Knowledge that Transforms

We identify a novel force behind the benefit of misaligned preferences in corporate governance. Our model entails a CEO who encounters a project and, after gathering information, decides whether to seek the approval of a corporate board. The CEO may be able to choose the properties of the collected information—this may happen if the project is “novel,” i.e., explores a new technology, business concept, or market and directors are less knowledgeable about it. We find that only sufficiently conservative and expansion-cautious directors can discipline the CEO’s empire-building tendency and opportunistic information collection. Such directors, however, underinvest in projects that are not novel. The board that maximizes firm value is either conservative or neutral (has interests aligned with the shareholders) and always overinvests in innovations. Boards with greater expertise are more likely to be conservative, but their bias is less severe. The board’s commitment power and bias are substitutes.

We examine how the development of voluntary sustainability standards has affected the nature of information covered in earnings calls. Using industry-specific dictionaries of sustainability terms contained in the disclosure standards developed by the Sustainability Accounting Standards Board (SASB), we find an increase in coverage of sustainability topics identified as relevant to investors in SASB standards, particularly for companies that had little or no coverage of sustainability issues historically. This trend begins around the time when SASB released a provisional standard for a given company’s industry and continues in the years afterward. We also find a stronger effect of SASB standards on conference call content for companies operating in industries with greater ex ante uncertainty about which sustainability topics are more likely to be financially material. Overall, our paper provides timely evidence as jurisdictions around the world consider whether to support sustainability reporting in their capital markets and, if so, how.

Market participants have called on the SEC to address the lack of disclosures about firms’ environmental impacts, investments, and exposures. However, the frictions that obstruct the flow of environmental information are not well understood. I shed light on these frictions by examining whether scrutiny by the Environmental Protection Agency (EPA) restricts the firm’s voluntary environmental disclosures in earnings conference calls. Consistent with the notion that EPA scrutiny gives rise to disclosure frictions, I find a negative relation between EPA scrutiny and the environmental disclosures of scrutinized firms. This negative relation is concentrated among firms without environmental expert directors, suggesting that environmental governance mitigates the chilling effect of EPA scrutiny. In terms of disclosure quality, I show that environmental disclosures include fewer quantitative details under EPA scrutiny. Collectively, these findings provide insights into the frictions that restrict the flow of environmental information to market participants, an important issue given the SEC’s efforts to improve current disclosure practices.

We use COVID-19 and sell-side analysts as an experiment to study the effects of gender on labor productivity. We find that the forecast accuracy of female analysts declined more than that of male analysts, especially when schools were closed and among analysts who were more likely to have young children, were inexperienced, were busier, or lived in southern states of the US. Relative to male analysts, females also reduced their forecast timeliness and resorted to more heuristic forecasts but did not reduce coverage or updating frequency. Relative to pre pandemic, female analysts’ careers were more negatively affected than male analysts’. Overall, our results show that the pandemic impacted female analysts more than males through the quality of their forecasts but not the quantity.

Using a novel measure that captures negative ESG incidents at both listed and private suppliers, we provide large-scale evidence on the value implications of supply chain ESG. We find that firms with fewer supply chain ESG incidents exhibit higher future accounting performance and that this effect is stronger in the presence of more conscious customers and vulnerable supply chains. We also find that firms with robust supply chain ESG exhibit higher future stock returns and that this effect is more pronounced when information frictions are higher, which suggests that it takes time for the market to understand the value implications of supply chain ESG. Overall, we highlight the benefits of managing supply chain ESG and the decision usefulness of the related information.