Rust (1997b) discovered a class of dynamic programs that can be solved in polynomial time with a randomized algorithm. For these dynamic programs, the optimal values of a polynomially large sample of states are sufficient statistics for the (near) optimal values everywhere, and the values of this random sample can be bootstrapped from the sample itself. However, I show that this class is limited, as it requires all but a vanishingly small fraction of state variables to behave arbitrarily similarly to i.i.d. uniform random variables.

Abstract The U.S. government uses its voting power to direct IMF loans to countries where U.S. banks are exposed to sovereign default (a de facto bailout). This effect is stronger in years when the costs of direct bailouts are higher and is also found among major European IMF members. We find that de facto bailouts reduce government incentives to default and that U.S. Congressional voting on IMF funding is consistent with a private interest view of government. Overall, we identify an alternative mechanism through which governments can backstop the losses of large multinational banks.

ABSTRACT This study examines corporate integrity culture—that is, a firm's shared values and behaviors related to compliance, trustworthiness, and ethics. Different from prior research that associates culture measures with general firm‐level outcomes, we evaluate the pervasiveness of the integrity culture within an organization across two disparate business functions: operations and financial reporting. We first develop a measure of corporate integrity culture based on firms' internal control environments and show that, as predicted, weak integrity culture contributes to both operational and financial non‐compliance. We next document the predicted positive contemporaneous association between operational and financial non‐compliance, controlling for the integrity culture reflected in the internal control environment. Given the organizational and physical distances and lack of day‐to‐day interactions between the two business functions, we infer that management's “tone at the top” likely affects non‐compliance in both functions. Finally, for firms with existing operational non‐compliance, we find more negative market reactions to accounting restatements and higher CEO turnover propensities following restatements. These results indicate that top management must consistently reinforce a culture of compliance and integrity, lest it decay throughout the organization. Our results also imply that regulators evaluating compliance in specific functions could benefit from reviewing compliance in other functions within the firm.

We explore the contributions of Black economists to research on major economic and social policy problems in the United States. We focus on applications in education, poverty and economic mobility, and public finance to extract common themes and patterns. The major themes that emerge include (i) Black economists’ examination of individual versus structural explanations for economic outcomes, (ii) the role played by race and discrimination, (iii) the endogenous determination of race, and (iv) the nature of objectivity and positionality in economic research. A unifying theme is a willingness of many Black economists to engage critically on economic policy issues, using frameworks both from within as well as outside of mainstream neoclassical economics.(JEL A11, D72, I23, I28, I32, J15, K42)

ABSTRACT In this study, we provide theoretical guidance for both analytical research and empirical research by considering how changing expectations of earnings affect a dishonest manager's strategy to overstate earnings and an auditor's strategy to exert effort in a two‐period setting. We expect our study's insights on changing economic conditions to help shape future research. We model the manager type as either honest or dishonest, which allows us to differentiate audit risk from audit effort. The key takeaways for future research are the insights on how changes in payoffs and expected earnings affect the associations that involve earnings overstatements and audit effort with audit risk and market price. For instance, researchers typically assume audit effort and audit risk are negatively associated, but we find the association can be positive when, for example, the auditor chooses a period 2 strategy based on the changes in period 1 game parameters. The results of our study provide two additional key insights on the design of future empirical tests. First, by dichotomizing, we show the importance of estimating the intercept in the market pricing equation when studying earnings quality, because market price also adjusts for expected bias through changes in the intercept. Second, our multiperiod setting demonstrates that the effects from a change in the manager's or auditor's incentives in period 1 may reverse in period 2. Empirical studies typically examine the contemporaneous effects of these changes on market price and/or audit risk but fail to identify the cross‐temporal effects we document in our study.

ABSTRACT Many companies regularly disclose non‐GAAP performance measures to communicate firm‐specific information that does not fit within the mold of GAAP reporting. However, these non‐GAAP measures may have low information content or even be misleading to investors. Thus, the question arises of whether auditors should play a larger role in the reporting of non‐GAAP measures, which currently are not audited. We run an experiment to provide ex ante evidence on the effect of auditing non‐GAAP measures. Specifically, we present investor‐participants with a non‐GAAP measure that should be used when making investment judgments (more informative) or should not be used when making investment judgments (less informative) and is either audited or is not audited. As predicted, we find that, when participants view a non‐GAAP measure that is more informative, they appropriately use the non‐GAAP measure in their investment‐related judgments, regardless of whether the measure is audited. However, also as predicted, we find that, while participants appropriately do not use a less informative non‐GAAP measure when it is not audited, participants inappropriately do use the less informative non‐GAAP measure in their investment‐related judgments when it is audited. Mediation results provide evidence consistent with audits affecting investors' reliance on non‐GAAP measures. Specifically, our results are consistent with audits of non‐GAAP measures signaling more than is intended, evidenced by investors perceiving an audited non‐GAAP measure as being useful in their investment decisions when the measure is less informative to them. Our findings suggest that regulators should exercise caution when it comes to prescribing assurance over non‐GAAP measures.

We study the emergence of blockholders as an important mechanism that corrects deviations from target CEO relative debt-to-equity incentive ratios. We find that a new active blockholder more likely emerges when a firm deviates from target; deviations fall during the period the blockholder owns shares; and deviations fall more when the blockholder appoints a director to the firm. When a firm is above (below) target, blockholders are associated with less (more) inside debt and more (no change in) inside equity, implying there is no “one-size-fits-all” compensation change for blockholders. Outside debt and equity increase for both above and below target firms.

This paper integrates the classic theory of firm boundaries, through span of control or taste for variety, into a model of the labor market with random matching and on‐the‐job search. Firms choose when to enter and exit, whether to create vacancies or destroy jobs in response to shocks, and Bertrand‐compete to hire and retain workers. Tractability is obtained by proving that, under a parsimonious set of assumptions, all worker and firm decisions are characterized by their joint surplus, which in turn only depends on firm productivity and size. The job ladder in marginal surplus that emerges in equilibrium determines net poaching patterns by firm characteristics that are in line with the data. As frictions vanish, the model converges to a standard competitive model of firm dynamics. The combination of firm dynamics and search frictions allows the model to: (i) quantify the misallocation cost of frictions; (ii) replicate elusive life‐cycle growth profiles of superstar firms; and (iii) make sense of the failure of the job ladder around the Great Recession as a result of the collapse of firm entry.

ABSTRACT We examine whether voluntary disclosure is associated with incentives for firms to collude. Public disclosure can facilitate collusion by aiding with coordination and monitoring for defections. Using common ownership (investors holding stock in competing firms) to identify reduced incentives to compete, we find a positive association between public disclosure and these incentives. We also find that common ownership is positively associated with measures of disclosure that are likely to facilitate tacit collusion and that this association is stronger in industries where collusion is easier. Our study expands the literature on disclosure and competition among firms by showing that public disclosure is positively associated with incentives for tacit collusion. This finding is consistent with managers facilitating anticompetitive outcomes using voluntary disclosure.

ABSTRACT We use experimental markets to examine how pushing investment information and the value relevance of that information interact to influence investors’ value estimate accuracy and market price efficiency. Developments in technology allow information to be pushed to investors anytime and anywhere. However, in addition to value‐relevant information, pushed information often includes information that is irrelevant for assessing firm value. Drawing on psychology theory, we find that pushing information has divergent effects depending on the value relevance of the information. Pushing only value‐relevant information increases investors’ processing of the information and leads to more accurate value estimates and market prices than when not pushed. In contrast, pushing a mix of value‐relevant and value‐irrelevant information reduces investors’ processing of value‐relevant information, leading to less accurate value estimates and market prices due to poorer acquisition and integration of information than when not pushed or when only value‐relevant information is pushed. Collectively, our results reveal a dark side to push technologies, particularly with the growing presence of value‐irrelevant information.