The corporate information environment develops endogenously as a consequence of information asymmetries and agency problems between investors, entrepreneurs, and managers. We review current research on the three main decisions that shape the corporate information environment in capital market settings: (1) managers’ voluntary disclosure decisions, (2) disclosures mandated by regulators, and (3) reporting decisions by analysts. We conclude that, in the last ten years, research has generated several useful insights. Despite this progress, we call for researchers to consider interdependencies between the various decisions that shape the corporate information environment and suggest new and interesting issues for researchers to address.

We examine how consumer credit affects entrepreneurship by linking three million earnings and pass-through tax records to credit reports. In the cross-section, we show that self-employment without employees and employer firm ownership increase monotonically with credit limits and credit scores. We then isolate individuals who have had discrete increases in credit limits after the exogenous removal of bankruptcy flags to measure the effects of personal credit on entrepreneurship. Following bankruptcy flag removal, individuals are more likely to start a new employer business and borrow extensively. Those who own businesses with employees borrow $40,000 more after bankruptcy flag removal, a 33% gain relative to the sample average.

Despite regulations mandating audit committee economic independence, the CEO may still influence audit committee members’ objectivity through social ties (e.g., belonging to the same country club) or professional ties (e.g., having served on boards together). Additionally, prior archival research finds that audit committee industry expertise enhances financial reporting quality. Nonetheless, information about ties and industry expertise are not currently publicly disclosed in regulatory filings. In an experiment with 342 reasonably informed investors, we find, as hypothesized, that ties (professional or social) and industry expertise affect assessments of audit committee independence and competence. Using planned contrast tests, we also find that investors assess audit committees with no ties and industry expertise (social ties and no industry expertise) as the most (least) effective and also result in the highest (lowest) likelihood of investing. Further, the potential negative effects of social ties on investor’s judgments are muted when there is industry expertise present, while the presence of no ties appears to decrease negative effects on investor judgments due to a lack of industry expertise. This study provides important baseline evidence supporting the relevance of audit committee ties and industry expertise information to investors and thus suggests the value of increased disclosures to investors of such information to enhance their ability to make more informed investment decisions.

We document that accrual-based earnings management increased steadily from 1987 until the passage of the Sarbanes-Oxley Act (SOX) in 2002, followed by a significant decline after the passage of SOX. Conversely, the level of real earnings management activities declined prior to SOX and increased significantly after the passage of SOX, suggesting that firms switched from accrual-based to real earnings management methods after the passage of SOX. We also document that the accrual-based earnings management activities were particularly high in the period immediately preceding SOX. Consistent with these results, we find that firms that just achieved important earnings benchmarks used less accruals and more real earnings management after SOX when compared to similar firms before SOX. In addition, our analysis provides evidence that the increases in accrual-based earnings management in the period preceding SOX were concurrent with increases in equity-based compensation. Our results suggest that stock-option components provide a differential set of incentives with regard to accrual-based earnings management. We document that while new options granted during the current period are negatively associated with income-increasing accrual-based earnings management, unexercised options are positively associated with income-increasing accrual-based earnings management.

Effects of public infrastructure investment on the costs and productivity of private enterprises have proven difficult to quantify empirically. One piece of this puzzle that has received little attention is spatial spillovers. We apply a cost-function model to 1982–1996 state-level U.S. manufacturing data, to untangle the private cost-saving effects of inter- and intrastate public infrastructure investment. We implement two spatial adaptations—including a spatial spillover index in the theoretical model, and allowing for spatial autocorrelation in the stochastic structure. Recognizing such spillovers both increases the estimated magnitude and significance of cost savings from intrastate public infrastructure, and augments these productive effects.

We explore a new mechanism by which investors take correlated shortcuts and present evidence that managers—using sales management—take advantage of these shortcuts. Specifically, we exploit a regulatory provision wherein a firm's primary industry is determined by the highest sales segment. Exploiting this regulation, we provide evidence that investors classify operationally nearly identical firms as starkly different depending on their placement around this sales cutoff. Moreover, managers appear to exploit this by manipulating sales to be just over the cutoff in favorable industries. Further evidence suggests that managers engage in activities to realize large, tangible benefits from this opportunistic action.

To test hypotheses about earnings management, many studies investigate managers' manipulation of real activities (real earnings management, REM). Tests using measures of abnormal REM hinge critically on the measurement of normal real activities. Yet, there is no systematic evidence on the statistical properties of commonly used REM measures. We provide such evidence by documenting the Type I error rates and power of the test of the REM measures commonly used in the literature. We find these measures are often misspecified with Type I error rates that deviate from the nominal significance level of the test, especially in samples of firms with extreme performance or firm characteristics. We also compare the specification and power of traditional REM measures with performance‐matched REM measures to see if the latter provide better specified and more powerful tests. While performance‐matched REM measures are not immune from misspecification in all settings, in general they are better specified under the null hypothesis (i.e., in terms of Type I errors) than are traditional REM measures. Comparisons of the power to detect abnormal REM reveal that neither approach, traditional or performance‐matched, is consistently more powerful than the other in terms of detecting abnormal REM ranging from 1 to 10 percent of (lagged) total assets. The absence of a dominant approach to measure abnormal REM leads us to recommend that future researchers report results using both traditional and performance‐matched measures, so that readers are able to clearly assess the reliability of the inferences drawn about the magnitude and significance of the abnormal REM documented in a given study.

We examine whether customer-base concentration has a differential impact on profitability for firms contracting with major government customers versus firms contracting with major corporate customers. We document that firm profitability increases with the concentration of major government customers, but decreases with the concentration of major corporate customers. We attribute the contrasting results to the differential impact of major government and corporate customers on demand uncertainty. Specifically, firms contracting with major government customers face lower demand uncertainty that enables them to realize more efficiency gains from customer-specific investments, whereas firms contracting with major corporate customers are exposed to higher demand uncertainty that reduces the efficiency of customer-specific investments. Overall, our study suggests that major government customers are unique and important in the composition of customer base, and they impact firm outcomes in a significantly different way than major corporate customers.