Knowledge that Transforms

We examine the stock price impact of corporate site visits using a unique data set of site visits to listed firms in China. Our main findings are as follows. First, the market reaction around corporate site visits is statistically and economically significant and is stronger for group visits, visits conducted by mutual fund managers, visits covering accounting and finance topics, visits to firms with poor information environments, and visits to manufacturing firms. Second, the stock returns around site visits are positively associated with firms’ future performance. Third, the changes in visiting funds’ holdings are more predictive of firms’ future performance than those of nonvisiting funds. Overall, this study contributes to the literature by providing evidence that site visits are important venues for investors to collect information about firms and make informed trades.

I examine whether political influence as a response to voters’ interest in employment levels is reflected in the enforcement actions of the SEC. I find that large employers are less likely to experience SEC enforcement actions. Next, I examine whether variations in politicians’ sensitivity to employment levels result in variations in enforcement against large employers. I find that large employers are less likely to face enforcement actions during presidential elections if they are based in politically important states. Large employers also face fewer enforcement actions if they are based in high‐unemployment states during elections of senators who serve on SEC oversight committees. Large employers based in high‐unemployment districts enjoy lower enforcement if their members of Congress serve on SEC oversight committees. The findings suggest that voters’ interests are reflected in SEC enforcement.

This paper provides new evidence on whether and how boards solve costly ex post settling up to recover CEO cash compensation for unrealized gains that fail to materialize. Our analyses are motivated by the likely expanding role for ex post settling up as the risk of compensating executives for unrealized gains that may never materialize increases in a more intangibles‐based economy, as well as by the conflicting evidence of prior research. We provide evidence consistent with ex post settling up by (i) using alternative truncation methods to derive observations most likely to fall within the theoretically motivated incentive zone; (ii) replicating and reconciling the conflicting results of prior research that supports (Leone et al. 2006) and fails to support (Shaw and Zhang 2010) ex post settling up; (iii) using Incentive Lab data with contract‐specific information, allowing strong identification of observations in the incentive zone; and (iv) documenting predictable cross‐sectional variation, with ex post settling up being more pronounced for firms with stronger corporate governance, less conservative accounting earnings, and a larger proportion of total pay in the form of cash compensation. Overall, we conclude that evidence is strong in support of the ex post settling up hypothesis.

This article investigates the impact of political uncertainty on contractual lending terms using a large sample of syndicated loans and a within-firm estimation approach to achieve identification. Firms pay 7 basis points (bps) more on loans originated when their lenders are undergoing an election relative to when their lenders are not undergoing an election. Lenders from less financially developed countries are more likely to pass political uncertainty costs to borrowers. Consistent with electoral uncertainty driving this premium, the most contested elections have the largest impact (17 bps). Overall, political uncertainty leads to a tangible increase in firms’ financing costs.

Firms’ reluctance at times to publicly disclose financial information is often attributed to concern that the information may be used against them by self‐interested outside parties. These outside parties may interact with the firm in the horizontal realm (e.g., retail competitors) or in the vertical arena (e.g., wholesale suppliers). This article is built on the premise that fully understanding the strategic consequences of disclosure requires joint consideration of horizontal and vertical relationships. When both rivals and suppliers are accounted for, we demonstrate that (i) lower intra‐industry correlation in product demand favors disclosure, with the precise correlation‐cutoff dependent on the firm's use of input suppliers; and (ii) the more a firm relies on input suppliers with pricing power, the less attractive is disclosure.

This study investigates whether task interdependence in teams alters the effectiveness of managerial discretion in motivating team performance. Teams are particularly useful when employees' tasks are interdependent—that is, when the degree to which the increase in team performance resulting from a team member's effort depends on the effort and skills of the other team members. The reason is that the more interdependent tasks are, the more employees need to coordinate their actions and help one another to achieve their objectives. Prior research analyzing settings where task interdependence is absent suggests that providing managers with discretion over team bonus allocation can improve team performance relative to equal team bonus allocations because it strengthens the link between contributions to team output and rewards. Economic theory suggests that managerial discretion will also improve team performance when task interdependence is present and information is efficiently used. However, we use behavioral theory to predict that managerial discretion is less effective in the presence of task interdependence, because managers do not fully incorporate all relevant information into bonus decisions and because managerial discretion hurts coordination and helping, which is particularly problematic under task interdependence. We find that while discretion over compensation has a positive effect on team performance relative to equal bonus allocation when task interdependence is absent, it has a negative effect when task interdependence is present. Additional analyses provide support for our underlying theory. Results of our study contribute to both theory and practice by suggesting that, ironically, managerial discretion may be most useful when the potential benefits of employing teams are lowest and least useful when the potential benefits are highest. Our results help explain why firms often grant managers only partial or no discretion over team members' compensation.

This study examines whether and how linguistic information quality (measured by readability) of customer firms' management earnings forecast reports (MEFRs) affects supplier firms' investment quality (measured by investment efficiency). Our analyses reveal that supplier investment efficiency is positively associated with the average linguistic information quality of customers' prior MEFRs, and the positive association between supplier investment efficiency and customer MEFRs' numerical information quality is stronger in supplier firms with more readable customer MEFRs. Our analyses also reveal that higher linguistic information quality of customer MEFRs improves the monitoring of supplier firms by their outside stakeholders, such as institutional investors and financial analysts, and ameliorates the negative impact of suppliers' customer‐dependence on their investment efficiency. Our results suggest that greater linguistic information quality of a customer firm's forward‐looking disclosures is associated with higher‐quality investments made by its suppliers along the supply chain.

The SEC's Disclosure Effectiveness Initiative (December 2013) highlights a difference between accounting regulators and academics in their perceptions of Item 1A risk factor disclosure effectiveness. Because most academic evidence relies on pre‐financial crisis data, we compare changes in risk factor disclosure informativeness before and after the crisis as a possible explanation for this disconnect. We further explore this discrepancy by considering (i) three classes of market participants, (ii) new, discontinued, and repeated disclosures, and (iii) nonmarket outcomes. Our results confirm previous findings but indicate that those results no longer hold in the subsequent period. Specifically, we find that although equity, option, and bond markets react to unexpected risk factor disclosures in the period leading up to the financial crisis (2006–2008), the market reactions decline significantly in the post‐crisis period (2009–2014). Perhaps surprisingly, the documented changes in informativeness are not driven by disclosures repeated from one year to the next but instead result from new disclosures initiated in the current year and, in the option and debt markets, also from disclosures discontinued from the previous year. Finally, using the Altman Z ‐score as an objective bankruptcy risk measure, we find that the association between risk factor disclosures and companies’ future bankruptcy risk declines significantly in the post financial crisis period. Taken together, these findings contribute to the current disclosure effectiveness debate by highlighting that risk factor disclosures, which were informative in the preceding period, become less reflective of the underlying economic risks and thus less informative to investors in the post‐crisis period. La déclaration des facteurs de risque est‐elle toujours pertinente ? Données tirées des réactions du marché à la déclaration des facteurs de risque avant et après la crise financière

Intrinsic motivation is generally thought to be positively associated with performance on a variety of tasks. However, there is only sparse experimental evidence supporting this idea and we know little about the specific mechanisms behind any effect. We develop theory about how auditors’ intrinsic motivation for their jobs can improve their judgments about complex accounting estimates. We experimentally test whether a prompt to make auditors’ intrinsic motivation for their jobs salient improves the specific information processing behaviors necessary for high‐quality judgments in complex audit tasks. It does: Prompted auditors attend to a broader set of information, process information more deeply, and request more relevant additional evidence. Supplemental analyses show that these processing behaviors mediate between salient intrinsic motivation and an improved ability to identify a biased complex estimate. Our theory and analyses indicate that auditors’ intrinsic motivation for their work provides unique value for improving judgment quality, particularly in the context of performing complex audit tasks. Our study supports the view that high‐quality cognitive processing can improve auditors’ professional skepticism by providing a foundation for skeptical judgments.

Motivated by research in psychology and experimental economics, we assume that investors update their beliefs about an asset's value upon observing the price, but only when the price clearly reveals that others obtained private information that differs from their own private information. Specifically, we assume that investors learn from the price of an asset in an asymmetric manner—they learn from the price if they observe good (bad) private information and the price is worse (better) than what is justified based on public information alone. We show that asymmetric learning from an asset's price leads to post‐earnings‐announcement drift (PEAD), and that it generates arbitrage opportunities that are less attractive than alternative explanations of PEAD. In addition, our model predicts that PEAD will be concentrated in earnings surprises that are not dominated by accruals, and it also predicts that earnings response coefficients will decline in the magnitude of the earnings surprises.