Knowledge that Transforms

This paper studies voluntary disclosures that firms have suspended, resumed, or completed their open market repurchase programs. Voluntary disclosures of repurchase status updates are common and value‐relevant. They also inform subsequent repurchase activities: voluntary disclosers are more likely to complete their repurchase programs and to initiate new repurchase programs than firms with undisclosed repurchase status changes. Moreover, firms that disclose repurchase suspensions experience larger returns to subsequent repurchase authorizations, consistent with a reward for establishing a reputation for transparency via voluntary bad news disclosure. Finally, exploiting a change in repurchase reporting requirements, we document that voluntary updates are less frequent when mandatory disclosure increases. An important exception, however, is when macroeconomic uncertainty is high, such as during the Great Recession and the COVID‐19 pandemic.

We study the role of segment disaggregation in equity‐based pay contracts in diversified firms. Disaggregated segment disclosures can improve the observability of managerial actions in internal capital markets and thus increase implicit incentives for managers to allocate resources as desired by shareholders, substituting for explicit incentives provided to CEOs. We use the adoption of Statement of Financial Accounting Standards No. 131 as an identification strategy and find that firms affected by this segment reporting mandate significantly decreased the provision of equity‐based incentives in the post‐adoption period, especially for firms with higher operating volatilities. This effect is also more pronounced for firms with weaker board monitoring in the pre‐adoption period but with stronger external monitoring in the post‐adoption period. Overall, our results suggest that disaggregated segment disclosures reduce the use of equity‐based pay contracts in diversified firms by enhancing the monitoring of managers.

Credit information sharing allows creditors to obtain borrowers' relevant credit information, and it can improve borrowers' investment outcomes that are funded by debt. Using reforms to European countries' public credit registries (PCRs) to capture mandated information sharing among creditors, we examine the impact of such sharing on firms' investment efficiency. We find that information sharing enhances firms' investment efficiency, which we measure by their investment‐ q sensitivity. This finding is consistent with credit information sharing enabling creditors to better screen borrowers to mitigate adverse selection and enhancing borrower discipline to avoid a bad credit record, which leads to the borrower making more efficient investments. We also document that the information sharing effect is more pronounced when firms rely more on debt financing, when the shared credit information is more accessible, when firms' information environment is more opaque, and when there is a greater information monopoly in the banking system. We offer supplementary evidence that the effect is also more salient when PCRs have characteristics that suggest more effective credit information sharing. Overall, our paper offers new insight into whether and how information sharing in credit markets enhances firms' investment efficiency. More broadly, it highlights how making more borrower information available to creditors can have important economic spillover effects on firm outcomes.

We analyze how bank sentiment affects bank liquidity hoarding, distinguishing unexplained beliefs of bank managers from fundamental‐based beliefs. We build a bank management sentiment measure from textual analysis of 10‐Ks and utilize a comprehensive bank liquidity hoarding measure. We find that negative bank sentiment increases liquidity hoarding not warranted by a bank's fundamental conditions or external circumstances. Further analysis confirms that our findings reflect bank volition rather than being driven solely by borrowers or depositors. We address endogeneity concerns using exogenous weather conditions as instruments. Overall, our findings suggest that bank sentiment can influence how much liquidity banks provide to the economy and financial system.

Penalty contracts are commonly utilized in developing countries. Such contracts may be perceived as unfair, potentially reducing employee motivation and performance. We predict that adding a second‐chance provision , an opportunity to reverse a penalty for poor performance if subsequent performance improves, could improve the effectiveness of penalty contracts. In a quasi field experiment at a company with two manufacturing facilities in Taiwan, we treated one facility with a traditional‐penalty contract without a second‐chance provision and the other with a penalty contract with a second‐chance provision. We observe a significant difference in the two treatment effects, with employee performance decreasing significantly after the traditional‐penalty treatment but showing no decrease when a second‐chance provision was included. Further analysis reveals that this difference is mediated by employees' fairness perceptions. These results provide valuable insights to governments, nongovernmental organizations, and multinationals as they work together to improve the fairness of global compensation practices.

The firm‐level bullwhip effect is the amplification of demand uncertainty along a supply chain—that is, fluctuations in production (for manufacturing firms) or purchases from suppliers (for retailers or wholesalers) in a firm tend to be greater than its demand fluctuations. We predict that the bullwhip ratio (a proxy for the bullwhip effect) amplifies the relation between demand uncertainty and cost structure. We expect this amplifying effect because the bullwhip ratio determines the extent to which demand uncertainty translates into uncertainty in production or purchases, which, in turn, affects cost structure. Using data from public US firms over the 1990–2020 period, we find results consistent with our prediction. Specifically, we find that both the negative relation between demand uncertainty and cost elasticity in the manufacturing sector and the positive relation between the two in the retail/wholesale sectors are stronger for firms with higher bullwhip ratios. We contribute to the literature on cost structure by highlighting the important role of the bullwhip effect in cost structure decisions.

Building effective corporate culture is challenging as it requires senior managers to embed shared values within the firm. Yet some firms can do so, and some cannot. This study examines whether managers' career preferences influence manager‐employee value misalignment and weaken corporate culture. Career preferences for job‐hopping provide incentives for managers to signal their leadership quality in the labor market. We capture managers' and employees' attention allocation across different cultural values using data from conference calls and Glassdoor. We predict and find that job‐hopping managers direct their attention away from soft cultural values (e.g., respect and integrity) that are less observable by the external labor market. Furthermore, job‐hopping managers who pay insufficient attention to soft cultural values fail to address the concerns that employees have in their everyday work, resulting in lower overall employee culture ratings. Our study highlights the significance of managers' career preferences in shaping different cultural values and offers implications for firms selecting senior managers.

We examine shareholders' perceptions about how external tax advisors contribute to corporate tax planning. As residual claimants of corporate tax planning, shareholders benefit from lower corporate taxes, but also bear the financial and reputational costs of subsequent tax enforcement. Despite the influential advisory role of external tax advisors in corporate tax planning, existing research on how shareholders perceive this role is limited. Using event study methods and exploiting the heightened regulation of tax advice through the covered opinion rules as a setting, we observe average and cross‐sectional stock returns consistent with shareholders perceiving external tax advisors as contributing unfavorably to tax planning by promoting excessively risky strategies. We further find that risky and overall tax planning declined across firms after the enactment of the rules, consistent with shareholders' perceptions about tax advisors' contributions to firms' tax planning. Overall, our findings contribute to research on shareholder perceptions and valuation of tax planning, and have important implications for practice, where regulatory oversight of external tax advisors remains a significant concern.

We use the adoption of General Accounting Standards Board Statement No. 34 (GASB 34) to examine whether disclosing information in states' financial reports influences their investment decisions. GASB 34 requires governments to report on general infrastructure assets and permits either the standard depreciation approach or the modified approach. The modified approach requires additional disclosures, a step which we argue promotes greater transparency about a government's infrastructure and can potentially facilitate infrastructure investment decisions. We find a robust positive association between the modified approach and investment in infrastructure maintenance. Additional evidence demonstrates a more pronounced effect when external monitoring is likely higher and government officials are likely better informed as a result of the increased disclosure. We further find that states using the modified approach are less likely to cut or divert funds intended for infrastructure maintenance. Our study suggests that disclosing information in governments' financial reports can have real effects, such as mitigating underinvestment in infrastructure maintenance, which governments often defer to future periods in violation of the interperiod equity principle and to the detriment of society.

While research has analyzed how the structure of incentive pay relates to the dispersion of the performance measure distribution, as measured by its variance or volatility, we examine how it relates to the asymmetry of the distribution, as measured by its skewness. In contrast to the variance, skewness affects the relative informativeness of high and low performance about the agent's effort, which determines the relative efficiency of providing rewards and punishments for incentive purposes. Therefore, skewness is an important determinant of compensation convexity, which is determined by the relative holdings of stock and options. Consistent with our analytical and numerical results, we find that the skewness of expected earnings is negatively associated with the convexity of CEO compensation. Our results are economically significant, robust to alternative specifications, and do not appear to be driven by reverse causality. In addition, we find that earnings skewness is negatively associated with total CEO compensation and that this association is driven by lower options‐based compensation. These findings are consistent with CEOs preferring positively skewed performance metrics. Overall, we provide theoretical, numerical, and empirical evidence suggesting that skewness is a more important determinant of the convexity and structure of CEO compensation than volatility.