Knowledge that Transforms

We examine the real effects of lease-capitalization rules (i.e., standards that require firms to capitalize finance leases) on corporate investment. We show that the introduction of these rules leads to a decrease in investment, which is more pronounced for firms with high reliance on leases. We posit and find that lease capitalization affects investment via a learning channel and a contracting channel. Regarding the first channel, we argue that managers identify areas of overinvestment and activities that should be discontinued or downsized because of the information they collect and analyze to comply with lease-capitalization rules. Accordingly, we find that the effect of lease capitalization is stronger when learning opportunities are higher. Regarding the second channel, we argue that lease capitalization affects investment via its effect on contracts. Accordingly, we document an increase in the likelihood of covenant breaches and a stronger decline in investment for financially constrained firms.

Fundamental to the accounting literature is that firms’ stock prices relate positively to their earnings news. We examine a setting where investors may be unsure to which firm the announced earnings accrue: earnings announced by acquisition targets between the announcement and completion of the acquisition. We find targets’ stock prices relate positively to their unexpected earnings during this interim period but only for unsuccessful M&A deals. For completed deals, we fail to find that targets’ or acquirers’ stock prices respond to targets’ unexpected interim earnings at the time of announcement. However, we find that targets’ interim earnings predict future returns of the combined firm following deal completion. A trading strategy based on targets’ interim earnings produces economically significant annualized abnormal returns of 7.25 percent. Our findings suggest investors respond inefficiently to the earnings that targets announce between the announcement and completion of acquisitions. Data Availability: Data are available from the public sources cited in the text.

Using data on the registration of clinical trials and the disclosure of trial results, we examine how firms respond to peer disclosures. We find that firms are less likely to disclose their own trial results if the results of a larger number of closely related trials are disclosed by their peers. This relation is stronger if the firms face higher competition (as measured by the number of competing trials). It is weaker if the firms are further along in their research than the peers (as measured by the trials’ phase) and if the peers’ disclosures convey more negative news (as measured by the firms’ stock price reaction). We also find that firms are more likely to abandon ongoing trials if a larger number of peers disclose the results of closely related trials. Additional tests suggest that this real effects channel does not drive the impact on the firms’ disclosure decisions. Data Availability: Data are available from the public sources cited in the text.

We investigate managers’ propensity to engage in strategic promotion behavior. Strategic promotion behavior occurs when managers pursue personal economic interests when contributing to employee promotion decisions, such that the probability that relatively lower performing employees are selected for a promotion is increased. We develop theory about how two important organizational characteristics—transparency about individual performance levels and the presence of group incentives—jointly affect managers’ tendency to strategically influence promotion decisions. Using a stylized lab experiment, we find that transparency about individual performance levels decreases strategic promotion behavior when group incentives are absent but not when group incentives are present. We discuss how our findings contribute to our understanding of management accounting and control systems.

Policies and procedures that centralize decision making within an audit firm create auditor style effects. Prior research suggests this style increases financial-statement comparability, implicitly making financial statements more useful. However, a potential hazard of auditor style is the propagation of decision errors. We examine the association between auditor style and common disclosure issues among audit clients. We measure auditor style as the presence of a common auditor and use comments given in the Securities and Exchange Commission’s (SEC’s) filing-review process to measure the occurrence of common disclosure issues. We find that auditor style is associated with common disclosure issues among Big 4 clientele. We also find that clients with the same auditor converge in issues as tenure increases and some evidence that clients assume the issues of a subsequent auditor. These results provide the first evidence that auditor style has potential costs in the form of common disclosure issues. Data Availability: All data are publicly available.

We study whether firms avoid financial disclosures to preserve their owners' financial privacy. We find that firms named after their owner, for whom firm disclosure would more directly expose owner information, are more opaque. Eponymous owners prefer firm opacity when disclosure exposes sensitive owner information with social stigma, in rural and anticapitalist areas, and in insider-oriented settings with high secrecy and distrust. When firms are forced to disclose, eponymous owners more frequently change their firms' names, and new firms are less frequently named after their founding owners. These findings indicate that owner-level privacy concerns dampen firm-level disclosure incentives. Data Availability: The data used in this study are available from public sources listed in the paper.

In this paper, I develop a measure of the difference in the amount of information that investors expect a forthcoming disclosure to contain should it reveal good news versus bad news (the disclosure’s “asymmetry”). To do so, I first show that this asymmetry is linked to the skewness of returns that the disclosure creates. I then show that this skewness can be measured using a weighted change in option-implied return skewness leading up to the disclosure’s release. The measure’s ability to capture investors’ prior beliefs regarding asymmetry is advantageous when studying ex ante decisions including contracting and information acquisition choices. I implement it on a sample of large firms’ quarterly earnings announcements, finding evidence that investors anticipate cross-sectional but not time-series variation in earnings’ asymmetry.

We study whether and how banks’ social performance affects depositors, who hold demandable debt with pervasive government protection. Exploiting the regulatory releases of bank performance ratings for community development and a difference-in-differences design, we find a decline in deposit growth after the release of negative bank social performance. In addition, deposits that are impacted by the negative events flow to nearby banks with high social performance. Further analyses find that the results hold similarly among insured and uninsured deposits and are primarily driven by banks with a large proportion of deposits from high-trust and pro-social counties, and in poor information environments. Overall, we contribute to the literature by documenting the importance of social performance to nonshareholder stakeholders and providing implications for bank stability.

Following management theory on organizational legitimacy, we predict that managers mimic the accounting of industry-leading companies to gain legitimacy. Such demand for legitimacy is expected to be greater for new managers because stakeholders are more uncertain about the managers’ ability. Using a sample of CEO turnovers, we find that a firm increases financial statement comparability with industry leaders after the new CEO assumes office. This relation is stronger when (1) new managers lack executive experience at larger firms, are younger, or belong to an underrepresented group (i.e., are female or nonwhite); (2) networks that facilitate imitation are more intense, such as when firms and peers are located in the same metropolitan statistical area (MSA) and when they share auditors or blockholders; and (3) firms’ operating environments are more volatile. These findings support the idea that CEOs’ demand for legitimacy leads to more comparable accounting. Data Availability: Data are available from the public sources cited in the text.

We study the influence of bank competition on U.S. public borrowers’ accounting conservatism by exploiting the staggered adoption of the Riegle-Neal Interstate Banking and Branching Efficiency Act (IBBEA) of 1994, which increased the threats of new bank entrants and actual bank entry. We find that borrowers’ conditional conservatism fell after IBBEA. Conservatism fell more for firms located in states with weak incumbent banks and states with more out-of-state entrants, especially entrants with better monitoring technologies. The decrease in conservatism partially stems from borrowers’ increased investment and risk-taking incentives. Conservatism fell more for firms relying more on bank loans, especially those that borrowed loans for the first time after IBBEA and for firms having lower dedicated institutional ownership and board independence. We also find that loans included fewer covenants and that bank loan borrowers became less likely to choose Big N auditors and industry specialist auditors after IBBEA. Data Availability: Data are available from the public sources cited in the text.