Knowledge that Transforms

We exploit the staggered state‐level adoption of the Riegle‐Neal Interstate Banking and Branching Efficiency Act (IBBEA) to examine how banking deregulation and the resulting increase in bank competition affect firms’ auditor choices. We find that an exogenous increase in the degree of interstate branch banking deregulation leads to a reduction in firms’ propensity to engage a Big N or industry expert auditor. This main result, when combined with our cross‐sectional analyses, offers evidence suggesting that deregulation leads to less demand for higher quality auditors because (1) firms have increased access to credit, which reduces the benefits of higher audit quality; (2) entering banks’ lending expertise substitutes for higher quality financial statements; (3) incumbent banks with less lending expertise seek to protect their rents by preferring that borrowers provide lower quality financial statement information; and (4) external stakeholders delegate their monitoring to banks to a greater degree, resulting in less demand for higher quality financial statements. As such, our study sheds light on how the U.S. credit market's infrastructure shapes firms’ auditor choice decisions.

This paper studies whether firms opportunistically make proprietary claims in mandatory environmental disclosure programs with trade secret exemption rules. Examining the mandatory chemical disclosure program in the fracking industry, I find evidence of opportunistic withholding of information among operators that are less likely to have trade secrets. Specifically, I find that these operators claim fewer chemicals as trade secrets when the operating site is in close proximity to water quality monitors. This is only observed among publicly traded operators that face a higher cost of societal backlash when disclosing pollutant information. Further analyses suggest that these operators are concerned about external environmental monitoring, which deters them from opportunistic information withholding. Regarding public and private operators that are more likely to have trade secrets, I do not find strong evidence that their information withholding varies with the monitoring conditions.

This paper investigates the role of corporate financial reports in the Environmental Protection Agency's (EPA) regulatory activities. By tracking the EPA's direct retrieval of SEC filings, we identify three key findings. First, the EPA retrieves a large volume of financial reports, especially from firms in high‐pollution industries. Second, the EPA is more likely to access financial reports during enforcement investigations and significant rule proposals, but less so during compliance monitoring, with patterns varying predictably across firms. Third, the EPA's reliance on financial reports is potentially driven by its demand for information on firm liquidity, solvency, and profitability. Overall, our study highlights the usefulness of financial reports for the EPA as an environmental regulator.

I examine how investors’ search for different types of information affects managers’ reporting decisions. I distinguish investors’ search for information about firm fundamentals (“fundamental search”) from their search for information about managers’ incentives (“incentive search”). Based on a parsimonious model of misreporting, I predict that fundamental search reduces the earnings response coefficient, which reduces managers’ benefits from misreporting, resulting in less misreporting. In contrast, incentive search increases the earnings response coefficient, which increases the benefits from misreporting, resulting in more misreporting. I test these predictions using an empirical technique that classifies EDGAR downloads as fundamental search or incentive search. Consistent with my theoretical predictions, I find that fundamental (incentive) search is negatively (positively) related to the earnings response coefficients and intentional restatements. I confirm my findings in two distinct empirical settings where the costs of information search exogenously changed: the adoption of XBRL and the electronic filing mandate of Form 4s. Collectively, the results show that investors’ information demand can shape managers’ reporting decisions, and its effects can vary depending on the type of information investors search for.

Many firms use relative stock performance to evaluate and incentivize their CEOs. We document that such firms routinely disclose information that harms their peers' stock prices, and sometimes explicitly mention the harmed peers, by name, in these disclosures. Consistent with deliberate sabotage, peer‐harming disclosures appear to be aimed at peers whose stock price depressions are most likely to benefit the disclosing firms' CEOs. The pricing effect of these disclosures does not reverse, suggesting that the disclosures contain legitimate information regarding peers' prospects. In sum, our results suggest that relative performance evaluation in CEO pay motivates CEOs to internalize the externalities of their disclosures, and strategically disclose information that harms peers' stock prices, in order to improve their firms' relative standing within their peer group.

We show that information complementarities play an important role in the spillover of transparency shocks. We exploit the revelation of financial misconduct by S&P 500 firms, and in a “Stacked Difference‐in‐Differences” design, find that the implied cost of capital increases for “close” industry peers of the fraudulent firms relative to “distant” industry peers. The spillover effect is particularly strong when the close peers and the fraudulent firm share common analyst coverage and common institutional ownership, which have been shown to be powerful proxies for fundamental linkages and information complementarities. We provide evidence that increase in the cost of capital of peer firms is due, at least in part, to “beta shocks.” Disclosure by close peers—especially those with co‐coverage and co‐ownership links—also increases following fraud revelation. Although disclosure remains high in the following years, the cost of equity starts to decrease.

We explore how a supervisor's hierarchical rank affects the extent to which employees’ targets reflect their past performance. Literature documents that supervisors do not fully ratchet targets for past performance, arguably because the commitment not to penalize successful employees with more difficult targets alleviates the severity of the ratchet effect. We argue that commitment is less credible in organizational hierarchies where a middle manager sets employees’ targets. Using data from an organization comprised of three hierarchical layers, we consistently find that a middle manager's exposure to performance pressure is positively associated with the ratcheting of the employees’ targets. Moreover, we show that management at headquarters reduces a middle manager's performance pressure when most of her employees missed their targets in the previous period. Overall, the results imply that the hierarchical rank is an important determinant of the credibility of a supervisor's commitment to deemphasize past performance in target setting.

During the revelation of the Harvey Weinstein scandal and the reemergence of the #MeToo movement, firms with a nonsexist corporate culture, proxied by having women among the five highest‐paid executives, earn excess returns of 1.3% relative to firms without female top executives. These returns are driven by changes in investor preferences toward firms with a nonsexist culture. Institutional ownership increases in firms with a nonsexist culture after the Weinstein/#MeToo events, particularly for investors with larger holdings and investors with a lower ESG focus ex ante. Firms without female top executives improve gender diversity after these events, particularly in more sexist states and in industries with few women executives. Our evidence attests to the value of having a nonsexist corporate culture and indicates that changes in societal norms toward women are permeating into capital markets and corporations.

I study whether firms that receive targeted U.S. state‐level subsidies are more likely to subsequently engage in corporate misconduct. I find that firms are more likely to engage in misconduct in subsidizing states, but not in other states that they operate in, after receiving state subsidies. Using data on both federal and state enforcement actions, and exploiting the legal principle of dual sovereignty for identification, I show that this finding reflects an increase in the underlying rate of misconduct and that this increase is attributable to lenient state‐level misconduct enforcement. Collectively, my findings present evidence of an important consequence of targeted firm‐specific subsidies: nonfinancial misconduct that potentially could impact the very stakeholders subsidies are ostensibly intended to benefit.

We provide large‐sample evidence on whether U.S. publicly traded corporations use voluntary disclosures about their commitments to employee diversity opportunistically. We document significant discrepancies between companies' external stances on diversity, equity, and inclusion (DEI) and their hiring practices. Firms that discuss DEI excessively relative to their actual employee gender and racial diversity (“diversity washers”) obtain superior scores from environmental, social, and governance (ESG) rating organizations and attract more investment from institutional investors with an ESG focus. These outcomes occur even though diversity‐washing firms are more likely to incur discrimination violations and have negative human‐capital‐related news events. Our study provides evidence consistent with growing allegations of misleading statements from firms about their DEI initiatives and highlights the potential consequences of selective ESG disclosures.