Knowledge that Transforms

Abstract We estimate investors’ disagreement regarding firm news and assess its ability to predict stock returns. Specifically, we quantify firm-level investor disagreement through the volume-volatility elasticity surrounding firm news; higher elasticity is associated with less investor disagreement. Intuitively, disagreement introduces additional trading motives that are not driven by price changes, weakening the connection between volume and volatility. Our findings indicate that investor disagreement on news negatively predicts cross-sectional returns. We also present empirical evidence aligned with the theoretical predictions of a recently developed model by Atmaz and Basak (Journal of Finance 73 (3): 1225–1279 2018) that the negative disagreement-stock relation strengthens when the optimism effect dominates the uncertainty effect. Importantly, this predictive relationship remains robust after controlling for news heterogeneity, other volume- and volatility-based measures, and alternative channels.

Abstract We study how global changes in information acquisition costs through disclosure technologies affect price informativeness. To explore this issue, we examine worldwide adoptions of centralized electronic disclosure systems, which significantly reduce the cost of and broaden access to financial disclosures. Consistent with theory, we show a significant reduction in private information acquisition around earnings announcements as a result of these adoptions. These effects are most pronounced in countries with the most substantial reductions in information acquisition costs and where we find more significant decreases in informed trade. Overall, we highlight an important, unintended cost of broadening access to financial disclosures through technology adoptions.

Abstract We study the role of CFO narcissism in the intent and ability to positively influence sell-side analysts’ perceptions of the firm. Consistent with narcissists casting favorable impressions on others, we find CFO narcissism is associated with overly optimistic analyst valuations. We then study public persuasion attempts by analyzing conference call transcripts and private persuasion attempts through a laboratory study. In the conference call setting, we show that narcissistic CFOs use more persuasive language and are more inclined to call on bearish analysts, both of which we link to price target revisions following the call. In the lab study, we simulate a one-on-one conversation and find that narcissists are especially more likely to use coercive methods to induce higher valuations from analysts. Collectively, we show that narcissistic CFOs use persuasion to favorably influence analysts’ perceptions of firm value.

Abstract We provide a comprehensive overview of accounting-related regulatory changes (financial accounting, auditing, tax, and other disclosures) in the 27 European Union countries and the United Kingdom since 1993 based on an extensive literature review, survey, and topic and country expert input. Across all countries and years, we find that more than 16 regulatory events occur in a typical difference-in-differences research design that includes pre- and post-periods of four years. On average 3.4 out of four accounting disciplines are affected, emphasizing the need for interdisciplinary awareness. Our accompanying website ( http://www.eu-regulations.com ) offers visual representations of these events, regulation summaries, literature links, and source documents, all by country. This work aims to (1) lower the cost for researchers, reviewers, and editors to understand the EU’s evolving regulatory landscape; (2) improve research designs by identifying concurrent regulatory events; and (3) highlight research opportunities for those studying the EU or specific member states.

Abstract This study examines the consequences of tax key audit matters (KAMs) to the valuation of tax attributes and to auditor-provided tax services (APTS). The literature finds that KAM adoption is not associated with investor or audit outcomes, creating an impetus to identify whether specific KAM topics are more consequential. Tax KAMs are an ideal setting because they are prevalent, taxes are economically important, and auditors can provide tax services to their clients. We find that investors discount the tax avoidance and deferred tax assets of tax-KAM companies, suggesting an incentive for managers to avoid tax KAMs. Consistent with self-interest threats to auditor independence, we find that receiving a tax KAM is negatively associated with clients’ concurrent purchases of APTS, but that clients increase their future purchases of these services when they stop receiving tax KAMs. These results reveal novel consequences of tax KAMs to the valuation of companies’ tax attributes and to APTS incentives.

Abstract We identify a novel force behind the benefit of misaligned preferences in corporate governance. Our model entails a CEO who encounters a project and, after gathering information, decides whether to seek the approval of a corporate board. The CEO may be able to choose the properties of the collected information—this may happen if the project is “novel,” i.e., explores a new technology, business concept, or market and directors are less knowledgeable about it. We find that only sufficiently conservative and expansion-cautious directors can discipline the CEO’s empire-building tendency and opportunistic information collection. Such directors, however, underinvest in projects that are not novel. The board that maximizes firm value is either conservative or neutral (has interests aligned with the shareholders) and always overinvests in innovations. Boards with greater expertise are more likely to be conservative, but their bias is less severe. The board’s commitment power and bias are substitutes.

Abstract We examine how the development of voluntary sustainability standards has affected the nature of information covered in earnings calls. Using industry-specific dictionaries of sustainability terms contained in the disclosure standards developed by the Sustainability Accounting Standards Board (SASB), we find an increase in coverage of sustainability topics identified as relevant to investors in SASB standards, particularly for companies that had little or no coverage of sustainability issues historically. This trend begins around the time when SASB released a provisional standard for a given company’s industry and continues in the years afterward. We also find a stronger effect of SASB standards on conference call content for companies operating in industries with greater ex ante uncertainty about which sustainability topics are more likely to be financially material. Overall, our paper provides timely evidence as jurisdictions around the world consider whether to support sustainability reporting in their capital markets and, if so, how.

Abstract Market participants have called on the SEC to address the lack of disclosures about firms’ environmental impacts, investments, and exposures. However, the frictions that obstruct the flow of environmental information are not well understood. I shed light on these frictions by examining whether scrutiny by the Environmental Protection Agency (EPA) restricts the firm’s voluntary environmental disclosures in earnings conference calls. Consistent with the notion that EPA scrutiny gives rise to disclosure frictions, I find a negative relation between EPA scrutiny and the environmental disclosures of scrutinized firms. This negative relation is concentrated among firms without environmental expert directors, suggesting that environmental governance mitigates the chilling effect of EPA scrutiny. In terms of disclosure quality, I show that environmental disclosures include fewer quantitative details under EPA scrutiny. Collectively, these findings provide insights into the frictions that restrict the flow of environmental information to market participants, an important issue given the SEC’s efforts to improve current disclosure practices.

Using a novel measure that captures negative ESG incidents at both listed and private suppliers, we provide large-scale evidence on the value implications of supply chain ESG. We find that firms with fewer supply chain ESG incidents exhibit higher future accounting performance and that this effect is stronger in the presence of more conscious customers and vulnerable supply chains. We also find that firms with robust supply chain ESG exhibit higher future stock returns and that this effect is more pronounced when information frictions are higher, which suggests that it takes time for the market to understand the value implications of supply chain ESG. Overall, we highlight the benefits of managing supply chain ESG and the decision usefulness of the related information.