This paper examines the determinants and economic efficiency of corporate voluntary disclosure. The focus is on the trade-off for an individual firm when the costs and benefits of voluntary disclosure stem from the consequences of its investment decisions and the impact on its share price. Investment and voluntary disclosure decisions are intertwined. First, voluntary disclosure leads to more accurate pricing, which induces more efficient investment decisions. Second, the firm may affect the market pricing in its favor by strategically disclosing or withholding its private information. This opportunistic use of disclosure may cause the real investment to be distorted at the margin. My analysis shows that the efficiency of voluntary disclosure is influenced by both effects. Further, this paper investigates how the investment efficiency and the propensity for providing voluntary disclosure respond to various environmental variables. Two such key variables are the general economic outlook of the investment opportunity and the quality of firm private information.

This study examines whether and how brokers manage the distribution of their stock recommendations. We document that if a broker's percentage of buy recommendations in a quarter is substantially higher than its target level, the broker issues significantly fewer buy recommendations than other brokers in the following quarter. This evidence remains robust after controlling for mean reversion in the data and varies systematically with brokers' expected benefits and costs of managing the distribution. Exploring possible methods to manage the distribution, we find evidence suggesting that brokers alter the timing of recommendation initiations and reiterations, and shift recommendations between adjacent quarters. Finally, we show that distribution management affects the informativeness of stock recommendations in the market.

We examine information quality and financial leverage when an entrepreneur needs financing to undertake a risky project and his effort input affects the project's outcome. We show that information quality and financial leverage interact to play active roles in both investment and effort decisions. Our analysis shows a positive association between leverage and optimal information quality—when leverage is low (high), low (high) information quality is optimal. This is because with low leverage, the entrepreneur is already motivated by his large share of the outcome to exert effort, and high information quality is not efficient as a precise bad signal discourages the entrepreneur's effort. In contrast, when leverage is high and thus the entrepreneur is less motivated by his residual cash flows, high information quality is optimal, because a precise good signal encourages the entrepreneur's effort. Our study highlights the joint effect of information quality and financial leverage on overall efficiency through firms' effort inputs as well as on defining investment efficiency.

Using a large sample of firms from 45 countries, we find that firms in countries with high-climate risk reduce their cash dividends but increasingly use share repurchases to make payouts. The evidence suggests that firms substitute dividends with repurchases to increase their payout flexibility in response to heightened climate risk. Operating volatility and financial constraints are two channels through which climate risk affects firms’ payout flexibility. Further analysis shows that the effect of climate risk on payout flexibility is more pronounced for firms that are more vulnerable to climate risk, and in countries where people are more concerned about climate risk and the national culture emphasizes uncertainty avoidance and long-term orientation.

We provide time-series and cross-sectional evidence on the significance of a risk-return tradeoff in the bond and equity markets. We find a significantly positive intertemporal relation between expected return and risk in the bond market. We also propose novel measures of systematic and idiosyncratic risk for individual corporate bonds and find a significantly positive cross-sectional relation between systematic risk and expected bond returns, whereas there is no significant link between idiosyncratic risk and future bond returns. We provide an explanation for the significance of systematic (idiosyncratic) risk based on different investor preferences and informational frictions in the bond (equity) market.

We construct a dynamic multi-agent moral hazard model to analyze the interactions among the firm owner, the manager and the auditor. Moral hazard may arise in hierarchical agency because a rational monitoring agent may accept a side payment from the monitored agent for misrepresenting information to the principal. This multi-agent moral hazard problem is the essence of the concern for auditor independence. We show that a "low-balling" compensation scheme and the auditor's legal liability constitute an efficient dynamic contracting mechanism for hierarchical agency. In particular, low balling serves as a substitute for legal liabilities for maintaining auditor independence. Low balling reduces the transaction costs associated with the audit engagement relative to the flat-fee structure and can actually improve auditor independence.

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In U.S. data 1981–2012, unsecured firm credit moves procyclically and tends to lead GDP, while secured firm credit is acyclical; similarly, shocks to unsecured firm credit explain a far larger fraction of output fluctuations than shocks to secured credit. In this article, we develop a tractable dynamic general equilibrium model in which unsecured firm credit arises from self-enforcing borrowing constraints, preventing an efficient capital allocation among heterogeneous firms. Unsecured credit rests on the value that borrowers attach to a good credit reputation which is a forward-looking variable. We argue that self-fulfilling beliefs over future credit conditions naturally generate endogenously persistent business-cycle dynamics. A dynamic complementarity between current and future borrowing limits permits uncorrelated sunspot shocks to unsecured debt to trigger persistent aggregate fluctuations in both secured and unsecured debt, factor productivity, and output. We show that these sunspot shocks are quantitatively important, accounting for around half of output volatility.

We empirically examine whether adopting a uniform set of accounting standards mitigates information frictions in financial markets and facilitates market integration. Using a difference‐in‐difference design, we find that after the mandatory adoption of IFRS local stock returns incorporate more global information and at a faster speed. The effect of IFRS adoption is stronger in countries where there are larger improvements in accounting comparability and for firms with a larger increase in foreign ownership. Overall, our results suggest that accounting standards harmonization facilitates financial market integration.

Motivated by the debate about the introduction of the fair value option for (financial) liabilities (FVOL) and the requirement to recognize and separately disclose in financial statements debt valuation adjustments (DVAs), this study explores what we can learn about a firm’s credit risk from DVAs. Using a sample of US bank holding companies that elect the FVOL, we show that DVAs generally cannot be explained by the same factors that explain contemporaneous changes in bank’s credit quality. We further find that DVAs can explain future changes in credit risk when the fair value of liabilities is based on managerial inputs (Level 3). Overall our results suggest that managers have an information advantage in estimating credit risk and that DVAs provide inside information to the market.