Effective financial reporting requires efficient information processing. This paper studies factors that determine efficient information processing. I exploit a unique small business lending setting where I am able to observe the entire codified demographic and accounting information set that loan officers use to make decisions. I decompose the loan officers’ decisions into a part driven by codified hard information and a part driven by uncodified soft information. I show that a machine learning model substantially outperforms loan officers in processing hard information. Loan officers can only process a sparse set of useful hard information identified by the machine learning model and focus their attention on salient signals such as large jumps in cash flows. However, the loan officers use salient hard information as “red flags” to highlight where to acquire more soft information. This result suggests that salient information is an attention allocation device: It guides humans to allocate their limited cognitive resources to acquire soft information, a task in which humans have an advantage over machines.

Asset pricing predictions from the investment CAPM depend on the cross-sectional relation between investment and profitability. In samples of U.S. stocks featuring high cross-sectional investment-profitability correlation, both investment and profitability premiums are weak. Consistent with the conditional predictions from the investment CAPM, triple sorts on size, investment, and profitability as in Hou et al. (2015)’s q-factors resurrect the premiums in the high-correlation samples. We find similar results using cash-based profitability, consistent with the dynamic investment CAPM. Our work has important implications for constructing asset pricing factors and interpreting out-of-sample asset pricing test results, in particular the insignificance of historical investment and profitability premiums.

Controlling shareholders dominate corporations and shareholder exit behavior is usually accompanied by the transfer of control. Using China's A-share listed companies as data from 2000 to 2017, this study investigates the effect of corporate litigation on the exit of controlling shareholders and related mechanisms for the first time. Empirically, we find that if a firm is involved in a lawsuit as a defendant, then the possibility of the controlling shareholder's exit increases. This finding is robust to various checks, including the parallel-trend assumption, placebo, instrumental variable tests, and the consideration of other potential factors. The tests reveal that this effect is mainly due to an increase in three aspects—the uncertainty of the firm's future cash flow, corporate risk, and external financing costs. Heterogeneity analyses find that contract lawsuits exhibit the strongest positive predictive powers over the subsequent exits of controlling shareholders. The firm's majority controlling shareholders, and institutional, non-family, and non-financial controlling shareholders are more likely to exit upon litigation.

We study optimal control problems in the multivariate linear‐quadratic‐Gaussian framework under rational inattention. We propose a three‐step procedure to solve this problem using semidefinite programming and derive the optimal signal structure without strong prior restrictions. We analyze both the transition dynamics of the optimal posterior covariance matrix and its steady state. We characterize the optimal information structure for some special cases and develop numerical algorithms for general cases. Applying our methods to solve three multivariate economic models, we obtain some results qualitatively different from the literature.

We examine the voluntary disclosure behavior of peer firms of hostile takeover targets. We find that peer firms under control threat use a disclosure strategy that emphasizes bad news: they provide more bad news forecasts, tend to bundle bad news forecasts with earnings announcements, use more negative tone in conference call presentations, and more evenly distribute negative tonal words throughout the presentation to heighten the visibility of bad news. This asymmetric disclosure of bad news is concentrated in firms whose managers have greater incentives to mitigate the control threat—firms with younger CEOs, CEOs with higher total compensation, and firms with weaker anti-takeover provisions. Further tests show that peer firms also manage accruals downward. We contribute to the sparse literature on the impact of corporate control contests on voluntary disclosure by demonstrating that peer firms under control threat emphasize bad news to preempt control threat.