We study a relatively recent change in voluntary disclosure practices by management, namely, the issuance of cash flow forecasts. We predict and find that management issues cash flow forecasts to signal good news in cash flow, to meet investor demand for cash flow information, and to precommit to a certain composition of earnings in terms of cash flow versus accruals, thus reducing the degree of freedom in earnings management. Our results also suggest that management discloses good news in cash flow to mitigate the negative impact of bad news in earnings, to lend credibility to good news in earnings, and to signal economic viability when the firm is young. Our finding that management cash flow forecasts primarily convey good news is in contrast to the generally negative nature of management earnings guidance and suggests that different incentives drive firms' disclosure of different financial information.

The East Asian countries Hong Kong, Malaysia, Singapore and Thailand provide rare insight into the interaction between accounting standards and the incentives of managers and auditors. Their standards derive from common law sources (UK, US, and IAS) that are widely viewed as higher quality than code law standards. However, their preparers’ incentives imply low quality. We show their financial reporting quality is not higher than under code law, with quality operationalized as timely recognition of economic income (particularly losses). It is misleading to classify countries by standards, ignoring incentives, as is common in international accounting texts, transparency indexes, and IAS advocacy.

Mandatory disclosure provides benefits, but it also entails costs. One cost concerns managerial learning: by discouraging informed trading, disclosure could reduce managers’ ability to glean decision-relevant information from prices. Using mandatory segment reporting in the United States, we uncover a reduction in investment-q sensitivity, indicating lower investment efficiency after regulation. Consistent with learning, lower sensitivity is concentrated in firms with more informed trading and lower financing constraints. Constrained firms exhibit no change in investment-q sensitivity, suggesting that they enjoy countervailing benefits via greater financing and stronger governance. Overall, we document a novel link between mandatory disclosure and real effects. Received October 25, 2017; editorial decision June 20, 2018 by Editor Wei Jiang.

We study how foreign investors’ access to corporate information varies with pairwise geopolitical tensions between the investor's and investee's countries. Using a sample of 1,760 country‐pairs, we find that geopolitical tensions between a conference call host firm's country and a foreign country relate negatively with investor participation from that foreign country as well as the quality and tone of management responses in the call, suggesting reduced foreign investor information access with rising tensions. A single‐country analysis of Chinese AB‐share firms produces similar inferences. With higher China–foreign tensions, foreign attendance at private meetings with management declines, and English translations of local language disclosures become less frequent and shorter in length. Curtailment in English translations is more pronounced when local language disclosures contain politically sensitive words, suggesting lower information supply by firm choice. Reduced disclosures from geopolitical tensions are impounded in foreign investors’ asset pricing decisions, resulting in steeper foreign‐share price discounts.

We study the influence of political partisanship in SEC investigations and AAER enforcement actions against financial misconduct. We find that the SEC is more likely to launch an investigation against a firm that is misaligned with the agency’s political ideology than other firms. The likelihood of an AAER appears unaffected by political misalignment, but once named in an AAER, a misaligned firm faces harsher penalties than other firms. We find evidence that collectively points to potential misallocation of scarce enforcement resources due to partisanship: conditional on investigation, misaligned firms are less likely to receive an enforcement action, and conditional on misreporting, non-misaligned firms are less likely to be investigated.

This paper provides evidence about the unintended consequences arising when small companies are exempted from costly regulations—these firms have incentives to stay small. Between 2003 and 2008, the SEC postponed compliance with Section 404 of the Sarbanes‐Oxley Act of 2002 (SOX) for “non‐accelerated filers” (firms with public float less than $75 million). We hypothesize and find that some of these firms had an incentive to remain below this bright line threshold. Moreover, we document that these firms remained small by undertaking less investment, making more cash payouts to shareholders, reducing the number of shares held by non‐affiliates, making more bad news disclosures, and reporting lower earnings than control firms. Finally, there is no evidence that firms remaining small are doing so to maintain insiders' private control benefits. These findings have implications beyond SOX because numerous federal and state regulations exempt small firms via bright line size thresholds.

We document that CEO cash compensation is twice as sensitive to negative stock returns as it is to positive stock returns. Since stock returns include both unrealized gains and unrealized losses, we expect cash compensation to be less sensitive to stock returns when returns contain unrealized gains (positive returns) than when returns contain unrealized losses (negative returns). This is consistent with boards of directors exercising discretion to reduce costly ex post settling up in cash compensation paid to CEOs.

Analysts often update their recommendations following corporate news. Questions have been raised regarding analysts’ ability to generate new information beyond recent corporate events. Employing a comprehensive database on corporate news, we show that only a small minority, or 27.9%, of all recommendation revisions directionally confirm the information in the preceding corporate events and even these “confirming revisions” facilitate the information discovery of corporate events and thus cannot simply be dismissed as “piggybacking.” Our analysis further shows that analysts not only facilitate price discovery to corporate news through issuing trending revisions but also help reverse prevailing market sentiments following corporate news by issuing contrarian revisions. Our study is the first to investigate short‐window intraday market reactions to revisions issued after hours, which account for 70% of all recommendation revisions in our sample period. Analysts’ incentives to issue revisions after hours appear to reflect demands from large institutional clients, who dominate after‐hours trading. More importantly, we show that the after‐hours revisions are associated with significantly greater price reactions and different price reaction patterns than revisions issued during regular trading hours. Collectively, our evidence indicates that analysts are a significant source of new information beyond recent corporate news and they also help shape the market's assessment of corporate disclosures.

Economics challenge the specification of discretionary accrual models. Since rent-seeking firms pursue differentiated business strategies, firms in the same industry experience idiosyncratic shocks due to heterogeneous economic fundamentals and hence have different accrual-generating processes. We present evidence that idiosyncratic shocks are widespread, propagate through multiple years of financial statements, and reduce accrual models' goodness of fit. This not only affects abnormal accrual estimates for the firm experiencing shocks, but also affects measurement of abnormal accruals for other firms in the industry. We show that idiosyncratic shocks not only add noise to abnormal accruals, but can also exacerbate bias in both unsigned and signed abnormal accruals. We propose ways to reduce accrual model misspecification.