In this paper I show that the bond price reaction to earnings announcements has predictive power for post-announcement stock returns and that this predictive ability is driven by the bonds of non-investment grade firms. I find that bonds’ predictive ability is more pronounced in firms that have a lower level of institutional shareholder ownership and whose bonds are more liquid. This paper enhances our understanding of the relation between the stock and bond markets and complements the literature which documents whether, and under what circumstances, various accounting-based measures and financial statement components predict post-announcement stock returns.

Section 1502 of the Dodd–Frank Act requires SEC‐registered issuers to conduct supply chain due diligence and submit conflict minerals disclosures (CMDs) that indicate whether their products contain tantalum, tin, tungsten, or gold (3TG) sourced from the Democratic Republic of the Congo (DRC) or its neighboring countries (“covered countries”). Consistent with the reputational cost hypothesis, we find that heightened public attention to CMDs increases responsible sourcing. After Section 1502 takes effect, we find higher demand for 3TG products processed in certified smelters, decreased conflicts in covered countries’ mining regions relative to other regions, and reduced sensitivity of conflict risk to conflict minerals’ price spikes. Finally, we find that conflicts decrease in Eastern DRC territories with prevalent 3T (tantalum, tin, and tungsten) mines but increase in territories with prevalent gold mines. Overall, our findings highlight the real effects of enhanced supply chain transparency regulation.

To mitigate information asymmetry in acquisitions, the seller makes contractual representations and warranties (referred to as “R&W” or “reps”) about the state of the target, such as attesting to the accuracy of the target’s financial statements. While seller indemnities allow buyers to impose costs due to breaches in the reps discovered after the deal’s close, these indemnities involve significant contracting costs. To mitigate these costs, the acquisition parties have increasingly turned to purchasing representations and warranties insurance. Using a proprietary and novel sample of R&W insurance policies issued worldwide for acquisitions of non-public targets, we find that the demand for R&W insurance, the premium charged for it, and the likelihood of a claim being filed are correlated with industry metrics for valuation uncertainty, the type of acquirer and seller, and the target’s legal regime. In particular, we find higher demand for R&W insurance and a higher R&W insurance premium charged when the target belongs to an industry with weaker internal controls. We also find that a higher premium is charged when the target is in an industry with relatively high levels of R&D to sales, indicating that the insurance company expects unrecognized intangible assets to have a greater risk of future claims. Our study adds to our understanding of how parties reduce target valuation uncertainty and the role of disclosures and R&W insurance policies in private mergers and acquisitions transactions.

We examine whether Governmental Accounting Standards Board (GASB) financial statement disclosure alters local governments' economic decision-making. To do so, we exploit a recent GASB standard that eliminated differences in the disclosure requirements for county governments' pension obligations. The standard, GASB 68, had no effect on pension economics or the annual budget—it affected only whether and how information was presented on GASB financial statements. Using a broad hand-collected dataset, we document that counties that did not disclose information about their pension obligations before GASB 68 reduced public welfare expenditures, employment, and salary expenses relative to those that had disclosed such information. We conduct extensive field research and employ several cross-sectional analyses to conclude that the effects we document are in part driven by increased awareness of the financial costs of pension obligations by newly disclosing counties.

This paper provides evidence that disclosing corporate bond investors' transaction costs (markups) affects the size of the markups. Until recently, markups were embedded in the reported transaction price and not explicitly disclosed. Without explicit disclosure, investors can estimate their markups using executed transaction prices. However, estimating markups imposes information processing costs on investors, potentially creating information asymmetry between unsophisticated investors and bond‐market professionals. We explore changes in markups after bond‐market professionals were required to explicitly disclose the markup on certain retail trade confirmations. We find that markups decline for trades that are subject to the disclosure requirement relative to those that are not. The findings are pronounced when constraints on investors' information processing capacity limit their ability to be informed about their markups without explicit disclosure.

This paper examines the informativeness of special purpose acquisition company (SPAC) revenue forecasts. We document a positive association between the compound annual growth rate in revenue forecasts and abnormal returns, retail trading, and Twitter activity in the five-day window surrounding the disclosure of a merger announcement. By contrast, we find limited evidence that institutional investors and traditional information intermediaries respond to SPAC revenue forecasts. We also find evidence that SPAC revenue forecasts positively predict future operating underperformance, stock underperformance, and class action lawsuits. Overall, our results affirm the SEC’s concerns about the attractiveness of aggressive revenue projections to retail investors.

We examine the suitability of using overnight returns to measure firm-specific investor sentiment by analyzing whether they possess characteristics expected of a sentiment measure. We document short-term overnight-return persistence, consistent with existing evidence of short-term persistence in the share demand of sentiment-influenced investors. We find that short-term persistence is stronger for harder-to-value firms, consistent with existing evidence that sentiment plays a larger role for such firms. We show that stocks with high (low) overnight returns underperform (outperform) over the longer term, consistent with prior evidence of temporary sentiment-driven mispricing. Overall, our evidence supports using overnight returns to measure firm-specific sentiment.

We examine the impact of reducing information processing costs on U.S. state regulators who supervise mortgage companies. State regulators traditionally disclosed enforcement actions only on their individual websites. A centralized repository, introduced in 2012, assembled enforcement records across states in one place, reducing a regulator’s cost to learn about enforcements in other states. Using a difference-in-differences design, we find that enforcement records posted on the centralized repository significantly increase the probability of subsequent enforcement actions against the same firm in other states. This suggests that reducing information processing costs helps state regulators identify companies engaging in misconduct. This effect is stronger for records from state websites where information is harder to process and for state regulators with more limited resources. Last, we observe that sanctioned lenders reduce the credit supply in other states after their enforcement records in one state are posted on the centralized repository.

We examine the significance and uniqueness of individual-pair relationships cultivated through repeated loan interactions. Using a hand-collected dataset compiled of borrowing manager and loan officer information, we find that individual-pair relationship loans are associated with a cost-of-debt reduction of between seven to 13 basis points. We also document that the relationship has an economic impact even when other affiliations, for example, institutional pairs, social ties, cultural proximity, and gender, are considered. Individual-pair relationships matter because they furnish lenders with useful soft information, especially when the firm has a poor hard information environment or when the bank and loan officer rely less on hard information. In addition, we find that individual-pair relationship loans have fewer rating downgrades, suggesting that accumulated soft information leads to better loan quality. Collectively, our results highlight the unique value of sustained professional engagement between two individuals in the lending process.