Knowledge that Transforms

This paper examines the effect of creditor protection on the choice of government procurement contract types. We use the staggered adoption of anti-recharacterization laws (ARLs) as a quasi-natural experiment to investigate the research question. ARLs strengthen creditors’ rights to repossess collateral in bankruptcy and thus enhance creditor protection. Using a dataset of U.S. government contracts, we find a significant shift from the use of fixed-price contracts to cost-plus contracts after the adoption of ARLs. The effect is more pronounced for firms with higher default risk and stronger firm-government ties. We also find that the government is more likely to switch away or reduce the contract value for contractors affected by ARLs. Overall, our findings point to an important relation between debt contracts and government contracts.

A growing body of evidence suggests that Federal Open Market Committee (FOMC) announcements can affect private sector beliefs about near-term macroeconomic conditions. We measure the impact of central bank policy on index option trader beliefs about near-term economic conditions using the return of short-term dividend strips around each FOMC announcement (we term this short-term dividend strip return, “SDR”). Consistent with the idea that these announcements contain valuable information about macroeconomic conditions, we find that SDR predicts both future firm-level earnings and firm-level earnings announcement returns. Furthermore, using analyst earnings forecasts, we provide evidence of belief underreaction to FOMC announcements. We discuss how investor specialization and segmented markets can generate our empirical results.

This paper examines the role of personal income taxes on multinationals' corporate tax-induced profit shifting. As mandated in most OECD countries, firms need economic substance in low corporate-tax countries to justify profit shifting to these countries. Because high personal income taxes raise labor costs and thus the cost of providing economic substance, we predict that personal income taxes mute profit shifting. Using data from 26 European countries, we find that personal income taxes substantially reduce profit shifting to low corporate-tax jurisdictions, particularly when parent countries impose strict substance requirements. We also find that firms use employees to justify economic substance and that the effect of the personal income tax is related to its incidence falling partly on firms. Our results show important interactions between personal and corporate income taxes that reduce multinationals’ profit-shifting activities when substance requirements are implemented as in the European Union or many OECD countries.

We examine whether CEOs use share repurchases to sell their equity at inflated prices. We document that share repurchases, like equity-based compensation, are affected by the corporate calendar—the firm's schedule of earnings announcements and insider trading restrictions. The corporate calendar can fully explain why share repurchases and equity-based compensation coincide. The alignment with the corporate calendar is stricter in firms with strong internal governance or high external monitoring. When CEOs sell equity, firms are actually less likely to repurchase. Our findings reconcile earlier studies and highlight the importance of the corporate calendar for the timing of share repurchases.

We present the first comprehensive descriptive evidence on the labor market and personal consequences for audit professionals in the United States who are named in SEC or PCAOB enforcement actions. Three key findings emerge. First, between 38% and 73% of culpable auditors depart from their firms within one year after the enforcement event. These departure rates are three to four times higher compared with a sample of non‐culpable auditors. Second, 83% of culpable auditors departing from Big 4 accounting firms exit the profession, compared with 58% of a departing non‐culpable comparison group. In contrast, about 77% of the culpable auditors leaving non–Big 4 accounting firms remain in public accounting, compared with 51% of a departing non‐culpable comparison group. Third, using novel data on personal real estate holdings, we find that culpable auditors do not appear to engage in markedly different transactions around enforcement compared with a comparison sample of non‐culpable individuals.

Patent applications often reveal proprietary information to competitors, but does such disclosure harm firms or also benefit them? We develop and empirically support a theory showing that when firms patent enhancements to incumbent, nondisruptive technologies, they can cooperate more easily on these technologies, increasing their profitability. The downside of cooperating on nondisruptive technologies is that the investment in and commitment to disruptive technologies decline. To improve their commitment to disruptive technologies, some firms rely more on trade secrecy. We provide empirical support for these predictions. We document that after a patent reform that made information about patent applications widely accessible, firms cooperate more and charge higher markups. Furthermore, the nature of patented innovation has changed, with the proportion of nondisruptive patents increasing substantially. Finally, while some firms start patenting more, others patent less and rely more on trade secrecy, with the response depending on the attractiveness of firms' innovation prospects.

Classification of financial statement elements into categories is an inherent, integral part of the financial reporting system. Although prior research documents that categories influence users’ perceptions of included items, we explore the reverse effect—how classifying items in a category can impact perceptions of the category itself and its other members. Using categorization theory from psychology and accounting literature and exploiting the classification challenges inherent to the crypto asset setting, we predict and find that classifying individual items into a category can impact equity analysts’ perceptions of the category itself and perceptions of the category's other members. We also explore the boundaries of this effect and find that categories like intangibles, with fewer common prototypical features, are more susceptible to these classification effects. Our results show several ways in which balance sheet classification could lead to unintended consequences for users.

We introduce a novel measure of CEO depression by applying machine learning models that analyze vocal acoustic features from CEOs' conference call recordings. Our research was preregistered via the Journal of Accounting Research 's registration‐based editorial process. In this study, we validate this measure and examine associated factors. We find that greater firm risk is positively associated with CEO depression, whereas higher job demands are negatively associated with CEO depression. Female and older CEOs show a lower likelihood of depression. Using this novel measure, we then explore the relationship between CEO depression and career outcomes. Although we do not find any evidence that CEO depression is associated with CEO turnover, we find some evidence that turnover‐performance sensitivity is higher among depressed CEOs. We also find limited evidence of higher compensation and higher pay‐performance sensitivity for depressed CEOs. This study provides new insights into the relationship between CEO mental health and career outcomes.

Using consumer complaints filed with the Consumer Financial Protection Bureau as a measure for the quality of financial products and services, we present evidence of racial disparities in the service quality received by consumers. Consumers in high‐minority communities file more complaints than those in low‐minority communities, and the racial gap in financial complaints increased by more than 60% during the COVID‐19 pandemic. Using a triple‐difference approach, we establish the role of corporate social attitudes, reflected in, for example, inclusive promotion practices and diversity in leadership, in mitigating the complaint racial gap and its pandemic‐period increase. Our results shed light on how inclusive corporate culture filters through an organization to benefit minority communities and underscore the effect of corporate social attitudes on important stakeholder outcomes.

We estimate the prevalence and drivers of short squeezes after short‐selling attacks. Positive returns after attacks have a disproportionate tendency to fully reverse and are accompanied by heightened short covering, consistent with the presence of short squeezes. We assess and find no support for non‐squeeze drivers of these positive return reversals and show they are more likely to be accompanied by squeeze‐related news articles, increased stock volatility, and disruptions in the stock lending market. Using positive return reversals as a proxy for short squeezes, we estimate that 15% of short attacks experience squeezes, and squeeze risk increases with short sellers’ visibility but decreases with the credibility of their evidence. Additionally, squeezes appear to be precipitated by actions of firms and investors, including insider purchases, share recalls, retail investor trading, and firm disclosures. Our findings quantify a material risk and check on activist short selling and are especially timely given recent proposed short‐selling restrictions.