Knowledge that Transforms

I study the effect of the implementation of the SEC’s EDGAR system on information asymmetry among investors. The SEC adopted EDGAR to decrease acquisition costs of mandatory filings. However, disclosure theory suggests that, even when acquisition costs are low, integration costs (i.e., costs necessary to filter and interpret information signals) may be so high that less sophisticated investors are disadvantaged, relative to their sophisticated peers. Consistent with this theory, I find evidence that EDGAR increased information asymmetries among investors. This result is more pronounced for firms with higher integration costs—i.e., those with more complex filings and filings that have higher information content—as well as for firms with lower analyst coverage. Overall, my results suggest that, although EDGAR lowered acquisition costs for all investors, it also benefited some investors at the expense of others. Data Availability: Data are available from the public sources cited in the text.

Regulators and researchers express concern about auditors who leave their firms for employment at their clients, due to lingering relationships which might represent a threat to audit quality. These relationships could negatively impact audit quality through undue influences of the client personnel on auditor judgment. We examine how these relationships influence novice auditors during evidence collection. Understanding the effects of alumni affiliation on evidence collection is important because undiscovered issues at this phase may go unaddressed, potentially hurting audit quality. Contrary to most research findings, we find that alumni affiliation can benefit the audit by increasing auditors’ evidence collection. However, we also find, when auditors become depleted, the benefits of alumni affiliation actually reverse, as auditors overrely on the relationship, leading them to prematurely cease evidence collection. These findings have implications for both practitioners and researchers. Data Availability: Data are available from the authors upon request.

Public corruption is a concern for democracies around the world. In the U.S., states have responded to this issue by publishing personal financial disclosures (PFDs) for public officials online. PFDs are a conflict-of-interest disclosure designed to relieve agency conflicts between private citizens and government officials by documenting overlaps between officials’ financial interests and public responsibilities. This paper explores whether and how online PFD supports anticorruption enforcement. I present a stylized model illustrating how online PFD leads investigators to increase case referral volume and quality. Empirically, I find that online PFD for local officials is associated with increased referral rates and greater likelihoods of prosecution conditional on referral. I conduct 126 field interviews of federal prosecutors, journalists, and ethics commissions to understand the mechanisms behind these results. I conclude that online PFD supports the enforcement of local corruption by reducing disclosure acquisition costs for enforcement agents.

We examine a comprehensive set of investigations by the SEC’s Division of Enforcement offices to provide evidence on the consequences of these office’s busyness on the formal investigation process. We find that higher office case backlog decreases the likelihood of an investigation into a restating firm. Our results show no evidence that higher backlogs affect the SEC’s ability to pursue cases involving revenue recognition issues and high insider trading, which is consistent with the agency’s stated priorities. But our findings indicate that busy SEC offices are less likely to pursue cases with the largest shareholder losses, which is inconsistent with SEC priorities. Backlog also impacts pursued investigations, leading to more prolonged investigations, a lower Accounting and Auditing Enforcement Releases likelihood, and smaller SEC penalties. Our evidence suggests that busyness undermines the SEC’s investigation process.

Under the Current Expected Credit Loss (CECL) model, banks should fully recognize expected lifetime credit losses upon loan origination while gradually recognizing interest revenues. This timelier recognition of losses versus gains (i.e., conditional conservatism) makes banks more capital constrained. To mitigate this, banks may (1) offset timelier credit losses by lowering conservatism in other earnings components and (2) reduce credit losses by demanding greater borrower conservatism. We find that, under CECL, banks increase conservatism in loan losses but decrease conservatism in other earnings components, making overall conservatism only marginally increase. In sharp contrast, their borrowers increase conservatism by 40 percent, and borrowers’ increase is twice that of banks. This substantial spillover effect suggests that, by greatly increasing borrowers’ conservatism, CECL may strengthen debt governance of a broad scope of firms in the economy, thereby having economy-wide consequences beyond the banking industry and potentially enhancing the stability of the entire economy. Data Availability: Data are publicly available from the sources identified in the study.

How prior trust moderates investor responses to restatements is unknown. We examine how societal trust affects the changes in institutional investors’ shareholdings around a restatement. We consider two competing hypotheses based on the erosion of trust and confirmatory bias. We find the change in institutional investors’ shareholdings around a restatement is more negative for investors from high trust areas compared to low trust areas, consistent with an erosion of trust where high trust institutional investors view the restatement as a violation of trust. Further analyses show that our findings vary with the regulatory or economic environment, type of institution, and type of restatement. Our results are also robust to different tests that address endogeneity and use alternative societal trust measures. Overall, we contribute to the literature by examining the role of societal trust in a dynamic setting where investors’ trust-based beliefs about the credibility of accounting information are not realized. Data Availability: GSS Sensitive Data Files are not available from the authors. Persons interested in obtaining these data should contact the GSS at [email protected]. Other data are available from the public sources cited in the text.

We investigate the effect of board gender diversity (BGD) on investment outcomes. We identify variation in BGD by compiling, for the first time, a global catalog of 83 BGD interventions implemented in 59 countries between 1999 and 2021. Using a staggered difference-in-differences research design, we document that BGD interventions improve investment outcomes. We find that treated firms reduce inefficient investment by 0.6 percent of total assets or 6.5 percent of total investment and are 4 percentage points more likely to have above-median investment efficiency. Cross-sectional tests reveal more pronounced results when BGD interventions are mandatory, are strongly enforced, and result in larger BGD increases. Event-time, stacked panel, and a wide variety of endogeneity-mitigating robustness tests corroborate. Our plausibly causal inferences have important implications for both research and practice.

Although daylight saving time (DST) is thought to provide economic benefits, extant research documents various adverse effects of DST adjustments. However, prior research provides little conclusive evidence about the effects of DST adjustments on capital market participants. We examine the effects of “spring forward” DST advances, which disrupt the human sleep cycle and economic activities, on investors’ processing of earnings news. We find a delayed price response to earnings news released during the first week following a DST advance. We also find that this effect is stronger among firms with investors who are more likely to be trading on earnings news and among firms with less sophisticated investors. Our findings contribute to research on the unintended consequences of DST adjustments and to the growing literature on intra-investor variation in disclosure processing costs. Our study may be of interest to legislators currently debating proposed legislation that would eliminate DST phasing. Data Availability: Data are available from the sources cited in the text.

We document time-varying interrelations between aggregate funding conditions and the impact of operating leverage (OL) on stock returns. OL represents a primitive source of risk, which helps explain the well established unconditional relation between OL and future returns. However, the outperformance of firms with high OL occurs exclusively during periods of unconstrained funding. Although high OL represents operational inflexibility, when the Fed eases funding constraints, improved capital availability mitigates this inflexibility. Consequently, investors bid up the prices of stocks with high OL when aggregate funding constraints are loosened to reflect their lower risk and greater expected performance in unconstrained periods. Data Availability: Data are available from the public sources cited in the text.

We examine how disclosure and manager reputation influence capital raised when there is no commercial substance underlying the investment. Special Purpose Acquisition Companies (SPACs or “blank check” companies) do not have operations or substantive assets at the IPO but promise to use the funds raised to acquire a private firm, generally within two years. Given the lack of commercial substance and historically poor ex post performance, it is unclear what SPACs disclose at the IPO and why investors invest. Although disclosure is important in traditional IPOs, the underlying information available differs for SPACs. Nonetheless, our evidence suggests disclosures are useful to SPAC investors, although differently than for traditional IPO investors. We also examine manager reputation and find prior SPAC or CEO experience and celebrity status are associated with funds raised. Even when an investment lacks commercial substance, disclosure and reputation are important for investing decisions. Data Availability: Data are available from the public sources cited in the text.