Management-issued linguistic tone is, on average, positively associated with future earnings and incrementally priced by the market. However, prior capital markets research also shows that linguistic tone is difficult to process, while lab-based findings establish that less sophisticated investors are more susceptible to the use of heuristics in their interpretation of tone. Taken together, these findings motivate us to examine whether investors disagree on the valuation implications of linguistic tone and whether small investors are subject to differential, and notably less efficient, trading in response to the linguistic tone in these corporate announcements. We measure “residual tone” (i.e., that portion of linguistic tone that is not associated with contemporaneous economic news or current valuation fundamentals) for a sample of publicly-released management forecasts. We find that abnormal trading volume is increasing in the residual tone of management forecasts after controlling for the price reaction to forecasts, suggesting that there is significant investor disagreement over the implication of this tone for firm value. Further tests show that the net buying behavior of small investors is positively associated with residual tone, while larger investors tend to sell on this signal. The negative relation between residual tone and future stock returns found in prior work on earnings announcements holds in our sample of management forecasts as well, implying that this differential buying behavior involves an economically significant wealth transfer from small to large investors. We show in an extended analysis that any success that might accrue to small investors from trading positions taken during the event period is decreasing in residual tone.

We show that “commodity currency” exchange rates have surprisingly robust power in predicting global commodity prices, both in-sample and out-of-sample, and against a variety of alternative benchmarks. This result is of particular interest to policy makers, given the lack of deep forward markets in many individual commodities, and broad aggregate commodity indices in particular. We also explore the reverse relationship (commodity prices forecasting exchange rates) but find it to be notably less robust. We offer a theoretical resolution, based on the fact that exchange rates are strongly forward-looking, whereas commodity price fluctuations are typically more sensitive to short-term demand imbalances.

We examine whether local political corruption affects managers' discretionary disclosures of non-GAAP earnings. Using United States Department of Justice data on the number of corruption convictions of government officials, we find that firms headquartered in more corrupt districts (1) are less likely to report non-GAAP earnings, (2) have less aggressive non-GAAP earnings disclosures, and (3) experience a significant decline in the exclusion magnitudes of non-GAAP earnings. These results are more pronounced for firms with concentrated operations in their headquarter states and are robust to controlling for demographic characteristics, employing alternative corruption and non-GAAP measures, using the instrumental variable approach, and conducting a difference-in-difference analysis based on firms' relocation. Finally, we show that as local political corruption increases, managers exclude lower levels of both recurring and non-recurring items when calculating non-GAAP earnings. Overall, the results suggest that managing non-GAAP reporting is one channel through which firms could deter rent-seeking by corrupt officials.

Using a large sample of firms from 30 countries, we find that the integration of corporate social responsibility (CSR) criteria into executive compensation is associated with greater innovation output in countries around the world. We also find that this positive association is stronger in countries with weak stakeholder orientation, countries with weak legal environments, and countries without mandatory CSR reporting requirements. These findings suggest that CSR contracting can compensate for institutional voids and high stakeholder demand for CSR, and thereby foster firm innovation. The results of the channel analyses suggest that a greater level of employee innovation productivity, enhanced managerial risk-taking, and greater responsiveness of firms' R&D investment to their investment opportunities play a significant role in the association between CSR contracting and innovation. Overall, our study demonstrates in a global context the importance of linking executive compensation to nonfinancial criteria in addition to financial criteria, and it documents the heterogeneity in the effect of CSR contracting on firm innovation in different countries.

We study environmental and social (E&S) disclosures in annual reports. Using the word embedding model to examine over 210,000 annual reports from 24,271 public firms in 30 international countries/regions between 2001 and 2020, we create an E&S dictionary that allows us to document trends in annual report E&S disclosure. Specifically, we find: (1) increases in length and boilerplate language and (2) decreases in specificity. Our results also suggest that E&S disclosure quality improves after the adoption of voluntary ESG reporting frameworks but deteriorates after disclosure mandates. Our findings provide systematic evidence on the evolution of E&S disclosure in annual reports over the past two decades and shed light on how voluntary and mandatory standards have shaped global E&S reporting practices.

Does government debt impede firm innovation? We address this question by examining the effects of the debt accumulated by local government financing vehicles (LGFVs) across Chinese prefectures between 2006 and 2012 on industrial firms’ R&D spending and patents. We find that government debt reduces firms’ R&D expenditures and lowers firms’ number of new patents. One plausible explanation is that government debt raises firms’ capital costs, which limits innovation activities. Consistently, we find that the innovations of firms that are more likely to be financially constrained – small firms and firms with low cash flow – are more affected by the expansion of government debt. Our results imply that although government deficit spending may stimulate the economy in the short run, it could have negative repercussions for economic productivity in the longer run.

In response to the mixed views about the appointment-based connectedness between CEO and subordinate C-level executives, we systematically analyze the net effect of top management team (TMT) connectedness in the context of real corporate investment activities. We document a robust negative association between TMT connectedness and corporate investments, driven by the reduction in corporate R&D spending and acquisitions. Further tests show investment inefficiency in firms with closely connected managers, suggesting an average weak governance effect of TMT connectedness. To explain such an effect, we find that connected executives tend to avoid risky investments and shirk investment responsibilities when facing little career concerns. Interestingly, the agency cost and coordination benefit of interconnected TMT are not mutually exclusive. The adverse investment effect of TMT connectedness tempers in firms facing financial constraints and even reverses during the Global Financial Crisis when financial constraints are most likely binding.

Raising capital on wholesale debt markets is an important source of funding for banks and non-banking institutions throughout the world. We investigate the determinants of wholesale funding costs for the Global Systematically Important Banks (G-SIBs) using credit default swaps, the proxy for the cost of wholesale debt funding. Using 25 G-SIBs which are heavily reliant on debt capital markets across multiple currencies, this paper investigates whether the default risk of the interbank lending system, i.e., LIBOR-OIS spread is a new global macroeconomic factor in determining G-SIBs’ CDS spreads. Based on time-fixed effects and bank-fixed effects, we find default risk from the US banking system seems to play a greater role in explaining the wholesale funding costs of the G-SIBs than that of their home-country equivalent default risk. Overall, the findings make an important contribution to domestic and international debt funding markets and provide an insight for financial intermediaries, regulators, and monetary-policy makers.

The momentum life cycle (MLC) hypothesis proposed by Lee and Swaminathan (2000) is spurious because it is largely driven by multiplying two widely documented effects on momentum and turnover. After controlling for these two effects, what remains is a negative return pattern for late-stage momentum, mostly driven by the higher returns of low-turnover losers. Although the higher returns of low-turnover losers disappear either under a risk adjustment or with the inclusion of NASDAQ stocks, they remain significant during periods of optimism, thus supporting the underreaction theory of momentum proposed by Hong and Stein (2007), whereby turnover proxies for the divergence of opinion among investors.