Statement of Financial Accounting Standards (SFAS) 141 (Accounting Standards Codification [ASC] 805) requires that firms record identifiable assets and liabilities acquired in business combinations at fair value. While the FASB argued that these fair values should provide users with incremental decision‐useful information, opponents have continuously argued that they are too difficult to reliably estimate and could be subject to managerial discretion. Using hand‐collected data from US mergers and acquisitions, we find that, on average, fair value adjustments predict future cash flows incrementally beyond pre‐deal book values and cash flows, goodwill, and other firm and deal characteristics. We also find that the relation between fair value adjustments and future cash flows varies predictably based on several factors that affect managers' ability and incentives to provide accurate estimates. Furthermore, despite prevailing concerns about their usefulness, we find that fair values for intangible assets predict future cash flows, on average. However, we find that this relation is driven primarily by the fair values of customer‐ and contract‐related intangible assets and that the fair values of other types of identifiable intangibles do not necessarily convey incremental decision‐useful information. Finally, we find that users appear to rely on the information conveyed by these disclosures, as evidenced by revisions to analysts' forecasts and changes in stock prices. Overall, our findings provide insight regarding the usefulness of current standards and users' reliance on fair values in business combinations.

We investigate how firms' use of derivatives impacts voluntary disclosure and offer four main findings. First, we find that when firms begin using derivative instruments, they increase the frequency of management earnings forecasts. Second, using path analysis, we find a direct link between derivative usage and forecast frequency, as well as an indirect link through reduced earnings volatility. Third, we find that CEOs with more pronounced career concerns increase forecast frequency only when derivatives make earnings easier to forecast and find no evidence that investor demand drives the decision to provide a forecast. These results suggest that the primary mechanism for the association between derivative usage and forecast frequency is a reduction in the manager's costs of providing the forecasts. Finally, we find that the majority of derivative‐induced forecasts are uninformative to capital market participants, especially after FAS 161 provided the necessary underlying data to understand how firms use derivatives. Overall, we provide the first empirical evidence that firms that use derivatives issue more management forecasts, but we also find that these incremental forecasts are largely uninformative and appear driven by managerial career concerns.

Cash flow hedge derivatives are an example of an economic transaction that is not fully portrayed in the financial statements in two key ways. First, while changes in the fair value of the derivative are recorded at each reporting date, changes in the value of the underlying purchase or sale commitment are not recorded or disclosed until that transaction occurs. Therefore, until the purchase or sale occurs, the financial statements only portray half of the economic transaction. Second, the gains/losses associated with these derivatives provide an inverse signal about the persistence of firm profitability. We document a method by which financial statement users can partially adjust for these distortions and find evidence that debt investors incorporate information conveyed by cash flow hedge gains/losses into their pricing of new debt issuances. We also find evidence that credit analysts incorporate these adjustments into their firm‐level credit ratings but are unable to find consistent evidence of similar adjustments to credit ratings on new debt issuances. Overall, our results suggest that a subset of sophisticated investors (i.e., those in public debt markets) appear to incorporate information from cash flow hedge accounting into their assessments of firm risk, and that users may benefit from enhanced disclosure about the amount and timing of a firm's future transactions that are exposed to foreign currency, interest rate, or commodity price risk as well as the amount and timing of derivatives that protect the firm from those risks.

Prior research finds that unrealized gains/losses on cash flow hedges are negatively associated with future earnings, and that investors and analysts fail to anticipate this association. These studies speculate that this mispricing is due to either poor derivatives disclosures or the accounting model for cash flow hedges. We examine whether enhanced mandatory derivatives disclosures set forth in FAS 161 improve users' understanding of firms' hedging activities and offer three main findings. First, we find that this mispricing does not persist after FAS 161. Second, we find that the correction of mispricing is greatest when disclosure might help investors most. Finally, we find that analyst forecast accuracy improves after FAS 161. Overall, our results suggest that the enhanced mandatory derivative disclosures required by FAS 161 improved users' understanding of the effects of derivative and hedging activities on future firm performance and firm value—and consequently mitigated investor mispricing.

Boards of directors encourage risk-averse managers to take risky actions by providing stock options and severance pay. We demonstrate that the ability of these incentives to encourage risk-taking hinges on the level of uncertainty facing the manager. We confirm prior findings that stock option convexity encourages risk-taking but find that this relation only holds when market-wide uncertainty is low. We also confirm prior findings that severance pay encourages risk-taking but find that this relation only holds during high market-wide uncertainty and negative market-wide performance. Finally, we find that compensation committees respond to variation in uncertainty by adjusting the level of option grants. Our results suggest that the effectiveness of incentives to take risk varies with the market-wide uncertainty, and that boards consider this in annual compensation design. Data Availability: Data are available from the public sources cited in the text.

Theory argues that career concerns (i.e., concerns about the impact of current performance on contemporaneous and future compensation) encourage managers to withhold bad news disclosure. However, empirical evidence regarding the extent to which a manager's career concerns are associated with a delay in bad news disclosure is limited. Across multiple proxies for career concerns, we find that the extent to which managers delay bad news is positively associated with their level of career concerns. Then, we hand-collect data on a compensation contract that firms use to reduce CEOs' career concerns (i.e., ex ante severance pay agreements). We find that if managers receive a sufficiently large payment in the event of dismissal, they no longer delay the disclosure of bad news. Overall, our findings support prior theoretical evidence that managers delay bad news disclosure due to career concerns and suggest a mechanism through which firms can mitigate the delay. JEL Classifications: M12; M41. Data Availability: Data are available from the public sources cited in the text.