Knowledge that Transforms

UNIVERSITY OF MINNESOTA, Carlson School of Management, Department of Accounting is seeking applications from candidates who are interested in a position as an Assistant Professor.All applicants must possess or be near completion of a

ABSTRACT Using a generalized aggregate-level difference-in-differences analysis across 32 countries over the 1991–2017 period, we find that the ability of aggregate earnings to predict one-year ahead GDP growth is greater for countries that adopted International Financial Reporting Standards (IFRS) than those that did not. IFRS adoption also enables aggregate earnings to better predict growth in GDP components and related factors. We show that aggregate accruals drive this effect, not aggregate cash flows. The mechanism for the enhanced predictive ability of IFRS-based aggregate earnings for future GDP growth is due to fair value-based accruals, which we proxy with IFRS-driven special items. In additional analyses, we find that our main results are stronger for adopting countries with greater differences between local accounting standards and IFRS and robust to controls for enforcement. Our findings suggest that IFRS adoption improves aggregate earnings’ ability to reflect fundamental economic news in a timely manner. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: E01; F00; M41; O50.

ABSTRACT Uniformity is an essential feature of financial reporting, yet its desirability has long been debated. We study a model in which firms decide whether to adopt either their locally preferred accounting methods or a common method, followed by an investor allocating capital across firms. Firms’ choices of a common method are strategic complements in attaining more comparable reports. As a result, multiple equilibria may exist. Specifically, an equilibrium in which firms use their local methods always exists. However, an equilibrium in which firms adopt a common method exists if uniformity improves comparability significantly and firm-specific productivity shocks are large relative to the common productivity shock. Firms may fail to coordinate on adopting the Pareto-dominant accounting method, which may not even emerge as an equilibrium if investments exhibit substitutability. These coordination problems provide accounting regulation an opportunity to facilitate efficient capital allocation, thus providing a microfoundation for accounting measurement regulation. JEL Classifications: D02; D61; D83; H11; M40; M41; M48.

ABSTRACT We examine firm decisions to provide listings of sell-side analyst coverage on corporate investor relations (IR) websites. These listings are related to three major areas of financial research—voluntary disclosure, investor relations, and analysts. Our hand-collected data permit cross-sectional and time-series analyses. Firms are more likely to have such listings when analysts are more important information intermediaries and when firms are directly involved in managing their IR websites. For firms with listings, the probability of an analyst being included on the listing is increasing in firm awareness of and familiarity with the analyst, how active and favorable the analyst is, and the analyst’s reputation. Additional analysis indicates similar results across self-hosting versus third-party hosting IR websites, with a notable exception that self-hosting firms exhibit a stronger preference for analysts who issue more favorable research about the firm. Decisions to add or drop analysts from listings reinforce the main results. Data Availability: Data are available from public sources identified in the text. JEL Classifications: G17; G24; M41.

ABSTRACT Although it is well understood that product market competition acts as a disciplining mechanism that reduces inefficiencies, our understanding of the implications for firms’ incentive design choices is still limited. We use a comprehensive new measure of competition and examine its effect on four major choices: CEO equity portfolio incentives, annual bonus plan incentives, choice of performance measures, and difficulty of financial performance targets. We find that competition reduces firm profits and total CEO compensation, including equity grants, which then also weakens portfolio incentives. Firms respond by adjusting annual bonus plans to restore incentives. Specifically, we find that competition goes together with stronger bonus plan incentives, more challenging annual performance targets, and a greater emphasis on long-term performance measures. Finally, we show that competition increases performance relative to annual bonus targets, which we interpret as evidence that CEOs work harder but get paid less in highly competitive environments. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M41; M52.

ABSTRACT We examine whether mandatory adoption of say on pay increases executives’ incentives to engage in insider trading to compensate for the negative impact of say on pay on the value of their explicit compensation packages. Our empirical design exploits the staggered adoption of say on pay laws across 14 countries over the 2000–2015 period. We find that mandatory adoption is associated with a material increase in insider trading profits, especially in firms where executive pay is most affected. The increase in insider trading profits is driven mostly by more frequent and larger profitable insider sales, consistent with executives’ desire to reduce their greater exposure to firm-specific risk while increasing their trading profits. Overall, our results highlight the importance of considering potential effects on insider trading incentives when designing compensation reforms and when assessing their effectiveness. Data Availability: All data used in the paper are available from cited public sources. JEL Classifications: G30; G34; G38; J33; K22; M12; M16.

ABSTRACT We argue that contracting with the federal government involves significant proprietary information cost due to regulations requiring contractors to provide proprietary information, which may become available to outsiders via Freedom of Information Act (FOIA) requests. We provide evidence by showing that firms become more willing to bid for government contracts after a recent Supreme Court ruling on FOIA (Food Marketing Institute v. Argus Leader Media) that improved information protection for contractors and that this effect strengthens when the contracts entail higher proprietary information cost for contractors. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: K4; M4.

ABSTRACT The wide-spread reporting of non-GAAP earnings suggests efficiency gains from doing so. By estimating a dynamic investment model, we examine the real implications of investors using both GAAP and non-GAAP earnings to value firms. When investors use the firm’s GAAP earnings only, the firm’s manager—who cares about current stock prices—underinvests, and his investment is sensitive to transitory earnings. Non-GAAP earnings can improve investment efficiency by adjusting for these transitory earnings, but can also hide inefficient investment by introducing opportunistic bias. Although non-GAAP earnings induce overinvestment, they dominate GAAP-only reporting. Counterfactual analysis reveals supplementing GAAP earnings with biased non-GAAP earnings increases firm value by 3.4 percent relative to GAAP-only reporting. Precluding bias reduces overinvestment and further increases firm value by 1 percent. Data Availability: Data are available from the sources cited in the text. JEL Classifications: E22; G31; G34; M40.

ABSTRACT We estimate the pay premium associated with CEO incentive compensation. Using explicit detailed U.S. CEO compensation contract data and simulation analysis, we find that CEOs with riskier pay packages receive a premium for pay at risk that represents 13.5 percent of total pay. The premium is positively correlated with proxies for CEO risk aversion, but implied risk aversion values suggest that the premium is economically smaller than suggested by prior studies. We perform our tests using a variety of proxies to measure the variance of pay and find consistent evidence of economically small pay risk premiums. These results are consistent with recent findings suggesting that risk may have a more limited influence over the level of pay than previously thought. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: D81; G30; J33.