Banks finance illiquid assets with demandable deposits, which discipline bankers but expose them to damaging runs. Authorities may not want to stand by and watch banks collapse. However, unconstrained direct bailouts undermine the disciplinary role of deposits. Moreover, competition forces banks to promise depositors more, increasing intervention and making the system worse off. By contrast, constrained central bank intervention to lower rates maintains private discipline, while offsetting contractual rigidity. It may still lead banks to make excessive liquidity promises. Anticipating this, central banks should raise rates in normal times to offset distortions from reducing rates in adverse times.

ABSTRACT We investigate how the strictness of a requirement to consult on potential client fraud affects auditors' propensity to consult with firm experts. We consider two specific forms of guidance about fraud consultations: (1) strict, i.e., mandatory and binding; and (2) lenient, i.e., advisory and non-binding. We predict that a strict consultation requirement will lead to greater propensity to consult, particularly under certain client- and engagement-related conditions. Results from two experiments with 163 Dutch audit managers and partners demonstrate that consultation propensity is higher under a strict consultation requirement, but only when underlying fraud risk is high. The strictness effect is also greater under tight versus relaxed time pressure. Further, a strict standard increases auditors' perceived probability that a fraud indicator exists. Overall, we demonstrate that the formulation of a standard can have the desired effect on the judgments of auditors while also creating unexpected incentives that may influence auditor judgments. Data Availability: The data used in this study are available upon request from the authors.

Areas differ in their propensity to experience natural disasters. Exposure to disaster risks can be reduced either through migration (i.e., self-protection) or through public infrastructure investment (e.g., building seawalls). Using migration data from the 1920s and 1930s, this paper studies how the population responded to disaster shocks in an era of minimal public investment. We find that, on net, young men move away from areas hit by tornados but are attracted to areas experiencing floods. Early efforts to protect against future flooding, especially during the New Deal era of the late 1930s, may have counteracted an individual migration response.

ABSTRACT This study examines the informational effects of unit of account choices in the context of a proposed standard on lease accounting. Standard-setters have tentatively decided that leases in excess of one year should be recognized on a lessee's balance sheet, including optional lease periods, even though the lessee can choose not to renew the lease. We argue that this approach lacks representational faithfulness and creates an informational problem for users. Using an experiment, we show that the proposed treatment of renewal options has a negative effect on lenders' willingness to lend to a firm with renewal options. However, we also show that disaggregating the capitalized optional renewal periods from the fixed-term lease obligation mitigates some of the negative effects of the proposed approach, particularly when disaggregation occurs on the face of the financial statements. These results should be of interest to standard-setters as they deliberate changes to lease accounting and when considering the trade-offs that can arise with expansive unit of account choices. Data Availability: The experimental data are available for purposes of replication. Please contact the authors..

ABSTRACT To facilitate managers' decision-making, firms develop strategic performance measurement systems that translate strategy into performance measures. Ideally, managers see measures for what they are—imperfect proxies for intangible strategic constructs. However, managers may fail to fully appreciate the fact that measures are merely representations of the strategic constructs, and act as though the measures are the construct of interest—a phenomenon we label surrogation. In this paper, we investigate whether and how the use of strategically linked performance measures for compensation purposes affects managers' propensity to exhibit surrogation. In accordance with the attribute substitution framework (Kahneman and Frederick 2002), we predict incentive compensation exacerbates surrogation, and that this effect is more prevalent when managers are compensated on a single measure of a strategic construct than when managers are compensated on multiple measures of a strategic construct. Via two experiments, we find support for these hypotheses. Our paper contributes to the literature on strategic performance measurement systems by highlighting the tendency of managers to use measures as surrogates for strategy. More generally, we identify a by-product of contracting on imperfect performance measures not previously considered in extant literature, and establish when consideration of costs of this by-product are likely to be critical.

ABSTRACT We examine whether audit quality affects the trade-off between accrual-based and real earnings management. We hypothesize that firms motivated to manage earnings per share (EPS) to meet or beat consensus analysts' forecasts are more likely to engage in accretive stock repurchases (a form of real earnings management) when their ability to manage earnings through accruals is constrained by high audit quality. We find that firms with high audit quality are more likely to use accretive stock repurchases and less likely to use accrual-based earnings management to meet or beat consensus analysts' forecasts. Our results are robust to various controls for endogeneity concerns.

In a series of studies employing a variety of approaches, we have found that the potential impact of climate change on US agriculture is likely negative. Deschênes and Greenstone (2007) report dramatically different results based on regressions of agricultural profits and yields on weather variables. The divergence is explained by (1) missing and incorrect weather and climate data in their study; (2) their use of older climate change projections rather than the more recent and less optimistic projections from the Fourth Assessment Report; and (3) difficulties in their profit measure due to the confounding effects of storage.