Knowledge that Transforms

In the setting of defined-benefit pension liabilities, we hypothesize that equity and debt investors value these liabilities differently. As expected, we find that investors' valuations of equity more closely align with a going concern perspective that emphasizes the long-term funding needs of pension plans. In contrast, as expected, we find that investors' pricing of short-term and unsecured debt more closely aligns with a settlement perspective that emphasizes pension termination costs. For both equity and debt securities, the settlement (going concern) perspective dominates for short-duration (long-duration) pensions. Overall, our evidence suggests that equity and debt investors perceive complex liabilities in predictably different ways that are consistent with their differing information demands, which in turn vary with the characteristics of the obligation.

We examine whether SEC effort to review state sponsors of terrorism (SST) disclosure negatively influences financial reporting oversight. Using comment letter inquiries about SST to measure effort, we find the likelihood that the SEC fails to identify a financial reporting error increases when comment letters reference SST. Consistent with SST disclosure review crowding out financial reporting oversight, comment letters referencing SST are less likely to mention accounting, non-GAAP, and MD&A issues. These effects are unique to SST as we find comment letter references to non-SST issues complement financial reporting oversight. Data obtained through a Freedom of Information Act request reveals a temporal shift in the occupational mix of SEC reviewers towards (away from) lawyers (accountants) that coincides with an increased focus on SST. Path analysis reveals that accountants (lawyers) are more (less) likely to detect errors and comment on financial reporting topics, with an indirect path through SST exacerbating these effects.

We study the economic consequences of mandates that require bank auditors to report to bank regulators. Based on survey responses from the European Central Bank, all 28 national bank regulators within the European Union, and a review of national banking regulations, we create a novel dataset on these mandates. Exploiting the cross-sectional and time-series variation in these mandates, we find evidence that auditor reporting to bank regulators reduces bank riskiness, as measured by counterparty risk and credit spreads. We also observe a decline in problem loans and risk-weighted assets, as well as improvements in timeliness of loan loss provisions. Additional analyses suggest that mandated auditor reporting increases the effectiveness of supervisory and monitoring efforts and improves market discipline of banks. However, mandated auditor reporting comes with costs: it reduces future lending growth, risky lending, and profitability, and increases audit fees paid by shareholders.

We investigate the effect of patent disclosures on corporate innovation. Using the American Inventor's Protection Act (AIPA) as a shock that increased patent disclosures, we find an increase in innovation for firms whose rivals reveal more information after the AIPA and a decrease in innovation for firms whose own disclosures are divulged to competitors as a result of the law. These findings suggest patent disclosures generate both spillover benefits and proprietary costs. Our findings provide justification for patent disclosure requirements by demonstrating positive externalities: rivals' disclosures facilitate a firm's innovation. However, we also highlight that mandatory patent disclosures can impose proprietary costs on firms. These results broadly contribute to our understanding of the real effects of disclosure, such that forcing firms to share proprietary information can be privately costly but beneficial to other firms.

Scholars have long suspected that people behave differently when their actions will be observed by or revealed to others. We hypothesize that financial reporting that reveals managers' actions will lead managers to take actions that better align with investor interests. We test this hypothesis with an experiment in which we manipulate the availability of a financial report that reveals managerial actions. Our evidence shows that financial reporting leads a manager to choose reinvestment and resource-sharing actions that better align with investor interests, even when the investor can impose no cost or confer no reward on the manager. This effect holds when the investor can shut down the firm and take a sizable portion of the assets. Our evidence suggests that financial reporting's economic value comes not only from its traditional contracting function, but also because managers care about investors' moral evaluations of them that are enabled by reporting.

We develop an approach based on publicly available data to decompose and quantify tax avoidance into two separate components: tax rate avoidance and tax base avoidance. Our measures are based on the average statutory tax rate, which accounts for the statutory tax rates across all transactions of a firm. We illustrate and validate our measures using simulation data, the Tax Reform Act of 1986, the Tax Cuts and Jobs Act of 2017, changes in tax rate avoidance and tax base avoidance across time, bonus depreciation time periods, several sample splits of U.S. multinational and domestic firms, differences across industries, and firms operating in tax haven locations. The measures allow regulators and researchers to gain insights into these two conceptually different tax avoidance strategies.

Mutual funds hold 32% of the U.S. equity market and comprise 58% of retirement savings, yet retail investors consistently make poor choices when selecting funds. Theory suggests poor choices are partially due to fund managers creating unnecessarily complex disclosures and fee structures to keep investors uninformed and obfuscate poor performance. An empirical challenge in investigating this “strategic obfuscation” theory is isolating manipulated complexity from complexity arising from inherent differences across funds. We examine obfuscation among S&P 500 index funds, which have largely the same regulations, risks, and gross returns but charge widely different fees. Using bespoke measures of complexity designed for mutual funds, we find evidence consistent with funds attempting to obfuscate high fees. This study improves our understanding of why investors make poor mutual fund choices and how price dispersion persists among homogeneous index funds. We also discuss insights for mutual fund regulation and academic literature on corporate disclosures.

While studies have sought to explain the benefits of cross-listing, little attention has been paid to the role of communication between managers and investors during this process. In this paper, I investigate whether managers change communication policies around U.S. cross-listings. I document significant increases in communication when firms cross-list. I then test whether these investor communication practices around cross-listing are associated with capital market benefits. I find that cross-listed firms that communicate more with investors experience greater and longer lasting cross-listing benefits. Lastly, I explore two potential reasons that may lead managers to choose higher levels of communication: to support an increase in investor recognition and to facilitate monitoring. I find results consistent with communication increasing visibility and scrutiny, suggesting that communication functions as a supporting tool to achieve managers’ cross-listing goals.

This study investigates whether brokerage houses appear to provide stock tips to politicians. Our results indicate that trades by politicians who are politically connected to the brokerage house where the trade is executed are more profitable. Our estimates suggest that these connected trades earn an incremental 0.3% over a five-day window relative to the politician's average profitability. Given the average number of trades our sample politicians execute in a year, the 0.3% return per trade translates to an incremental $3,411 in trading profits each year. We provide additional support by investigating the frequency and differential profitability of politicians' trades immediately before the brokerage house issues a revised recommendation, as well as during a period when Goldman, Sachs & Co. was sanctioned for providing stock tips to high priority clients. Additional tests suggest that brokerages may provide stock tips to politicians in exchange for favorable legislative outcomes or political information.

Theories of delegated monitoring predict that when public disclosure is costly, monitoring by a large investor leads management to supply more private information to that investor, and less public disclosure to other similarly aligned investors who free-ride off the monitor. We test this prediction in the setting where large shareholders contractually bind management to share private information. We find that after the execution of such contracts, firms improve their performance and reduce their public disclosures. Overall, our evidence supports the disclosure prediction of delegated monitoring theories, and is inconsistent with poor-performance and expropriation theories of disclosure.