This study investigates whether MD&A disclosures have predictive ability for future firm performance in cases of disproportionate inventory increases. Using a sample of 568 manufacturing firms with disproportionate inventory increases, I find that the favorability of explanations for inventory changes in MD&A is positively associated with a firm’s profitability and sales growth in the subsequent three years. I also find that future profitability and sales growth of firms that do not explain disproportionate inventory increases in MD&A fall between those of firms with favorable explanations and firms with unfavorable explanations. These results suggest that the existence and the favorability of MD&A inventory disclosures help users interpret disproportionate inventory increases and predict future firm performance.

This study investigates whether extensive disclosure reduces managerial expropriation of corporate resources by examining the potential effects of enhanced reporting on the values of cash assets and investment ventures, respectively. We uncover evidence that liquid asset holdings are valued at a discount by firms with fewer disclosure practices than their more transparent counterparts. Moreover, disclosure activity substantially improves the value of cash assets in excess of requirements for operations and investment. These findings suggest that detailed reporting facilitates the scrutiny and discipline of capital markets, thus preventing the diversion of cash reserves. In further support of the disciplinary power of greater disclosure, we find that value-destroying projects, through internal capital investment and external acquisitions, are concentrated in firms adopting opaque disclosure policies. Collectively, our results support the premise that extensive disclosure impairs insiders' abilities to utilize corporate resources in a self-serving manner. Data Availability: Data are available from public sources indicated in the text..

We study voluntary cost disclosure by duopoly firms when they can invest in a cost-reduction technology, i.e., when their private cost is endogenously determined. We find that, contrary to most of the literature, firms disclose their endogenous cost information regardless of the type of competition. The underlying mechanisms and welfare implications, however, are different. Under Bertrand competition, cost disclosure helps a firm avoid aggressive investment in cost reduction to coordinate actions to the mutual advantage of the duopoly firms. Under Cournot competition, disclosing cost information enables a firm to show a hardened stance toward the competing firm. Although firms gain from their disclosure decisions under Bertrand competition, their disclosure decisions under Cournot competition place them in a prisoner’s dilemma, as both firms would be better off if they chose not to disclose their information. Consequently, consumers may lose under Bertrand competition but gain under Cournot competition.

Our goal is to understand the extent to which cash-flow properties explain accruals. Using the Dechow, Kothari, and Watts (1998) model, we derive a negative relation between accruals and cash-flow changes, and show that the strength of the relation is linked to negative serial correlation in cash-flow changes. Dechow et al. (1998) also suggest that the strength of the relation between accruals and revenue changes relates to operating cycle length. Prior accrual models have not incorporated these theoretical relations. We show that incorporating cash-flow changes, serial correlation in cash-flow changes, and operating cycle length increases explanatory power of all accrual models considered (i.e., Jones 1991; Ball and Shivakumar 2006; McNichols 2002; Jeter and Shivakumar 1999). We find that incorporating these variables in accrual models also improves specification and power, aids detection of earnings management in AAER firms, and produces a nondiscretionary accrual estimate that better predicts future cash flows and earnings. These results suggest the importance of considering the economic role of accruals when predicting accruals.

Facing pressure to meet short-term earnings expectations, corporate managers often take actions that are perceived as value-destroying. Our study provides empirical evidence supporting an alternative view: earnings pressure can discipline managers to undertake value-enhancing actions by refocusing on the firm’s core products. Consistent with this product refocus hypothesis, we find that firms under earnings pressure reduce investment in non-core products, leading to the subsequent underperformance of these non-core products, whereas the performance of core products remains unaffected. As predicted, product refocus is stronger when managers exhibit ex ante high-level agency problems. To strengthen identification, we exploit shocks arising from analyst brokerage mergers and closures. Our study suggests a bright side of earnings pressure—it helps reduce agency-motivated product diversification.

Following securities law violations, regulators can require firms to hire a corporate monitor to implement reforms that limit future misconduct and protect investors. We examine the determinants of including a corporate monitor as equitable relief in an enforcement action, as well as their effectiveness in promoting positive change at a firm. Using a structural equation model that jointly determines monetary and nonmonetary sanctions, we find that monitor assignments are related to the nature of the offense, violation severity, and investor harm. We also find that monitors with targeted accounting oversight responsibilities are associated with improved corporate culture, a higher likelihood of financial restatements during their tenure, and enhanced financial reporting credibility at the firms they oversee relative to enforcement firms without such monitors. Although corporate monitors can foster positive change, their impact depends on the scope of their responsibilities. Data Availability: Data are available from the public sources cited in the text.

This study investigates the role of employment policies in reducing internal control ineffectiveness and financial restatements. We provide new evidence that employee treatment policies are an important predictor of ineffective internal control. We also find that employee-friendly policies significantly reduce the propensity for employee-related material weaknesses. These results suggest that greater employee benefits facilitate the acquisition, development, and motivation of the workforce and ameliorate the loss of valuable human capital, thereby mitigating employee failures to implement internal control tasks properly. Moreover, we document novel results that financial restatements, especially those caused by unintentional errors, are less likely to arise in firms that invest more in employee benefits. Collectively, our emphasis on the effect of employee treatment policies on the integrity of internal control and financial reporting distinguishes our paper from previous studies that focus on the role of top executives in accounting practices. Data Availability: Data are available from public sources indicated in the text.