We present a simple model of managerial reporting bias for a setting in which the capital market is uncertain about the manager's reporting objective. In this setting, the manager's reporting bias reduces the value relevance of the manager's report; that is, it adds noise to the report. Through comparative static results, our model yields insights into factors that affect the slope and intercept terms in a regression of price on earnings. Specifically, we find that the information content of the manager's report, as captured by the earnings slope coefficient, falls as the private cost to the manager of biasing reports falls, and as the uncertainty about the manager's objective increases. We also find that the magnitude of the adjustment for the expected amount of bias, as captured by the absolute value of the intercept, falls as the uncertainty about the manager's objective increases. Finally, to highlight conditions under which managers would lobby to retain an option to bias reports (i.e., retain reporting flexibility), we analyze the effect of the option to bias on the manager's welfare. For example, we show that the ex ante benefit from biasing the report is positive if there is sufficient uncertainty about the manager's reporting objective.

Reviews the book "Intermediate Accounting," 7th ed., by Jay M. Smith and K. Fred Skousen.

We assess how forms of disagreement among investors affect a firm's cost of capital. Firms experience a lower cost of capital if investors perceive that other investors are ignoring relevant disclosures (perceived errors of omission), but a higher cost of capital if investors perceive that others are responding to irrelevant disclosures (perceived errors of commission). The impact of these two sources of disagreement on the cost of capital is determined by the distribution of opinion and the nature of disclosure. For example, even though aggregated disclosures reveal less to investors, aggregated disclosures may decrease the cost of capital by eliminating disagreement associated with perceived errors of commission. These and additional results arise because the cost of capital is driven not only by investors’ uncertainty about the firm's future earnings performance, but also by investors’ uncertainty about the evolution of beliefs, which partly determines the path of prices.

We analyze how incentives affect the reporting of fair values using mutual funds’ valuations of Level 3 equity holdings. We conjecture that the observed stickiness of reported values arises because funds defer revaluation until they can make a sufficiently compelling and objective case to avoid costly accusations of aggressive valuation. Consistent with our conjecture, we find that funds’ revaluations of the same security are clustered in time and tightly distributed, and revaluations of non-traded securities are more likely when market returns are larger and the source of those returns is less subjective. In addition, consistent with a greater concern for overvaluation, we document that funds are more likely to reduce valuations of these holdings when market returns are negative. Finally, given the stickiness of valuations, we provide evidence that funds exploit valuation discretion to improve performance rankings through the timing of revaluations rather than through the levels of new values.

This paper considers how the presence of a speculative investor, who bets on a firm's future earnings report, affects how the firm's management manipulates that report. We examine the influence of the speculator's information on earnings management behavior, quality of reported earnings, and stock price efficiency. We also provide predictions for, and interpretations of, short‐window event studies and long‐window association studies.

This paper analyzes a communication game between a sender and receiver with misaligned incentives. Because of the misalignment, in equilibrium, the sender's privately observed information is not perfectly communicated. We study the relation between the quality of the sender's information and the quality of the information communicated. We establish that the quality of information communicated is a non‐monotonic function of the quality of the sender's information, and it is maximized when the sender has imperfect information. We suggest that our model applies to a setting where an equity research analyst communicates information about a firm's value to investors.

Research in sociology and ethics suggests that individuals adhere to social norms of behavior established by their peers. Within an agency framework, we model endogenous social norms by assuming that each agent's cost of implementing an action depends on the social norm for that action, defined to be the average level of that action chosen by the agent's peer group. We show how endogenous social norms alter the effectiveness of monetary incentives, determine whether it is optimal to group agents in a single or two separate organizations, and may give rise to a costly adverse selection problem when agents' sensitivities to social norms are unobservable.

Private organizations that produce public goods often receive offers for funding from large donors who seek to influence the nature of the public goods produced. We consider a model in which the potential for large donor influence creates a commitment problem for the organization in the sense that, from an ex ante perspective, the organization sets the price for influence too low given the opportunity cost. Our analysis identifies determinants of the likelihood of large donor influence and assesses various mechanisms that can alleviate or exploit the commitment problem—greater transparency, organization leadership preferences and/or incentives, and targeted small donor campaigns. Finally, we assess how an option to walk back influential large donor contributions or an inability to commit to longer-term agreements with influential donors alters the implications of potential large donor influence.

We examine a communication game between an analyst and a decision-maker and investigate how the presence of public information affects the precision of the information the analyst gathers and communicates to the decision-maker. We characterize conditions under which public information causes the analyst to underinvest or overinvest in the information gathered relative to the case where analyst credibility is not an issue. We then discuss when the presence of public information causes the analyst to reduce the depth of coverage of the firm, suggesting that the introduction of public information can make the decision-maker strictly worse off.