Knowledge that Transforms

This paper examines how accounting comparability affects the monitoring role and the risk allocation role of capital markets. We develop the statistical and informational properties of accounting reports under varying degrees of comparability. A perfectly comparable accounting information system enables investors to perfectly infer the difference between any two firms' future cash flows although investors remain uncertain about either firm's cash flow. Comparability alleviates entrepreneurs' moral hazard problem by strengthening the price response to the relative accounting performance, but can induce excessive price risk as well as residual systematic cash flow risk. Unlike the investors (users) who earn their surplus by bearing the residual systematic risk, the entrepreneurs (preparers) do not find perfect comparability desirable. Hence, a standard setter would mandate higher comparability than preferred by preparers, but not perfect comparability.

I examine whether corporate managers learn from institutional investors through direct interactions at investor conferences. I find that managers seek more direct interactions with institutional investors at conferences when they have a greater need for information about their firm's product markets and supply chains. This relation is stronger when managers expect investors to be knowledgeable. I also show that the information acquired from conference interactions is reflected in subsequent manager decisions. First, direct interactions help managers to extract information embedded in stock prices and later use it to make investments. Second, within the same firm and month, managers' personal stock trades immediately after attending a conference earn higher abnormal returns, consistent with direct interactions expanding their private information set. Overall, these findings suggest that managers can acquire decision-relevant information from direct interactions with institutional investors of their firm.

This study examines the stock market reaction to the unprecedented leaks of confidential advance tax rulings between Luxembourg and multinational corporations—also known as the “LuxLeaks.” Contrary to the negative market reaction to tax shelter news documented in prior research, we find that investors responded positively to these leaks. This reaction is concentrated among U.S. firms. Furthermore, we document a positive association between abnormal returns and the reduction in firms' tax uncertainty, consistent with a downward revision in investors' perception of the tax uncertainty associated with the firms' Luxembourg operations. We also investigate other firm characteristics and find that, among U.S. firms, investors' reaction is weaker for those over-invested in tax avoidance. Among non-U.S. firms, the market response is muted by concerns about the quality of governance. In summary, our results suggest that investors' reaction to tax shelter news is conditional on their reassessment of the firms' tax uncertainty.

We provide evidence that accruals quality in the U.S. has generally improved since 2000, following a decade of decline during the 1990s. Our results indicate that both the initial decline in accruals quality and the subsequent reversal can be explained by an inverse relation with operating cash flow volatility. Moreover, even though patterns of cash flow volatility and accruals quality vary in different regions of the world and relative to the U.S., we find evidence of an inverse relation between accruals quality and cash flow volatility globally. We corroborate our main results in a battery of additional tests, which also indicate that our results are not attributable to other explanations. Overall, our evidence challenges conventional wisdom and suggests that concerns about a sustained decline in accruals quality over time are unwarranted.

This paper develops a positive role for accounting conservatism in fostering relational contracts between two agents in a two-period model of moral hazard. Building on Kreps (1996), the principal in our model designs a conservative measurement system and optimal contracts to create multiple equilibria that foster a team-based corporate culture. Accruals introduced by conservatism increase each agent's stake in the future of the relationship when it matters most—when it is going badly. This makes staying in the relationship worthwhile for the agents, even if they plan to play a low payoff equilibrium in the second period to punish first-period free-riding. In turn, this allows the principal to use lower-powered (and less costly) team incentives in the first period of the relationship. In contrast, deferred compensation increases each agent's stake in the future of the relationship when it is going well, making it less efficient in fostering relationships.

We document a novel trend in syndicated lending where some participants voluntarily waive their rights to borrowers' private information. We posit that “public-side” lending emerged to facilitate broad lender participation in the syndicated loan market by mitigating concerns about the leakage of borrowers' private information into public securities markets. In line with this proposition, we find that public-side lending facilitates the loan market participation of lenders for which maintaining robust information barriers is particularly costly. Furthermore, while public-side lending increases within-syndicate information asymmetry, our findings indicate that it does not materially increase interest spreads and is associated with lower coordination costs among syndicate participants. Collectively, we document how debt contracting practices evolved to address frictions associated with the protection of borrowers’ private information and the related changes in loan contracting equilibria.

Extensive evidence suggests that managers strategically choose the complexity of their descriptive disclosures. However, their motives in doing so appear mixed, as complex disclosures are used to obfuscate in some cases and to provide information in others. Building on these observations, we first identify a novel stylized fact: disclosure complexity is non-monotonic in firm performance. We develop a model of disclosure complexity that incorporates the dual roles of complexity and can explain this stylized fact. In the model, a manager discloses to investors of heterogeneous sophistication and can adjust the complexity of the disclosure to either provide more precise information or to obfuscate. When the firm's investor base is largely unsophisticated, the manager issues a complex disclosure only upon observing negative news. In contrast, when the firm's investor base is more sophisticated, the manager issues a complex disclosure upon observing either highly positive or negative news. As a result, the market may react more positively to complex information releases than to simple releases, complex disclosures generate heightened return volatility, and firms with more inherently complex information are more likely to use their discretion to simplify their disclosures.

Between 2010 and 2017, Chinese investors used an investor interactive platform (IIP) to ask public companies around 2.5 million questions, the vast majority of which received a reply within two weeks. We analyze these IIP dialogues using a BERT-based algorithm and provide preliminary evidence on their causes and consequences. Our analyses show most questions reflect investors’ difficulties in processing information already in the public domain. Controlling for other news, higher IIP activity is associated with increases in trading volume, return volatility, market liquidity, and price informativeness as well as decreases in bid-ask spread. Financial statement-related postings increase around the adoption of new accounting standards. Collectively, our results show that investors face significant information processing costs but that IIP activities help reduce these costs, leading to improvements in stock price formation.

Advocacy groups have responded to the lack of political solutions to some of the greatest problems we face—from climate change to armed conflicts—by lobbying for securities regulation that increases corporate transparency. They aim to incentivize corporations to address problems that lack other political solutions. I discuss what we can (and cannot) learn about the efficacy of reporting mandates from the findings in Darendeli et al. (2022) and related papers that stakeholders respond to greater availability of corporate social responsibility information. I support my arguments with evidence from mandatory conflict mineral disclosures—to date, the only related US securities regulation. Although stakeholder responses are likely necessary to incentivize changes in corporate behavior, they are insufficient to justify a mandate. A convincing justification must explain how reporting mandates lead to socially beneficial real effects, are best overseen by the Securities and Exchange Commission, and are less costly than alternative policy instruments. So far, proponents of reporting mandates have, at best, provided incomplete justifications. These circumstances are problematic given the current push for mandatory reporting related to issues such as climate change and workplace diversity.

This paper investigates how information uncertainty, measured through variation in the informativeness of the public information environment, shapes the organizational design choices of firms. I posit that, when faced with higher uncertainty about demand and supply, managers are more likely to establish links to customer/supplier industries through high-level hiring decisions and vertical integration, thereby facilitating access to information about these industries. Consistent with this hypothesis, I find that firms modify their hiring and, to a lesser extent, vertical integration decisions in response to variation in the informativeness of the public information environment about demand and supply, measured with two distinct empirical approaches. Further, I observe that these organizational design choices correlate with the efficiency of inventory management and investment sensitivity to growth opportunities; this finding is consistent with organizational design facilitating access to information otherwise unavailable to managers through public sources.