Knowledge that Transforms

Financial statement fraud generates many negative effects, including reducing people's willingness to participate in the stock market. If it also stigmatizes accounting, it may similarly adversely affect the quantity and quality of workers willing to become accountants, thereby potentially creating negative effects for years to come. We examine the impact of fraud on the labor force entering the accounting profession, which is a key input into the production of accounting information (i.e., the output). Using data describing millions of college students across the United States, we find incoming students are actually more likely to major in accounting when local frauds occur during their formative years. These students are also more likely to have attributes desired by the accounting profession (e.g., high academic aptitude) and are more likely to subsequently serve in public accounting and become Certified Public Accountants. In the context of other fields (i.e., all college majors), we find that fraud similarly spurs interest in other business disciplines, but not in majors outside of business schools. Those attracted to other business disciplines, however, generally possess different traits. Specifically, students entering accounting are distinctively more likely to exhibit values espoused by the accounting profession, including a predisposition to public service and less commercial orientation. Thus, nonpecuniary motives appear to uniquely drive accounting student enrollment following fraud. Collectively, our findings suggest that, while fraud is unmistakably bad, it appears to have the positive unintended consequence of attracting labor into business disciplines and, in accounting, increasing the prevalence of desirable traits among entrants.

We investigate how the mandatory adoption of International Financial Reporting Standards (IFRS) by publicly listed firms in the European Union affects peer private firms. We find that private firms’ capital investment decreases significantly after the IFRS mandate, relative to public firms. Private firms also display decreased investment when benchmarked against firms relatively insulated from the impact of the IFRS mandate, but the magnitude of the effect is smaller in this case. These results are consistent with the hypothesis that mandatory IFRS reporting (combined with other reforms), while increasing public firms’ financing and investment, crowds out funding for private firms. The effect is more pronounced for larger private firms and in industries where public peers have greater external financing needs. Our evidence suggests that financial reporting regulations cause shifts in resource allocation in an economy.

Mafia firms introduce distortions in the markets in which they operate, increasing the cost of doing business for peer firms. We investigate whether peers respond by increasing their tax avoidance and thus increasing funds available to compete with the Mafia firms. Using a sample of Italian anti‐Mafia police actions that resulted in the removal of Mafia firms and a difference‐in‐differences approach, we find that peers reduce their tax avoidance following these actions. We further show that, following anti‐Mafia police actions, peer firms improve their performance and increase capital investment while enjoying a reduction in the cost of raw materials. Overall, our results highlight the microlevel channels through which Mafia can affect firm outcomes and local economies.

Firms are increasingly implementing performance–potential assessment systems, whereby supervisors evaluate employees’ current performance and future‐oriented potential (i.e., promotion prospects). Whether retention is greatest for high performance–high potential (HiPo) employees under such a system is an empirical question—while the “promise” of a promotion may aid retention, these employees likely face attractive outside options. Using data from a multinational firm, I find that HiPos generally depart at a lower rate than lower performing non‐HiPos. Among shorter tenured employees, I find the strongest evidence that potential matters to departures, above and beyond performance. In several instances, the rate of departure is lower when assessed potential is higher, holding performance constant. This is the case both among higher performers, where high potential leads to HiPo status, and among lower performers where high potential affords no such status. My findings suggest that HiPo status and potential ratings may help in facilitating employees’ early sorting decisions.

Using influenza epidemic data, we examine how constraints on corporate information production affect disclosure policies. We find that firms in areas with higher flu activity are less likely to issue short‐run earnings forecasts and more likely to issue long‐run earnings forecasts. These results are more pronounced when the information production process is more complex, when managers face a greater reputational loss for issuing low‐quality short‐run forecasts, and when firms’ costs of switching the forecast horizon are lower. Further analysis implies that the effect of flu activity on these forecast issuance decisions is not driven by firm performance or information uncertainty. Our results suggest that managers do not simply avoid issuing forecasts in response to information production constraints. Instead, they shift the forecast horizon from short‐run to long‐run, appearing to balance the costs of issuing low‐quality forecasts with those of not issuing forecasts at all.

Using a wide sample of international publicly traded firms, this paper studies the rapidly increasing practice of incorporating Environmental, Social, and Governance (ESG) metrics in executive compensation contracts. Our evidence suggests that this compensation practice varies at the country, industry, and firm levels in ways that are consistent with efficient incentive contracting. We also observe that reliance on ESG metrics in executive compensation arrangements is associated with engagement, voting, and trading by institutional investors, which suggests that firms could be adopting this practice to align their management's objectives with the preferences of certain shareholder groups. Finally, we find that the adoption of ESG Pay is accompanied by improvements in key ESG outcomes, but not by improvements in financial performance.

Using the implementation of the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system from 1993 to 1996 as a shock to information dissemination technologies, we examine how a significant reduction in disclosure processing costs affects the real economy. We find that the EDGAR implementation leads to an increase in corporate investment and that this effect is concentrated in value firms. We provide evidence that improved equity financing and enhanced managerial incentives are likely the underlying mechanisms. Specifically, the EDGAR implementation leads to an increase in a firm's stock liquidity, a decrease in the cost of equity capital, and an increase in the level of equity financing. Consistent with the monitoring effect of broad information dissemination, the EDGAR implementation leads to an increase in a firm's operating performance. Our findings suggest that it is important to consider information dissemination beyond information production when examining the real effects of corporate disclosures.

We examine how open procurement data affect the competitiveness of award procedures and the execution of government contracts. The European Union recently made its historical procurement notices available for bulk download in a cohesive and user‐friendly database. Comparing government contracts above and below EU procurement size thresholds, we find that, after the open data initiative, procurement officials are more likely to award treated contracts through open bidding. In cross‐sectional analyses, we document variation in the open bidding effect consistent with two underlying mechanisms: (1) increased scrutiny by NGOs and investigative journalists and (2) learning by national procurement regulators. However, treated contracts are also more likely to experience costly modifications because the shift to open bidding introduces rigidity that limits officials’ discretion in selecting suppliers based on private information. Overall, our evidence indicates that open procurement data promote competitive bidding but lead to contracts with weaker execution performance. These inferences also hold in an alternative open data setting.

We examine whether the Financial Accounting Standards Board (FASB) Codification made it easier for preparers and auditors to locate relevant accounting guidance. We find that areas of U.S. GAAP with more dispersed and voluminous guidance before the Codification experience a larger post‐Codification reduction in restatements. We find a similar decline in SEC comment letter questions referencing areas of U.S. GAAP with more dispersed and voluminous pre‐Codification guidance. Our results suggest that before the Codification, preparers and auditors had difficulty in locating the appropriate accounting guidance and that the Codification mitigated this difficulty.

This paper studies whether and how environmental, social, and governance (ESG) disclosure regulations imposed on banks generate transmission effects along the lending channel. I use a setting of U.S. firms borrowing from non‐U.S. banks and exploit the staggered adoption of ESG disclosure regulations in banks’ home countries. I find that exposed borrowers of affected banks improve their environmental and social (E&S) performance following the disclosure mandate. Consistent with banks enhancing both their engagement and selection activities, affected banks impose more environmental action covenants in loan contracts, and they are more likely to terminate a borrower with bad E&S records following the regulation. Further evidence shows that the transmission effects are stronger when a disclosure regulation is well‐enforced (as indicated by a greater increase in banks’ disclosure) and among borrowers with greater switching costs. Collectively, the findings document the role of lending relationships in transmitting the real effect of ESG disclosure regulations from banks to borrowing firms.