Analysts are recognized for their expertise in predicting industry growth, yet little is known about whether CEOs learn from analysts’ insights to guide investment decisions. Focusing on conglomerates where CEOs are underinformed about segment growth opportunities, we find that CEOs learn industry insights from analysts to adjust internal capital allocation. The extent of learning increases when analysts have closer proximity to CEOs or expertise in segments where CEOs face larger internal knowledge gaps. CEOs likely learn from analysts through private communications, as the insights learned are not yet publicly available, difficult to replace with other sources, and persistently impactful for firms. CEOs also exploit conference calls as another way to learn from analysts. As a result, learning analysts’ insights enhances firm value. We employ brokerage mergers/closures as a quasi-experiment to address endogeneity concerns. Overall, our study provides novel evidence on a learning channel through which analysts add value to firms.

In this paper, we investigate the stock market valuation of the intangible asset created by selling, general, and administrative (SG&A) expenditure. Although GAAP requires immediate expensing of SG&A, prior studies show that current SG&A generates future economic benefits, suggesting that it creates an intangible asset. We find that the contemporaneous stock market seems to recognize some of the intangible asset value implicit in SG&A. Positive subsequent returns can be earned in firms with a high SG&A intangible asset value. These excess returns are more likely due to investor mispricing than to risk compensation. Furthermore, we find that both analysts' long-term growth forecast revisions and one-year-ahead forecast errors are positively associated with the future value created by current SG&A, indicating that analysts partially incorporate the intangible SG&A asset value into their forecasts. Overall, the evidence suggests that the capital market only partially recognizes the intangible asset value created by SG&A expenditure.

Despite regulators’ allegations that digital technology giants misuse their market power to earn abnormal profits, there is a dearth of systematic work on (1) whether digital-tech firms in general, and tech giants in particular, earn excess profits or (2) whether their abnormal profitability, if any, is due to market power. We use two alternative measures of economic profitability in addition to accounting rate of return (ARR): internal rate of return (IRR), which equates current investments to their long-term payback, and return on invested capital (ROIC), whose numerator (profits) and denominator (invested capital) are adjusted for capitalized intangibles. Inferences based on IRRs differ from those based on ARRs and ROICs. IRRs show that the digital-tech sector is now the best-performing sector, and its gap between profitability and cost of capital has increased over time. We are unable to separate the contribution of market power and innovation to digital tech’s high IRRs.

We document that textual discussions in a sample of 363,952 analyst reports provide information to investors beyond that in the contemporaneously released earnings forecasts, stock recommendations, and target prices, and also assist investors in interpreting these signals. Cross-sectionally, we find that investors react more strongly to negative than to positive text, suggesting that analysts are especially important in propagating bad news. Additional evidence indicates that analyst report text is more useful when it places more emphasis on nonfinancial topics, is written more assertively and concisely, and when the perceived validity of other information signals in the same report is low. Finally, analyst report text is shown to have predictive value for future earnings growth in the subsequent five years.

Sell-side analysts employ different benchmarks when defining their recommendations. A buy for some brokers means the stock is expected to outperform its industry, while for other brokers, it means the stock is expected to outperform the market or some return threshold. We show that these stated benchmarks have implications for the distribution of recommendations, price reactions to recommendations, and the investment value of recommendations. We conclude that, depending on the question, academics may need to account for the benchmarks when studying analysts' outputs, and investors may find the benchmarks beneficial in interpreting analysts' advice.

This study focuses on the relation between current compensation and past performance measures as signals of a chief executive officer's (CEO's) ability. We develop a simple two-period principal-agent model with moral hazard and adverse selection and test theoretical predictions using CEO compensation data from 1993–2006. Consistent with the predictions, we find that salary (bonus) is positively (negatively) associated with past performance for both continuing and newly hired CEOs. We also find that while current salary is positively associated with future performance, current bonus is not. As the model suggests, salary is adjusted to meet the reservation utility and information rent, and is positively correlated over time to reflect ability. Bonus serves to address moral hazard and adverse selection by separating high-ability agents into riskier contracts. Our results indicate that it is important to disaggregate cash compensation into salary and bonus components to understand the dynamic interaction between incentives and performance. Data Availability: Data are available from public sources indicated in the text.

We examine the information role of accounting disclosures on warranties, utilizing a database that became available due to the requirements of FIN 45. First, because firms use warranty policies as a business strategy to promote their products, a warranty reserve can serve two roles: an information signal regarding product quality, as well as a contingent liability. Consistent with this view, we find that the stock market recognizes that: (1) the warranty reserve contains information about firms’ future performance, and (2) the reserve is a liability. Second, because warranty accruals require estimation of future claims, they can be used as a tool of earnings management. Our evidence indicates that managers use warranty accruals to manage earnings opportunistically to meet earnings targets. Finally, we find that the stock market recognizes the understatement of warranty liabilities of firms that managed earnings.

Audit firms have invested significantly in data analytics (DA). However, evidence shows that auditors are often reluctant to rely on DA. A major auditor concern is that inspectors will second-guess the audit evidence gathered using DA. Drawing on psychology research, we examine how the effect of inspection risk on auditors' reliance on DA is moderated by a fixed mindset (a belief that one's ability is fixed) versus a growth mindset (a belief that one's ability is malleable). In an experiment with Big 4 auditors as participants, we find that, relative to low inspection risk, high inspection risk reduces auditors' reliance on DA when auditors are prompted to adopt a fixed mindset but increases it when auditors are prompted to adopt a growth mindset. Our findings contribute to auditing literature on DA, inspection risk, and mindsets, and have implications for auditors, audit firms, and regulators.