We study the influence of bounded rationality on companies’ disclosure to investors in new industries. Using a historical example of a new industry, we document that several companies initially withheld their earnings, despite external capital needs and investor information demands. However, almost all these companies started disclosing shortly thereafter. Interpreted through the lens of a disclosure model featuring level-$ k $ thinking, these patterns suggest that limited strategic thinking of some companies contributed to the initial failure to disclose, while feedback and learning over time contributed to the quick convergence to an equilibrium of (almost) full disclosure in the new industry.

We find evidence that investors value dividends differently depending on their level of trust. Our tests indicate that investor demand for dividend-paying stocks increases as trust decreases, and that this relationship affects market values. We begin with survey evidence showing that people think accounting fraud is less likely among dividend payers and that people with low trust are more likely to hold dividend-paying stocks. We then empirically exploit accounting fraud discoveries within a mutual fund’s portfolio as a shock to trust. In response to these shocks, we show that mutual funds tilt their portfolios toward dividend-paying stocks. This result is not explained by a shift in risk preferences, indicating that these institutional investors are seeking dividends in particular rather than stable firms that just happen to pay dividends. Finally, we provide evidence that dividend payers experience a premium in their market values relative to non-payers when their investor base becomes less trusting.

We describe the development of public company auditing in the U.S. in the early 20th century to gain perspective on current developments in environmental, social, and governance (ESG) assurance. Using a broad sample of historical annual reports spanning four decades, we document three facts: first, the spread of public company auditing occurred steadily over the span of several decades. Second, audit services were initially heterogeneous but became standardized through the audit profession’s efforts and interactions with private and public actors. Third, the role of regulation in those early developments was seemingly limited to codifying existing practices, as the first federal audit regulation was introduced only late in the development of the profession and did not significantly impact capital markets. Our historical evidence helps us understand how we arrived at today’s widely accepted and highly regulated financial audits. It uncovers parallels to and offers lessons for current developments in ESG assurance. Data Availability: Data are available from the public sources cited in the text.