Knowledge that Transforms

We explore whether bank regulatory oversight affects the ability of environmental enforcement to reduce industrial emissions. A major objective of environmental enforcement is to reduce industrial emissions by encouraging firms to employ greener production processes and technologies. However, such changes often require external financing obtained from banks, and prior research shows that regulatory oversight of banks can affect bank lending. We find that, on average, the reduction in air pollution in response to county‐level environmental enforcement is attenuated in counties exposed to increased bank regulatory oversight, as measured by severe enforcement actions. Furthermore, we show that the negative impact of bank regulatory oversight on small business lending to affected counties is the likely mechanism behind this on‐average effect. However, when bank regulatory oversight targets banks with stronger capitalization, we find that the negative effect of bank regulatory oversight on environmental enforcement is mitigated. Collectively, our findings suggest that bank regulation has a nuanced effect on the extent to which environmental enforcement reduces emissions, indicating that one regulator's mission can impact the objectives of another.

How do investor reactions to the mandatory disclosure of firm tax information influence managers' reporting choices? To answer this question, we build a structural model of reporting bias, which we test with a unique data set of Turkish firms that have been mandated to publicly disclose their tax returns since 2009. We find that both book and tax income numbers are informative to investors. Structural estimates are consistent with disclosure of the tax report reducing both market incentives to manage book earnings and investor uncertainty about underlying firm value. Tax disclosure is associated with higher reported tax income, though the increase is not statistically significant. Counterfactual estimates suggest that book‐tax‐conformity could change financial and tax reporting biases, but lead to a lower quality information environment relative to the separate disclosure of book and tax reports.

Bank regulators use peer information for bank evaluations and publicly disclose this information. This study investigates whether the regulatory use and disclosure of peer information induce herding behavior in banks' regulatory capital ratios. I examine this question using a 2004 peer group reform that introduced class‐of peer groups for newly chartered banks, grouping them exclusively with their cohorts, while established banks continued to be compared with similar‐sized banks. The results show that, post‐reform, banks exhibit heightened herding behavior in their regulatory capital ratios. Depending on their relative capital position, banks either become more sensitive to changes in the peer group average or converge toward it. Additionally, I find that under‐capitalized banks adjust loan portfolios to manage their capital ratios, and this gap‐closing behavior is associated with worse subsequent loan quality, higher bank failure rates during the financial crisis, and, at the bank holding company level, larger systemic‐risk contributions. These findings highlight significant implications of regulatory disclosure for bank behavior and stability.

We document that as interest rates rose in 2022, banks largely left long‐duration assets exposed to interest rate risk while shielding the accounting value of their balance sheets. Call report and Securities and Exchange Commission (SEC) data show that only about 6% of U.S. banking assets were hedged with derivatives, and even the heaviest users hedged only a small share of their portfolios. Rather than hedge market‐value risk, banks relied on held‐to‐maturity (HTM) accounting to shield book capital, reclassifying about $700 billion of securities as HTM during the tightening period, more than twice the amount reclassified beforehand. Cross‐sectionally, banks with lower capitalization, more fragile uninsured funding, and greater long‐duration asset exposure were less likely to expand hedging during tightening and more likely to rely on HTM accounting. More vulnerable banks, especially those overseen by less stringent state regulators, were also more likely to shift into HTM. We develop a stylized model showing how higher interest rate risk, through its effects on bank solvency, run risk, and regulatory capital, shapes banks’ incentives to hedge, recapitalize, or rely on HTM accounting. While HTM accounting can help well‐capitalized banks avoid excessively tight capital constraints, it can also weaken hedging incentives among weaker, moderately capitalized banks by allowing them to window‐dress capital ratios while remaining exposed to runs. Our evidence suggests that this latter channel dominated during the tightening episode. Incorporating deposit franchise value into regulatory capital without accounting for run risk may further weaken the effectiveness of capital regulation. These findings carry important implications for regulatory capital accounting and bank risk‐management practices.

We examine whether firms apply partisan standards when responding to employee financial misconduct. Using detailed individual‐level data on financial advisers, we find that advisers who are in the political minority at their firm (political minority advisers) are no different from their colleagues at the same firm and time in the incidence and severity of misconduct, yet following misconduct, they are significantly more likely to depart—a pattern we term “partisan punishment standards.” This pattern is especially pronounced at firms with lower internal information quality (IIQ), proxied with (1) lower external reporting quality (for public firms only), (2) private firms (relative to public firms), and (3) not hiring an independent public accountant to create an internal control report (for both public and private firms). We also document “partisan reporting standards”: Firms are more likely to publicly disclose misconduct by political minority advisers while remaining relatively silent in other cases. Firms that exhibit partisan punishment practices subsequently experience slower growth.

Professional development and training are essential for organizational growth and success, but resource constraints often force managers into a dilemma: Should they train their lower performing or higher performing employees? While lower performers with greater skill gaps can benefit more from training than higher performers, managers must also consider employees’ fairness concerns. Using an interactive experiment, we predict and find that how employees react to their manager's allocation of training resources depends on the prevailing fairness norms in the work environment. When egalitarian norms dominate, such as when employees have little control over their job tasks, lower performers take the receipt of resources for training for granted and react negatively when the manager allocates those resources to higher performers instead. In contrast, when meritocratic norms dominate, such as when employees have more control over their job tasks, higher performers react more negatively than lower performers to not receiving training resources. Additional experiments suggest that these fairness‐norm–dependent reactions are most pronounced under tournament incentives and may disappear under individual performance‐based pay. Overall, our study highlights the importance for managers to consider both employee productivity and the prevailing fairness norms of the work environment when allocating scarce training resources.

This study examines the relation between taxes and business investment using the setting of an unexpected and economically significant federal corporate income tax rate increase in Canada known colloquially as the Halloween Massacre of 2006. This tax increase only applies to firms organized as income trusts, but not corporations. Using a difference‐in‐differences design, we find that investment by income trusts decreases about 0.67% for each 1 percentage point increase in the tax rate, translating into over $10 billion in reduced aggregate investment. In decomposing total investment, our results reveal that capital expenditures exhibit an immediate decrease while there is a delayed decrease in acquisition activity. Our results are concentrated in high‐investment income trusts that are most sensitive to the link between investment and taxes. Our study helps resolve conflicting prior results by providing robust evidence that tax increases have an economically significant and negative causal effect on business investment.

We examine how analysts’ information acquisition and processing differ when analysts have access to AI resources, focusing on investment banks’ AI investments. We propose and test a two‐step framework, which is informed by in‐depth interviews with analysts. First, consistent with AI facilitating automation‐assisted public information processing, we show that AI investments are associated with more timely earnings forecasts following 10‐K filings, particularly after the implementation of iXBRL, which increases the machine readability of filings. Second, we show that analysts reallocate the time and capacity freed by automation toward acquiring and incorporating private information, supported by several sets of evidence: AI investments (1) are associated with higher quality and bolder earnings forecasts, particularly when private information is more important and accessible to analysts; (2) are associated with an expansion of analyst coverage to new firms and industries; and (3) are associated with higher information‐seeking efforts, particularly greater participation in earnings conference calls. Additionally, exploiting the launch of AskResearchGPT at Morgan Stanley, an in‐house generative AI designed for research, we find results consistent with our main analyses. Overall, our study provides insights into the potential for AI to reshape the human value of sell‐side analysts.

Prior studies predominantly examine fundamental performance‐driven explanations of loan renegotiations. We contrast with this work by investigating the improvement in secondary loan market trading conditions as a non‐fundamental driver of loan renegotiation. Exploiting a regression discontinuity design around the LSTA 100 Index reconstitution, we find that index‐included loans are around five times more likely to receive interest‐rate–reducing amendments than comparable loans just below the index inclusion threshold. Within‐loan‐package tests confirm that these renegotiations are not driven by changes in the borrower's fundamental performance. The threat of refinancing likely drives this effect, as the results are more pronounced when such threats are more credible.

We examine the spillover effects of local initial public offerings (IPOs) on new business formation. An IPO in a local area is associated with a 1%–4% increase in new business registrations, and this effect is particularly pronounced in counties facing higher economic uncertainty. New business registrations are significantly influenced by the extent of EDGAR downloads related to the IPO firm's public disclosures and the information in the IPO firm's S‐1 disclosure. The findings highlight the role of IPOs in conveying crucial information through signaling of potential success prospects and additional provision of information through disclosures. A field survey of 503 entrepreneurs further supports these conclusions.