Knowledge that Transforms

We study the information content of earnings announcements and its relevance for job search using detailed search data from half a million anonymous job seekers. We find evidence consistent with job seekers initiating job-search activity in response to a prospective employer's earnings announcements. Job seekers search more intensely for employers with media coverage and earnings growth, consistent with the attention and information roles of earnings announcements. We find corroborating evidence about the usefulness of earnings announcements' financial information content to job seekers: (1) a survey experiment indicates that job seekers are more willing to apply to firms when provided with evidence of positive performance; (2) job seekers search for financial information during applications and interviews; and (3) financial information is predictive of future job prospects, including job openings and career growth. Overall, our paper suggests that earnings announcements—among other sources—prompt and guide job seekers' search activities.

The regulation that caps executives’ variable compensation, as part of the Capital Requirements Directive IV of 2013, likely affected executive turnover, compensation design, and risk-taking in EU banking. The current study identifies significantly higher average turnover rates but also finds that they are driven by CEOs at poorly performing banks. Banks indemnified their executives by off-setting the bonus cap with higher fixed compensation. Although our evidence is only suggestive, we do not find any reduction in risk-taking at the bank level, one purported aim of the regulation.

Bloomfield, Marvão, and Spagnolo (2023) establish an interesting yet puzzling finding: Firms in concentrated industries that form cartels are more likely to use relative performance evaluation (RPE) compensation arrangements for their top managers. The paper interprets this as evidence that cartel members constrain managers' incentives to engage in costly sabotage when their compensation depends on their peer firms' performance. I argue that successful costly sabotage to gain an RPE advantage is extremely unlikely and that costly sabotage is more likely among cartel firms than non-cartel firms. It therefore is an unlikely explanation of the paper's main finding. I propose an alternative explanation, that RPE benchmarks include firms that are not cartel member firms.

We examine whether the potential for costly sabotage is a deterrent to firms' use of relative performance evaluation (“RPE”) in CEO pay plans. We exploit illegal cartel membership as a source of variation in the potential for costly sabotage and document that firms are more likely to use RPE if they are currently cartel members. Moreover, firms frequently drop RPE from their CEOs’ pay plans immediately after their cartels are detected, dissolved and punished. We further provide suggestive evidence that the potential for costly sabotage explains these patterns; cartel membership severs the empirical association between RPE and competitive aggression.

Tax enforcement and compliance are critical features of any tax system. One way that prior studies examine these topics is by measuring taxpayer responses to different types of letters from a tax authority. We extend this research by focusing on ‘remote firms’ – firms with no physical presence in the tax authority's jurisdiction – and examining sales tax compliance. Specifically, we partner with the Texas Comptroller's office to conduct a randomized field experiment that examines whether and why firms comply with remote tax authority. Using a sample of remote firms with a recent history of late filing, we find that tax authority correspondence increases the average reported sales tax base by 105 percent and tax payments by $3,711, although the effects are short-lived. Our evidence suggests that the effect is driven by increased salience of firms' tax obligations. Our study offers key insights given the growth in cross-border transactions and remote taxation.

This paper examines the effect of shareholder governance on firms' cost of borrowing using the voting outcomes of shareholder-sponsored anti-takeover governance proposals. Implementing a regression discontinuity design centered around the proposals' passing thresholds, we show that firms' public debt prices fall significantly upon the proposals' passage, and that banks demand higher interest rates and more general covenants on new loans issued to those firms. We find that these effects are more pronounced for riskier firms where shareholder-debtholder conflicts are more severe. Moreover, firms with passed shareholder-sponsored proposals become more volatile, reflecting an increase in their risk-shifting incentives. Collectively, our findings suggest that shareholder governance exacerbates shareholder-debtholder conflicts and raises firms’ cost of borrowing.

Aghamolla and Smith (2023) make a significant contribution to enhancing our understanding of how managers choose financial reporting complexity. I outline the key assumptions and implications of the theory, and discuss two empirical implications: (1) a U-shaped relationship between complexity and returns, and (2) a negative association between complexity and investor sophistication. However, the robust equilibrium also implies a counterfactual positive market response to complexity. I develop a simplified approach in which simple disclosures indicate positive surprises, and show that this implies greater investor skepticism toward complexity and a positive association between investor sophistication and complexity. More work is needed to understand complexity as an interaction of reporting and economic transactions, rather than solely as a reporting phenomenon.

Many U.S. private firms choose either a financial statement compilation or review rather than the higher assurance provided by an audit, yet little is known about these choices. We explore economic aspects of private firm choice of less-than-audit levels of assurance applied to GAAP-based financial statements. We find that CPA fees more than double for each increment in assurance. Commonly used financial reporting quality proxies are higher for both reviews and audits relative to compilations but are statistically indistinguishable on average between reviews and audits. Cost of debt is significantly lower for reviews than for compilations and significantly lower for audits than for reviews. Finally, we find that assurance level choices are associated with bank debt, trade credit, and potential internal information reliability and control concerns.

Binz, Ferracuti, and Joos (2023) examine whether better internal information systems can mitigate the association between inflation and investment. According to Real Business Cycle models, inflation should not impact real decisions like investment, yet empirically the two are positively related. Lucas (1972) theorizes that imperfect information can cause agents to rationally extrapolate from their local set of information to make conclusions about what is happening in aggregate. Motivated by this model, the authors argue that better internal information systems allow managers to disentangle firm-level real shocks from nominal shocks. My discussion evaluates the measurement of internal information quality and questions how distinct it is from external information quality. Next, I relate the findings to a growing literature that examines how individuals and firms form economic expectations. Finally, I consider whether and how these findings can inform policy.

The wisdom of crowds suggests that groups with more diversely informed individuals reach more informed decisions because their members are collectively more knowledgeable. I study this idea in the context of the market's response to earnings announcements by examining how information diversity across investors affects the efficiency of the price response to earnings news. I measure investors' information diversity based on their geographic dispersion, which I estimate using the locations of the requests for firms' filings to EDGAR. Greater geographic dispersion is associated with greater trading during the announcement period; this supports the use of geographic dispersion as a measure of information diversity. Consistent with my predictions, the price response to a firm's earnings news is more efficient when the firm's investors have greater information diversity. In further analysis, I find that the initial heightened trading for firms with more diversely informed investors subsides quickly after the announcement period.