Knowledge that Transforms

We find that bond issuers receive bank loans with 12% fewer covenants when the secondary corporate bond market becomes more transparent. The treatment effect is more pronounced when bond trades are more informative, when stock prices are less informative, and when the likelihood of future debt-equity agency conflicts is higher. The evidence suggests that bond prices reflect forward-looking information that mitigates banks’ information risk in debt contracting. As such, banks impose fewer contractual restrictions on bond issuers when bond transactions become publicly observable. We find consistent results using a hand-collected dataset of negative covenants. Treatment firms are also less likely to subsequently renegotiate borrowing terms. Finally, we find corroborating evidence from new primary bond issues. Taken together, our findings suggest that public bond market frictions affect private debt contract design.

Using comprehensive data on U.S. corporate bond trades since 2002, we find evidence that retail bond investors overrely on untimely credit ratings to their financial detriment. Specifically, they appear to select bonds by first screening on a credit rating and then sorting by yield, buying the highest-yielding bonds within each rating level. Because yields lead credit rating changes, selecting on yield-within-rating means that retail investors systematically trade in the opposite direction of changing fundamentals, buy in advance of credit downgrades and defaults, and materially underperform a diversified portfolio. Our study provides new evidence of ill-informed retail trading in a market that is thought to be relatively sophisticated, corroborates regulators’ concerns about investor overreliance on credit ratings, and contributes to the academic literature on the roles and consequences of credit ratings in debt markets.

We find that a new compensation disclosure item on expected payouts from performance-based stock grants reveals unique information regarding future firm performance. Extracting inferred performance expectations from the disclosures, we find that firms disclosing the highest expected grant payout significantly outperform in ROA, Q, sales growth, and profit margin over the next two years, while those disclosing the lowest expected payout underperform. The embedded information is not captured by other information channels, such as managerial earnings guidance, 10-K sentiment, insider selling activities, unexplained CEO pay, and analyst forecasts. Investors and analysts do not fully incorporate the information and are later surprised around earnings announcement days. A portfolio that buys firms with the highest performance expectation and shorts firms with the lowest expectation earns significantly positive abnormal returns. Our findings suggest that the enhanced compensation disclosure contains valuable information, but investors underreact to information that is difficult to collect and process.

We examine whether the quality of firms' internal information systems influences the relation between inflation shocks and corporate investment, as posited by imperfect information models. Inconsistent with RBC models’ prediction that nominal variables (e.g., inflation) do not affect real variables (e.g., corporate investment) but consistent with the presence of information frictions, we first document a positive relation between inflation shocks and firm-level investment. Next, we show that higher internal information system quality, measured through responses to the World Management Survey, mitigates the positive relation between inflation shocks and firm-level investment. This result suggests that internal information quality serves as a channel through which aggregate-level nominal variables affect firm-level real variables. We then document that firms with higher internal information system quality make relatively more efficient investment decisions following inflation shocks. Our inferences are robust to using the 8th EU Company Law Directive as a shock to internal information system quality and to several additional tests.

This paper explores the shock of school closures caused by the COVID-19 pandemic to study the effect of childcare responsibilities on analyst forecasts. With manually collected data on whether analysts have children, I find that female analysts with children (mother analysts) are less likely to issue timely forecasts after school closures, compared to male analysts with children (father analysts). Mother analysts’ forecasts also become less accurate after school closures, but the negative effect only exists among forecasts for firms with relatively low institutional ownership, suggesting that mother analysts prioritize maintaining the forecast accuracy for firms that are more important to their careers. Additionally, mother analysts shift forecast release times to avoid childcare hours. My findings imply that childcare responsibilities hurt the productivity of mother analysts more than that of father analysts, even though these women have established themselves in a competitive industry.

We describe the taxation landscape in the cryptocurrency markets, especially concerning U.S. taxpayers, and examine how recent increases in tax scrutiny have led to changes in crypto investors' trading behavior. We argue conceptually and then empirically document that increased tax scrutiny leads crypto investors to utilize conventional tax planning with tax-loss harvesting as an alternative to non-compliance. In particular, domestic traders increase tax-loss harvesting following the increase in tax scrutiny, and U.S. exchanges exhibit a significantly greater amount of wash trading. Additional findings suggest that broad-based and targeted changes in tax scrutiny can differentially affect crypto traders’ preference for U.S.-based exchanges. We also discuss other gray areas for tax regulation related to new crypto assets, such as Non-Fungible Tokens and Decentralized Finance protocols, that further highlight the importance of coordinating tax policy and other regulations.

We study financial reporting and disclosure practices in China using survey methods similar to prior studies of U.S. firms (i.e., Graham et al., 2005; Dichev et al., 2013). Comparing earnings features, motives to manage and smooth earnings, and voluntary disclosure practices between the two countries, we reveal three major differences. First, Chinese firms exhibit a stronger preference for predictive, relative to verifiable, attributes of earnings that can signal stable firm performance to their stakeholders. Second, smooth earnings are desired by various stakeholders and can be achieved through coordination among connected stakeholders, which is conceptually different from earnings management. Third, Chinese firms consider public disclosure as less relevant in the reduction of the cost of capital. In addition, Chinese firms do not have a bias towards conservative reporting. We explain and reconcile these differences as resulting from some unique institutional features of China. Our study provides novel field evidence that contributes to, expands, and directly corroborates existing empirical studies.

This paper examines the relation between audit market competition and audit quality. We use the staggered introduction of bullet trains in different Chinese cities as shocks to travel time between audit clients and prospective audit firms, which increases the threat of competition for incumbent audit firms. The inception of bullet train connectivity leads to a 4.5 percentage point (pp) increase in the probability of GAAP violations and a 1.7 pp decrease in the probability of modified audit opinions for clients headquartered in connected cities. Bullet train connectivity is also followed by a 1.6 pp decrease in income-decreasing audit adjustments but no change in income-increasing audit adjustments. The negative relation between bullet train connectivity and audit quality is 1) stronger when bullet trains put greater competitive pressure on incumbent auditors and 2) weaker when clients demand high audit quality. Our paper provides plausibly causal evidence that competition lowers audit quality.

We study the determinants and the informational role of firms' fixed income conference calls, a unique form of voluntary disclosure that deviates from the traditional multi-purpose firm disclosures intended for all stakeholders. We find that fixed income calls are more likely to be held by firms that have more debt, lack credit ratings or have publicly traded equity, are foreign, or are experiencing losses. In a content analysis using a sample of public firms, we find that these calls discuss debt-equity conflict events, such as share repurchases, to a greater degree relative to a matched sample of earnings conference calls. Finally, we document that credit markets react to these calls, consistent with the calls providing investors new information. Overall, these results are consistent with fixed income calls meeting the differential informational demands of debt versus equity investors.

We study the information content of earnings announcements and its relevance for job search using detailed search data from half a million anonymous job seekers. We find evidence consistent with job seekers initiating job-search activity in response to a prospective employer's earnings announcements. Job seekers search more intensely for employers with media coverage and earnings growth, consistent with the attention and information roles of earnings announcements. We find corroborating evidence about the usefulness of earnings announcements' financial information content to job seekers: (1) a survey experiment indicates that job seekers are more willing to apply to firms when provided with evidence of positive performance; (2) job seekers search for financial information during applications and interviews; and (3) financial information is predictive of future job prospects, including job openings and career growth. Overall, our paper suggests that earnings announcements—among other sources—prompt and guide job seekers' search activities.