Knowledge that Transforms

We use experimental markets to examine how pushing investment information and the value relevance of that information interact to influence investors’ value estimate accuracy and market price efficiency. Developments in technology allow information to be pushed to investors anytime and anywhere. However, in addition to value‐relevant information, pushed information often includes information that is irrelevant for assessing firm value. Drawing on psychology theory, we find that pushing information has divergent effects depending on the value relevance of the information. Pushing only value‐relevant information increases investors’ processing of the information and leads to more accurate value estimates and market prices than when not pushed. In contrast, pushing a mix of value‐relevant and value‐irrelevant information reduces investors’ processing of value‐relevant information, leading to less accurate value estimates and market prices due to poorer acquisition and integration of information than when not pushed or when only value‐relevant information is pushed. Collectively, our results reveal a dark side to push technologies, particularly with the growing presence of value‐irrelevant information.

By linking sell‐side equity analysts to their deed records and LinkedIn profiles, I show that analysts with higher exposure to negative wealth shocks issue more pessimistic and less accurate forecasts. The effects are stronger when analysts have higher leverage in their homes and face career concerns. I also find that stocks recommended by exposed analysts underperform those of nonexposed counterparts, by an amount that is significant and economically large in magnitude. The results remain robust to unobserved skill differences, the potential endogeneity of housing prices, the self‐selection of analysts into neighborhoods with certain traits, and placebo tests where housing wealth shocks are randomized across analysts. Collectively, this study provides new evidence on if and how personal wealth shocks impact analysts' work productivity and forecast behavior.

This study uses a controlled experiment to examine the trade‐off between managers’ use of non‐GAAP and GAAP earnings to satisfy market expectations and how this relationship can be moderated by both formal and informal regulatory attention to non‐GAAP earnings. Our key takeaway is that allowing financial reporting discretion in an alternative disclosure channel, that is, non‐GAAP earnings, can reduce firms’ opportunistic GAAP reporting. However, statements by regulators about increased attention to non‐GAAP earnings constrain this channel, and this can result in more aggressive GAAP earnings management and reduced GAAP earnings quality. We triangulate these findings with a survey and archival analyses and find results that are consistent with this primary message. Our study provides evidence relevant to standard setters and regulators that non‐GAAP measures may serve an important role even if they can be used opportunistically.

I develop a theory to study the consequences of providing more detailed information to rationally inattentive investors. I first consider a simple data‐provision problem and show that adding more data or detail in financial statements can make it more difficult for investors to extract information. Consequently, investors who have limited information‐processing capacity may prefer less detailed information. I also show that when investors' decisions are complements, providing details in addition to a summary may reduce investors' welfare. More specifically, because of increased disclosure of details, a coordination failure could occur in investors' attention‐allocation decisions. By showing that adding more detail in financial statements can lead to an information overload problem for investors, this study yields valuable insights for accounting standard setters.

This paper finds that the disclosure of supervisory actions by bank regulators is associated with changes in their enforcement behavior. Using a novel sample of enforcement decisions and orders (EDOs) and a change in the disclosure regime, we find that regulators issue more EDOs, intervene sooner, and rely more on publicly observable signals following the regime change. EDO documents become longer, more complex, and contain more boilerplate language. Our results also indicate that intervention happens sooner and more frequently in counties with higher news circulation, which suggests that regulators take into account the public perception of their actions. We evaluate potentially confounding factors, including the savings and loan (S&L) crisis and competition from thrifts, and find robust results. We also study bank outcomes and document that uninsured deposits decline at EDO banks in the disclosure regime, especially for those covered in the news. Finally, we observe that bank failure accelerates despite improvements in capital ratios and asset quality. Overall, our research provides new insights on the disclosure of regulatory actions.

Firm life‐cycle stage reflects a firm's current strategic direction toward exploration independent of age or size. We provide evidence that young life‐cycle firms are particularly vulnerable to negative innovation consequences from financial regulation but do not appear to experience any compensating financial reporting quality (FRQ) benefits. Using a generalized difference‐in‐differences design around Sarbanes Oxley Act of 2002 (SOX), we document a significant reduction in both research and development (R&D) spending and innovation outputs for young life‐cycle stage firms after regulation. Declines in innovation manifest both from the diversion of scarce resources and from the imposition of an organizational culture mismatched to the pursuit of explorative innovation, resulting in a less generalizable and less diversified patent portfolio. However, we find no evidence that improvements to FRQ materialize to offset these costs. Event study analyses suggest that this negative impact was expected by market participants, and postregulation returns confirm this expectation.

We examine the relation between a measure of managers’ physical display—body expansiveness—and favorable reporting practices (in firm forecasts and valuation information) and performance (survival and funding success). We videotape 154 entrepreneurs pitching their business ideas, and use computer vision software to obtain information about speakers’ movements. We show that physical expansiveness correlates with higher forecast errors and proposed firm valuations and lower survival rates yet higher likelihood of funding success. We argue that investors may incorrectly interpret nonverbal communication in their assessments of entrepreneurs and propose a behavioral explanation. We further corroborate the proposed mechanism by studying investor perceptions of entrepreneurs’ personal characteristics. Overall, we shed light on an overlooked source of information—nonverbal behavior—and relate it to firm forecasting, valuation, survival, and financing success, which are important factors in the assessment of investment opportunities, deal structure, and monitoring.

We provide evidence that the documented weakening of the accrual–cash flow association results not from a loss of accrual accounting usefulness per se, but from the deviation from accrual accounting as it relates to intangible investments. More specifically, the weakening of the negative association is driven by the combined effects of (1) increasing intangible investments, (2) the practice of expensing rather than capitalizing intangible investments, and (3) scaling accruals and cash flows by book value of assets, which are understated for intangible‐intensive firms. Treating intangible expenditures as capitalized investments and scaling accruals and cash flows by market value of equity, which reflects the value of intangible investments, (1) substantially strengthens the negative association between accruals and cash flows and (2) practically eliminates the apparent weakening trend in the association.

I examine the effects of occupational licensing on the quality of certified public accountants (CPAs). I exploit the staggered adoption of the 150‐hour rule, which increases the educational requirements for a CPA license. The analysis shows that the rule decreases the number of entrants into the profession, reducing both low‐ and high‐quality candidates. Labor market proxies for quality find no difference between 150‐hour rule CPAs and the rest. Moreover, rule CPAs exit public accounting at similar rates and have comparable writing quality to their nonrule counterparts. Overall, these findings are consistent with the theoretical argument that increases in licensing requirements restrict the supply of entrants and do little to improve quality in the labor market.

We examine whether investors consider foreign component auditors when assessing the value of U.S. multinational corporations (MNCs) using two sets of Public Company Accounting Oversight Board (PCAOB) international regulatory events. We find investors react negatively when the PCAOB is denied access to inspect foreign component auditors in jurisdictions where a U.S. MNC has significant operations and positively when those countries later allow inspection. For foreign component auditors that are inspected, we find investors react positively when they receive clean inspection reports and negatively when they fail to remediate quality control deficiencies. Consistent with PCAOB international oversight providing additional assurance about foreign component auditor quality, our collective results indicate investors consider foreign component auditors when valuing U.S. MNCs.