainty resolution, in turn, reduces nondisclosing banks' precautionary demand for liquidity. Using bank business interactions to measure the treatment intensity of the disclosure, I find that more treated nondisclosing banks cut their liquidity significantly more in response to the disclosure. In addition, the disclosure rule was followed by lower overall liquidity and a build‐up of systemic risk, indicating an economically considerable disclosure spillover effect in the aggregate. My paper reveals a new economic force, the spillover effect of mandated liquidity disclosure, that shapes banks' liquidity holdings.

ABSTRACT This paper examines how firms’ tax policy expectations (TPE) evolve around and relate to their investment responses to changes in tax policy. Using a text‐based approach to measuring TPE, we find that two recent tax policy–changing events—namely, the 2016 U.S. presidential election and the enactment of the Tax Cuts and Jobs Act (TCJA)—spawned considerable between‐ and within‐firm variation in TPE, with aggregate time‐series patterns in TPE occasionally challenging prevailing assumptions in previous research. Further, we observe that event‐induced TPE relate to investment both before and in response to the TCJA's passage in 2017, with offsetting associations between its first and second moments, and that these TPE moderate the TCJA's intended investment‐stimulating effect. Furthermore, we document a difference between domestic and multinational firms in their TPE‐investment response, with the former (latter) more likely to adjust the level (shift the country location) of their investment. Overall, our findings support the idea that TPE can impact investment behavior in the face of a tax policy change and suggest that our methodology can be used by future research to incorporate TPE into analyses of tax policy effects.

ABSTRACT Research documents price co‐movements, or “spillovers,” between focal firms and their peers at focal firms’ earnings announcements. We find that both signed and absolute co‐movements between focal‐ and peer‐firm returns are significantly lower at earnings‐announcement dates compared to other dates. Analytically, we demonstrate that co‐movements do not necessarily indicate common information; instead, co‐movements measure the relative proportion of focal firm‐specific information to common information in focal‐firm earnings announcements. We study three settings where information transfers might be higher: when focal firms report significant earnings surprises, are industry leaders, or share correlated earnings patterns with peer firms. We continue to find lower return correlations during focal‐firm earnings announcements. We conduct two alternative tests but fail to find evidence that common information released during focal‐firm earnings announcements is significantly greater than on other days. These results raise doubt about the extent of the information externality attributable to financial‐report releases.

ABSTRACT We investigate the impact of observing peers’ information acquisition on financial analysts’ allocation of attention. Using the timely disclosure mandate by the Shenzhen Stock Exchange as a setting, we find that, shortly after analysts observe that a firm has been visited by peer analysts, they reduce short‐term attention to that firm, as indicated by a reduced tendency to conduct follow‐up visits. Nonvisiting analysts who do not conduct follow‐up visits are more likely to discontinue coverage of the visited firm. These findings are consistent with the conjecture that the timely disclosure reveals the first‐mover advantage of visiting analysts, leading nonvisiting ones to reallocate their limited attention. We also find that, compared with the pre‐mandate period, the information environments of visited firms deteriorate immediately after an analyst's visit but not over the longer term. Further evidence suggests that the timely disclosure mandate has positive externalities in the form of increased immediate attention to and improved short‐term information environments of unvisited peer firms.

ABSTRACT We study whether federal judges’ personal exposure to financial fraud affects their professional behavior, in the form of sentencing outcomes in white‐collar cases. Following the methodology outlined in our registered report, we construct a novel measure of financial fraud exposure based on judges’ direct shareholdings in firms that commit financial fraud. Using this measure, we exploit the random assignment of cases to judges to examine whether judges exposed to fraud in one firm are (1) less likely to rule in favor of defendants in white‐collar cases involving other firms and (2) less likely to grant favorable pretrial motions to defendants. We find minimal evidence in support of either (1) or (2), concluding that for all but the most serious frauds, judges are unlikely to let their personal victimhood experience affect their professional sentencing behavior with respect to related cases. Our study broadens our understanding of the spillover effects of financial fraud enforcement and contributes to the literature on how judges’ personal experiences can shape judicial decision‐making.

ABSTRACT We adopt a financial‐materiality approach in studying the costs and benefits of measuring greenhouse gas (GHG) emissions on social welfare. Production by firms internally generates direct GHG emissions (Scope 1 emissions) whereas outsourcing to suppliers generates indirect emissions (Scope 3 emissions). Our analysis incorporates two frictions: (1) long‐term negative environmental externalities caused by emissions and (2) fragmentation in regulating emissions disclosures across jurisdictions. We show firms' failure to internalize the environmental externalities provides a rationale for mandating Scopes 1 and 3 emissions disclosures. However, such disclosures induce emissions leakage. Disciplining emissions leakage calls for setting complementary—rather than independent—disclosure requirements for Scopes 1 and 3 emissions. Our analysis underscores the importance of improving the reliability of Scope 3 emissions measurements given that measurements of Scope 1 emissions are highly reliable for public firms in Europe and the United States. Regulators can further enhance the disciplinary effects of Scope 3 emission measurements by requiring the allocations of Scope 3 emissions in supply chains to individual firms, especially when allocating Scope 3 emissions is more reliable, and for firms/industries that are more prone to transition climate risk relative to physical climate risk.

ABSTRACT We present a dynamic model of information acquisition and disclosure. The manager seeks to maximize future stock prices and collects information privately about the firm's fundamentals. Information acquisition increases the arrival rate of private information. The manager can choose to disclose his private information or withhold it in perpetuity. We study the impact of information acquisition on the accumulation of private information, disclosure, and the firm's initial investment.

ABSTRACT We study the impact of social connections between judges and executives on the outcomes of Securities Class Action Litigation (SCAL). Judges who are socially connected to a firm's executives are significantly more likely to dismiss lawsuits against the firm. There is also evidence of faster resolution and lower payout amounts in connected cases. The favorable outcomes cannot be explained by the lower severity of connected cases, or by court, judge, or firm characteristics. Our results are more pronounced when executives connected to the judge are named defendants in the lawsuits, when connected cases involve less visible lawsuits or firms, and when connections between judges and executives are likely more direct. Our evidence indicates that social connections influence judge impartiality and meaningfully alter SCAL outcomes.

ABSTRACT This study examines whether the efficiency of federal district courts affects the likelihood of SEC enforcement. The results indicate that the SEC is less likely to initiate enforcement actions against firms in less efficient federal district courts. In addition, the study examines the implications of court efficiency for firms’ financial reporting quality (FRQ). The evidence suggests that firms residing in more efficient federal districts have higher FRQ and the effect is stronger in subsamples with weak private enforcement regimes. Additional analysis of the choice of venue suggests that the SEC's decision to file in the District Court for D.C. is not affected by local court efficiency. Collectively, this study highlights the importance of an efficient federal judicial system for public enforcement.

ABSTRACT A significant portion of a merger's purchase price is allocated to goodwill. Currently, goodwill is not amortized but rather tested annually for impairment. When managers of acquiring firms care about earnings, goodwill's accounting treatment can have large effects on future earnings and may influence how much a manager will bid for a target company. We quantify the effects of goodwill accounting by estimating a structural model of corporate takeovers. Our estimates suggest accrual accounting increases buyout premia by an average of approximately 11 percentage points. If firms needed to amortize goodwill over 10 years, we estimate premia would reduce by 4.9 percentage points and M&A volume would shrink by 4.1% or $67 billion per year. Furthermore, the fraction of private equity acquirers would increase by 6.9 percentage points, shifting control over productive assets to the private and financial sector. Our results suggest the accounting treatment for goodwill has a meaningful effect on the market for corporate control.