Knowledge that Transforms

We document a growing disparity in earnings disclosure mechanisms. Firms are increasingly disclosing earnings announcements (EA) concurrently with the 10-K filing instead of first issuing a ‘stand-alone’ EA. Firm adoption of concurrent EA/10-Ks is associated with lower investor sophistication, greater impediments to producing timely and reliable earnings information, and greater industry-level concurrent reporting. Concurrent EA/10-Ks differ from stand-alone EAs in that investors anticipate more information in the EA, disclosures are preempted by industry peer EAs, the market reaction is muted even when controlling for EA timing, and post-earnings-announcement drift is greater.

We examine how firms' accounting quality affects their reaction to monetary policy. The balance sheet channel of monetary policy predicts that the quality of firms' accounting reports plays a role in transmitting monetary policy by affecting information asymmetries between firms and capital providers. Consistent with this prediction, we find that accounting quality moderates firms' equity market response and future investment sensitivity to unexpected changes in monetary policy. Moreover, the former relation is amplified for firms with more growth opportunities and more financial constraints, further consistent with accounting quality moderating the transmission of monetary policy.

In state owned enterprises (SOEs), taxes are a dividend to the controlling shareholder, the state, but a cost to other shareholders. We examine publicly traded firms in China and find significantly lower tax avoidance by SOEs relative to non-SOEs. The differences are pronounced for locally versus centrally-owned SOEs and during the year of SOE term performance evaluations. We link our results to managerial incentives through promotion tests, finding that higher SOE tax rates are associated with higher promotion frequencies of SOE managers. Our results suggest managerial incentives and tax reporting are conditional on the ownership structure of the firm.

We explore the governance effect of short-selling threat on mergers and acquisitions (M&A). We use equity lending supply (LS) to proxy for the threat, as short sellers incentives to scrutinize a firm depend on the availability of borrowing shares. Our results show that acquirers with higher LS have higher announcement returns. The effect is stronger when acquirers are more likely to be targets of subsequent hostile takeovers and when their managers wealth is more linked to stock prices. We conduct four sets of tests to mitigate endogeneity concerns. Finally, the governance effect exists only for deals prone to agency problems.

Despite evidence that tax surprise is incrementally value relevant, the literature has done little to broaden the investigation beyond the United States or examine circumstances that affect informativeness. After extending to the international setting, I examine the impact of tax enforcement. I report strong results of greater value relevance when tax enforcement is high and that the value relevance of tax surprise is mostly contained within its interaction with tax enforcement. These findings highlight the importance of tax enforcement in determining the information content of tax surprise and suggest that extant and future discussions should be broadened to include it.

This study examines the relation between financial institutions’ corporate culture and the quality of analysts’ research services. Using data collected from the Financial Industry Regulatory Authority, I measure the weakness of financial institutions’ corporate culture based on violations observed in securities activities unrelated to equity research. I find evidence demonstrating an association between weak corporate culture and analysts’ providing research products catered to institutional clients at the expense of individual investors. Specifically, FINRA violations are associated with both (i) less accurate forecasts and less informative reports, and (ii) higher institutional commission revenues and more broker-hosted conferences for select institutional clients.

We develop new distribution discontinuity tests conditional on multiple explanatory variables for analyzing meet-or-just-beat behavior around benchmarks. These tests combine Burgstahler and Dichev's (1997) meet-or-just-beat intuition with a flexible statistical model that addresses important limitations of the existing tests. Our method considerably outperforms logit-based tests of distribution discontinuity determinants and changes the interpretation of a major finding in the earnings discontinuity literature. As a secondary benefit, it also has slightly higher statistical power than histogram-based tests of distribution discontinuity existence. Our method is robust, easy to implement using our publicly available Stata command, and could benefit researchers in many fields.

Higher accruals are associated with lower subsequent earnings. We show this phenomenon can be explained by the way sales, profits, and working capital respond to changes in a firm's product markets. Empirically, high accruals predict high subsequent sales growth but a long-lasting drop in both profits and profitability. Accruals also predict an increase in future competition, suggesting that accruals are correlated with abnormally high—and, in equilibrium, transitory—true profitability that attracts new entrants to the industry. Overall, the predictive power of accruals is better explained by product-market effects than by measurement error in accruals or diminishing returns from investment.

We examine the effect of voluntary adoption of clawback provisions on non-GAAP earnings disclosures. Prior literature documents that voluntary clawback adoption improves financial reporting quality by increasing the costs of misstating GAAP earnings. However, managers may respond to perceptions of reduced discretion over GAAP reporting by increasing their reliance on non-GAAP earnings disclosures. Using a propensity score matched sample, we find that non-GAAP earnings disclosure frequency increases and non-GAAP exclusion quality decreases after clawback adoption, consistent with a more opportunistic use of non-GAAP reporting. Additional cross-sectional tests help support this interpretation.

Investor relations officers (IROs) play a central role in corporate communications with Wall Street. We survey 610 IROs at U.S. public companies and conduct 14 follow-up interviews to deepen our understanding of the role of IROs in corporate disclosure events. Three important themes emerge from our results: (i) the value, nature, and timing of private communication between IROs, analysts, and investors; (ii) the significant influence IROs have on corporate disclosures; and (iii) the degree of “theater” involved in public earnings conference calls, even the Q&A portion. We provide insights into the investor relations, analyst, institutional investor, and disclosure literatures.