Knowledge that Transforms

Firms led by older CEOs invest less, but the mechanism behind this age–investment gradient remains unclear. We study how CEO age shapes investment evaluation by eliciting CEOs' ratings of a project's investment attractiveness in a large-scale scenario-based experiment with more than 3700 CEOs from owner-managed Danish firms. Our design provides direct evidence on CEOs' investment evaluations by separating baseline differences in investment attractiveness from sensitivity to risk moments and payout horizon. Each CEO evaluates randomized capital-budgeting scenarios relative to the status quo, allowing us to distinguish a baseline shift in willingness to view projects as compelling from age differences in responsiveness to risk characteristics and payout horizon. We document a pronounced negative association between CEO age and investment attractiveness. Holding expected IRR, variance, skewness, and payout horizon constant, CEOs aged 60 or older rate the same opportunities as less attractive, while age differences in sensitivity to these attributes are weak. Standard stated risk attitudes and a lottery measure show no systematic age pattern. For external validity, we construct a CEO-specific inaction propensity from the experiment—the residual tendency to rate otherwise identical projects as less attractive after accounting for project characteristics—and show that it predicts lower investment in administrative data. Including this measure attenuates the reduced-form age–investment association, suggesting that age-related investment declines are not readily explained by conventional risk preferences or investment horizons alone, but also reflect a broader residual tendency towards lower investment propensity.

We study monopolistic certification in markets where sellers possess partial private information about product quality. A certifier can provide information through two channels: screening sellers’ private information (soft information) and acquiring new quality data (hard information). We prove that any certification menu achieving less than maximal screening is Pareto dominated by one with full screening. Among Pareto-efficient menus, the certifier’s profit-maximising menu provides maximal soft information while restricting hard information provision. The two channels diverge because screening creates value the certifier can fully capture, whereas hard information amplifies costly information rents. Using power value functions, we derive comparative statics showing that information restrictions target low-quality sellers when information value is moderate, but high-quality sellers receive perfect quality revelation when information value is high.

We study whether exogenous improvements in stock liquidity, unrelated to the information environment, affect managers’ disclosure choices. We exploit the 1997 Nasdaq reforms, which exogenously improved stock liquidity by reducing the non-information asymmetry components of the bid-ask spread, and find that Nasdaq firms reduced voluntary disclosure relative to a control group of unaffected firms. This evidence is consistent with managers substituting between components of the bid-ask spread when forming disclosure choices. Specifically, as the non-information asymmetry components decline, managers respond by decreasing disclosure, which in turn raises the information asymmetry component. Despite the reduction in disclosure and corresponding increase in information asymmetry, total stock liquidity nevertheless improves, suggesting that maintaining prior disclosure levels would have yielded minimal marginal benefits.

A principal (such as a centrist political party) can partially influence the allocation of power between two competing parties. The principal is closer to one party, the ``Friend'', than to the other, the ``Enemy''. The principal's optimal contract initially seeks to exclude the Enemy. However, once the Enemy gains power, the principal embraces him in exchange for policy moderation. Moderation also disciplines the Friend, inducing him to move closer to the principal's preferred policy. Principals close to the Friend fully embrace the Enemy; more centrist principals divide their support. Commitment benefits the principal only if she is close to the Friend and parties value power little.

This study examines the income loss following forced CEO turnovers using income data from the official records at the Danish Tax Authorities. We find that dismissed CEOs’ personal income is 40% lower in the five years following forced turnovers. The decline is driven by labor market outcomes: Labor and entrepreneurial incomes decline, while other sources of income increase. We find larger declines in income for executives with poor performance during their tenures, consistent with the executive labor market being the main channel for the lower income. Overall, the findings suggest that executives face significant personal costs from forced turnovers.

We examine the adoption of expanded audit reports that include key audit matters (KAMs) in Hong Kong (2016) and mainland China (2017). These jurisdictions are highly integrated and together constitute one of the largest economies to adopt the IAASB's reporting standards in a staggered fashion, while also differing in investor protection and legal enforcement. Using matched samples, pre‐post tests, and staggered difference‐in‐differences analyses with company fixed effects, we do not find compelling evidence that expanded audit reports affect market reactions or audit quality. These findings suggest a substantial gap between regulatory intent and implementation—on average, in these markets, KAMs do not appear to meet investors' demand for incremental information or to improve audit quality substantially. At the same time, our cross‐sectional evidence on KAM characteristics is more nuanced. A higher number of KAMs and the presence of novel or transaction‐specific KAMs are associated with stronger pricing of fundamentals, consistent with investors perceiving the related financial statements as better vetted. Yet a higher number of KAMs and novel KAMs are also associated with lower profitability persistence, consistent with these disclosures reflecting company risk and volatility. In contrast, industry‐common KAMs appear less relevant for valuation, consistent with investors discounting routine disclosures, even though they are associated with more persistent performance likely reflecting more stable industry conditions. Overall, our evidence suggests that mandating expanded audit reports alone may be of limited value, whereas better tailored KAM disclosures may still serve as signals of firm fundamentals and future performance.

Operating cash flows are a critical input to valuation activities. Research and practice indicate that the most common method of presenting operating cash flows, the indirect method, is viewed as overly complex. We experimentally examine whether two theoretically motivated factors represent shortcomings of the indirect method: (1) inadequate linking of related components of net income and changes in working capital accounts, and (2) inconsistent income statement labeling between components of net income and their corresponding working capital changes. Drawing on causal reasoning theory, we predict and find that these factors hinder the decision usefulness of the operating section of the statement of cash flows. The results of our study are informative to the academic literature and standard setters, as we examine underlying reasons why the indirect method may be viewed unfavorably.