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Standing on the shoulders of giants: Financial reporting comparability and knowledge accumulation J. Account. Econ. (IF 7.293) Pub Date : 2024-02-17 Kevin Tseng, Rong (Irene) Zhong
This study examines whether and how financial statement comparability facilitates the dissemination of innovative knowledge between firms and stimulates the creation of new knowledge. Using cross-patent citations to track interfirm knowledge transfers, we find that comparability increases firms' incentives to learn from peers and create new patents that cite their peers' existing patents. The investigation
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Mandatory financial information disclosure and credit ratings J. Account. Econ. (IF 7.293) Pub Date : 2024-02-07 Steven Vanhaverbeke, Benjamin Balsmeier, Thorsten Doherr
When firms are forced to publicly disclose financial information, credit rating agencies are generally expected to improve their risk assessments. Theory predicts such an information quality effect but also suggests an adverse reputational concerns effect since credit analysts may become increasingly concerned about alleged rating failures. We empirically examine these predictions using a large-scale
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Editorial data J. Account. Econ. (IF 7.293) Pub Date : 2024-01-30 Elizabeth Blankespoor, John E. Core, Ed deHaan, Wayne Guay, Michelle Hanlon, Mark Lang, Nemit Shroff, Joanna Wu
Abstract not available
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Fraudulent financial reporting and the consequences for employees J. Account. Econ. (IF 7.293) Pub Date : 2024-01-23 Jung Ho Choi, Brandon Gipper
We combine U.S. Census data with SEC enforcement actions to examine employees' outcomes, such as wages and turnover, before, during, and after periods of fraudulent financial reporting. We find that fraud firms’ employees lose about 50% of cumulative annual wages, compared to a matched sample, and the separation rate is much higher after fraud periods. Yet, employment growth at fraud firms is positive
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Litigation risk and strategic M&A valuations J. Account. Econ. (IF 7.293) Pub Date : 2024-01-10 Claudia Imperatore, Gabriel Pündrich, Rodrigo S. Verdi, Benjamin P. Yost
We study the role of litigation risk in M&A valuations. Specifically, we hypothesize that litigation risk leads to strategic valuations in fairness opinions (FOs) obtained in M&A transactions. Employing a regulatory shock to merger litigation risk and focusing on the most common valuation techniques – peer firm comparables and DCF analysis – we find that target-sought FOs exhibit lower valuations when
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Rank-and-file accounting employee compensation and financial reporting quality J. Account. Econ. (IF 7.293) Pub Date : 2024-01-07 Christopher S. Armstrong, John D. Kepler, David F. Larcker, Shawn X. Shi
We use a proprietary database with detailed, employee-specific compensation contract information for rank-and-file corporate accountants who are directly involved in the financial reporting process to assess their influence on their firms' financial reporting quality. Theory predicts that paying above-market wages can both attract employees with more human capital and subsequently encourage better
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Do industry-specific accounting standards matter for capital allocation decisions? J. Account. Econ. (IF 7.293) Pub Date : 2023-12-28 Peter Fiechter, Wayne R. Landsman, Kenneth Peasnell, Annelies Renders
This study examines whether the implementation of industry-specific accounting standards helps capital market participants in making decisions about providing capital to firms. We predict and find an, on average, increase in firms’ capital growth in years following implementation of the relevant industry standard. The increase in capital growth arises primarily from equity issuances and is attributable
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Disclosure paternalism J. Account. Econ. (IF 7.293) Pub Date : 2023-11-17 Jeremy Bertomeu
This study presents a model in which behavioral investors shape their current expectations based on statistical analysis of historical non-disclosure events. Investors may hold overly optimistic expectations following a non-disclosure event, thereby disrupting unravelling toward forthcoming disclosures. While a regulator can mandate disclosure, this protective intervention has its drawbacks. Overprotection
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Auditor industry range and audit quality* J. Account. Econ. (IF 7.293) Pub Date : 2023-11-20 Simon Dekeyser, Xianjie He, Tusheng Xiao, Luo Zuo
We develop the concept of auditor industry range as the extent to which an auditor has experiences in auditing clients from different industries, and we link this construct to auditor performance, drawing on prior research in psychology and cognitive science. We find that auditors with a wide range of industry experiences are more likely to require audit adjustments than auditors with a narrow range
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Accounting information and risk shifting with asymmetrically informed creditors J. Account. Econ. (IF 7.293) Pub Date : 2023-11-10 Tim Baldenius, Mingcherng Deng, Jing Li
This paper explores the effects of public information such as accounting earnings in a competitive lending setting with risk shifting. Debt financing creates incentives for borrowers to take on excessive risks, in particular in bad states of the world. If a privately informed inside creditor bids against outside creditors to extend a loan, public information levels the playing field, which affects
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“Just BEAT it” do firms reclassify costs to avoid the base erosion and anti-abuse tax (BEAT) of the TCJA? J. Account. Econ. (IF 7.293) Pub Date : 2023-11-09 Stacie O. Kelley, Christina M. Lewellen, Daniel P. Lynch, David M.P. Samuel
This study empirically examines whether firms reclassify related-party payments to avoid the base erosion and anti-abuse tax (BEAT) of the Tax Cuts and Jobs Act (TCJA). We leverage the BEAT filing threshold and use both a difference-in-differences design among U.S. firms and a triple-difference design utilizing the parent company's location to provide evidence that firms reclassify related-party payments
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Gone with the big data: Institutional lender demand for private information J. Account. Econ. (IF 7.293) Pub Date : 2023-11-07 Jung Koo Kang
I explore whether big-data sources can crowd out the value of private information acquired through lending relationships. Institutional lenders have been shown to exploit their access to borrowers' private information by trading on it in financial markets. As a shock to this advantage, I use the release of the satellite data of car counts in store parking lots of U.S. retailers. This data provides
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Editorial data J. Account. Econ. (IF 7.293) Pub Date : 2023-11-01 John E. Core, Ed deHaan, Wayne Guay, Michelle Hanlon, Mark Lang, Joanna Wu
Abstract not available
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The Effect of Patent Disclosure Quality on Innovation J. Account. Econ. (IF 7.293) Pub Date : 2023-09-29 Travis A. Dyer, Stephen Glaeser, Mark H. Lang, Caroline Sprecher
The patent system grants inventors temporary monopoly rights in exchange for a public disclosure detailing their innovation. These disclosures are meant to allow others to recreate and build on the patented innovation. We examine how the quality of these disclosures affects follow-on innovation. We use the plausibly exogenous assignment to patent applications of examiners who differ in their enforcement
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Long-Term Firm Gains from Short-Term Managerial Focus: Myopia and Voluntary Disclosures J. Account. Econ. (IF 7.293) Pub Date : 2023-09-28 Anil Arya, Ram N.V. Ramanan
A CEO’s short horizon and associated myopic actions are typically viewed as detrimental to the firm. In contrast, studying a voluntary disclosure model wherein capital market and product market strategic considerations are in play, we show that the CEO’s myopic behavior can improve a firm’s long-term value. In particular, the disclosures of a long-horizon CEO are seen as being entirely focused on the
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Everything changes: A look at sustainable investing and disclosure over time and a discussion of “Institutional investors, climate disclosure, and carbon emissions” J. Account. Econ. (IF 7.293) Pub Date : 2023-09-28 Jeffrey Hales
This paper summarizes and discusses Cohen et al. (2023), including how their results fit into a larger set of open questions about how sustainability-oriented information gets used in capital markets. Two key messages emerge. The first is that investors are not a monolith. The second message is that the information environment in which investors have been operating has changed dramatically over the
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The Misuse of Regression-Based x-Scores as Dependent Variables J. Account. Econ. (IF 7.293) Pub Date : 2023-09-12 Dmitri Byzalov, Sudipta Basu
Researchers often use regression-based x-Scores (e.g., conservatism C-Score, misstatement F-Score) from a stage 1 model as a dependent variable in stage 2. We argue that this x-Score analysis can cause coefficient biases and interpretation problems because (1) x-Score does not capture new sources of variation, and (2) the estimates often hinge on unacknowledged technical assumptions. Instead, we recommend
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The Learning Hypothesis revisited: A discussion of Sani, Shroff and White (2023) J. Account. Econ. (IF 7.293) Pub Date : 2023-09-15 Eric Gelsomin, Amy Hutton
While Sani, Shroff and White (2023) examine a plausibly exogenous shock to the information acquisition landscape that arguably changes informed traders’ incentives to generate private information without the focal firm changing its disclosure policy, the causal chain underlying their analyses shares the implicit assumptions employed in the extant empirical literature that tests the Learning Hypothesis
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Firm-Level Political Risk and Credit Markets J. Account. Econ. (IF 7.293) Pub Date : 2023-09-09 Mahmoud Gad, Valeri Nikolaev, Ahmed Tahoun, Laurence van Lent
We take advantage of a new composite measure of political risk (Hassan et al., 2019) to study the effects of firm-level political risk on private debt markets. First, we use panel data tests and exploit the redrawing of US congressional districts to uncover plausibly exogenous variation in firm-level political risk. We show that borrowers’ political risk is linked to interest rates set by lenders.
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Spillover effects of mandatory portfolio disclosures on corporate investment J. Account. Econ. (IF 7.293) Pub Date : 2023-08-29 Jalal Sani, Nemit Shroff, Hal White
This paper examines whether portfolio disclosure requirements for actively managed investment funds affect the investment decisions of the firms they own. We argue that mandatory portfolio disclosures reduce fund managers' incentive to collect and trade on private information, which reduces the stock price informativeness of their portfolio, and thus portfolio firm managers' ability to learn from their
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Capital-Market Effects of Tipper-Tippee Insider Trading Law: Evidence from the Newman Ruling J. Account. Econ. (IF 7.293) Pub Date : 2023-08-25 Andrew T. Pierce
This study examines the capital-market effects of tipper-tippee insider trading laws. To do so, I exploit the unexpected decision issued by the Court of Appeals for the Second Circuit in U.S. v. Newman 773 F.3d 438, which reduced legal jeopardy for Second Circuit-based market participants prior to being overturned. Consistent with Newman constraining insider trading enforcement, I find strong evidence
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Institutional investors, climate disclosure, and carbon emissions J. Account. Econ. (IF 7.293) Pub Date : 2023-08-26 Shira Cohen, Igor Kadach, Gaizka Ormazabal
Exploiting the unique features of the CDP, the world-leading platform of corporate climate risk disclosures, we study the relationship between institutional investors' demand for climate-related information (as reflected in their CDP signatory status), firms' decision to disclose this information, and corporate carbon emissions. We provide systematic international evidence that ownership by CDP signatories
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Processing inflation news: A discussion of Binz, Ferracuti, and Joos (2023) J. Account. Econ. (IF 7.293) Pub Date : 2023-08-26 Lindsey A. Gallo
Binz, Ferracuti, and Joos (2023) examine whether better internal information systems can mitigate the association between inflation and investment. According to Real Business Cycle models, inflation should not impact real decisions like investment, yet empirically the two are positively related. Lucas (1972) theorizes that imperfect information can cause agents to rationally extrapolate from their
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Managers’ choice of disclosure complexity J. Account. Econ. (IF 7.293) Pub Date : 2023-08-16 Jeremy Bertomeu
Aghamolla and Smith (2023) make a significant contribution to enhancing our understanding of how managers choose financial reporting complexity. I outline the key assumptions and implications of the theory, and discuss two empirical implications: (1) a U-shaped relationship between complexity and returns, and (2) a negative association between complexity and investor sophistication. However, the robust
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Strategic complexity in disclosure J. Account. Econ. (IF 7.293) Pub Date : 2023-08-16 Cyrus Aghamolla, Kevin Smith
Extensive evidence suggests that managers strategically choose the complexity of their descriptive disclosures. However, their motives in doing so appear mixed, as complex disclosures are used to obfuscate in some cases and to provide information in others. Building on these observations, we first identify a novel stylized fact: disclosure complexity is non-monotonic in firm performance. We develop
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The SEC’s September Spike: Regulatory Inconsistency within the Fiscal Year J. Account. Econ. (IF 7.293) Pub Date : 2023-08-12 Dain C. Donelson, Matthew Kubic, Sara Toynbee
We examine whether performance reporting leads to inconsistent enforcement at the Securities and Exchange Commission (SEC). In a sample of over 13,000 SEC enforcement actions, we show that SEC staff respond to performance-reporting pressures and file more enforcement actions in September, the final month of the SEC’s fiscal year, than in any other month. The increase in case volume in September is
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Accounting Conservatism and Managerial Information Acquisition* J. Account. Econ. (IF 7.293) Pub Date : 2023-08-06 Christian Laux, Volker Laux
We study the interaction between optimal financial reporting rules and managers’ incentives to gather additional information about firm performance. Accounting-based covenants transfer control rights to lenders, allowing them to take corrective actions. After the accounting report is released, the manager can exert effort to uncover whether the report is a false alarm or unduly optimistic. The manager’s
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Investment, inflation, and the role of internal information systems as a transmission channel J. Account. Econ. (IF 7.293) Pub Date : 2023-07-28 Oliver Binz, Elia Ferracuti, Peter Joos
We examine whether the quality of firms' internal information systems influences the relation between inflation shocks and corporate investment, as posited by imperfect information models. Inconsistent with RBC models’ prediction that nominal variables (e.g., inflation) do not affect real variables (e.g., corporate investment) but consistent with the presence of information frictions, we first document
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Data visualization in 10-K filings J. Account. Econ. (IF 7.293) Pub Date : 2023-07-24 Theodore E. Christensen, Karson E. Fronk, Joshua A. Lee, Karen K. Nelson
The Securities and Exchange Commission encourages the presentation of information or data in graphical form to improve users’ ability to understand financial disclosures. We find a dramatic increase in the disclosure of both qualitative and quantitative infographics in 10-K filings over time and substantial cross-sectional variation in firms’ choices regarding image types, data content, and the placement
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Public Environmental Enforcement and Private Lender Monitoring: Evidence from Environmental Covenants J. Account. Econ. (IF 7.293) Pub Date : 2023-07-19
Abstract not available
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Learning from Peers: Evidence from Disclosure of Consumer Complaints J. Account. Econ. (IF 7.293) Pub Date : 2023-07-11
In 2013, the U.S. Consumer Financial Protection Bureau released a database of consumer complaints filed against banks under its supervision (“CFPB banks”). We find that after the disclosure, rival banks exhibit a greater increase in mortgage approval rates in markets with more intensive mortgage complaints about CFPB banks. The effect is weaker when rivals have more expertise in the local market, are
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Pay for Prudence J. Account. Econ. (IF 7.293) Pub Date : 2023-07-04 Salman Arif, John Donovan, Yadav Gopalan, Arthur Morris
We provide the first evidence that prudential principles shape bankers’ executive compensation, a phenomenon we call “pay for prudence” (PfP). We conjecture that PfP incentivizes bankers to balance shareholders’ preference for risk with regulators’ preference for prudence. Although PfP terms are often used in bank compensation contracts, we find that the use of detailed and concrete PfP terms are positively
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The Effects of Non-Big 4 Mergers on Audit Efficiency and Audit Market Competition J. Account. Econ. (IF 7.293) Pub Date : 2023-06-22 Andrew R. Kitto
This study examines whether recent mergers between small and midsize accounting firms influence competition by increasing the number of firms that can compete with larger rivals in the U.S. public company audit market. I find that in-market mergers generate efficiencies that are reflected in a post-merger reduction in audit hours but not in reduced audit quality. For both in-market and out-of-market
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MiFID II unbundling and sell-side analyst research J. Account. Econ. (IF 7.293) Pub Date : 2023-06-21 Mark Lang, Jedson Pinto, Edward Sul
We examine broad effects of MiFID II, which mandated unbundled pricing of analyst research in the European Union beginning in 2018. We find significant reductions in sell-side analyst following, particularly for firms for which the marginal analyst was less important (larger, older, less volatile firms with greater coverage and more accurate forecasts). High quality analysts (more accurate, experienced
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Whistleblowing Bounties and Informational Effects J. Account. Econ. (IF 7.293) Pub Date : 2023-06-08 Lin Nan, Chao Tang, Gaoqing Zhang
We examine the impact of increasing whistleblowing bounties on whistleblowers’ strategy and regulatory efficiency in detecting fraud. Our analysis shows the regulator extracts information about the incidence of fraud from whistleblowers’ actions, and the quality of such information depends on the size of whistleblowing bounties. With a larger bounty, upon receiving a whistleblowing report, the quality
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Conflicts of Interest in Subscriber-Paid Credit Ratings∗ J. Account. Econ. (IF 7.293) Pub Date : 2023-06-02 Samuel B. Bonsall, Jacquelyn R. Gillette, Gabriel Pundrich, Eric So
We provide the first evidence of systematic bias among an emerging type of credit rating agency that relies on subscriptions from institutional clients as its primary source of revenue. Using data from Egan-Jones Ratings Company (EJR), a representative subscriber-paid rating agency, we show that EJR issues more optimistically biased credit ratings, less timely downgrades, and less accurate ratings
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Managing Decision Fatigue: Evidence from Analysts’ Earnings Forecasts J. Account. Econ. (IF 7.293) Pub Date : 2023-06-02 Yawen Jiao
Prior literature shows decision fatigue reduces analysts’ forecast accuracy. We study whether analysts strategically manage their decision fatigue. Firms within an analyst’s research portfolio can differentially affect the analyst’s reputation and career, with larger firms with greater trading volumes and institutional ownership being more important. We find that analysts choose to issue forecasts
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The Managerial Perception of Uncertainty and Cost Elasticity J. Account. Econ. (IF 7.293) Pub Date : 2023-05-30 Jason V. Chen., Itay Kama., Reuven Lehavy
Theoretical research demonstrates the important role of uncertainty in shaping a firm’s cost elasticity. We contribute to this literature by analyzing the inherent tension between the effects of uncertainty about unit contribution margin (CM) and sales volume on cost elasticity. We identify the occurrence of words implying uncertainty in managerial forward-looking statements and employ a novel methodology
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Advertising Rivalry and Discretionary Disclosure J. Account. Econ. (IF 7.293) Pub Date : 2023-05-23 Chuchu Liang
Advertising is a critical competitive tool that shapes interactions among firms in the product market. Using third-party tracked data on advertising outlet costs, I find that a nontrivial portion of public firms, even those with intense advertising activities, do not disclose advertising expenses in their financial statements, indicating significant disclosure discretion. I further use product category-level
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Comment on Cong et al., “Tax loss harvesting with cryptocurrencies” J. Account. Econ. (IF 7.293) Pub Date : 2023-05-23 Reuven Avi-Yonah
This comment explains that while taxpayers may increase loss harvesting in crypto, they are wrong if they believe such losses will be upheld if challenged by the IRS.
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When are firms on the hot seat? An analysis of SEC investigation preferences J. Account. Econ. (IF 7.293) Pub Date : 2023-05-11 Eric R. Holzman, Nathan T. Marshall, Brent A. Schmidt
Little is known about how the SEC selects its targets for investigation. We study this subject using a new database of formal SEC investigations. We predict and find that case selection is associated with a firm’s (i) likelihood of regulatory noncompliance, (ii) exposure to private sector scrutiny, and (iii) conspicuous public trigger events. The relationship between investigations and regulatory noncompliance
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Tax-loss harvesting with cryptocurrencies J. Account. Econ. (IF 7.293) Pub Date : 2023-05-08 Lin William Cong, Wayne Landsman, Edward Maydew, Daniel Rabetti
We describe the taxation landscape in the cryptocurrency markets, especially concerning U.S. taxpayers, and examine how recent increases in tax scrutiny have led to changes in crypto investors' trading behavior. We argue conceptually and then empirically document that increased tax scrutiny leads crypto investors to utilize conventional tax planning with tax-loss harvesting as an alternative to non-compliance
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Unlikely sabotage: Comment on Bloomfield, Marvão, and Spagnolo J. Account. Econ. (IF 7.293) Pub Date : 2023-05-08 Jonathan M. Karpoff
Bloomfield, Marvão, and Spagnolo (2023) establish an interesting yet puzzling finding: Firms in concentrated industries that form cartels are more likely to use relative performance evaluation (RPE) compensation arrangements for their top managers. The paper interprets this as evidence that cartel members constrain managers' incentives to engage in costly sabotage when their compensation depends on
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Relative performance evaluation, sabotage and collusion J. Account. Econ. (IF 7.293) Pub Date : 2023-05-05 Matthew J. Bloomfield, Catarina Marvão, Giancarlo Spagnolo
We examine whether the potential for costly sabotage is a deterrent to firms' use of relative performance evaluation (“RPE”) in CEO pay plans. We exploit illegal cartel membership as a source of variation in the potential for costly sabotage and document that firms are more likely to use RPE if they are currently cartel members. Moreover, firms frequently drop RPE from their CEOs’ pay plans immediately
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Disclosure Regulation, Cost of Capital, and Firm Values J. Account. Econ. (IF 7.293) Pub Date : 2023-05-04 Jinji Hao
This paper shows that mandating some firms to disclose more while leaving other firms disclosing voluntarily is less effective in improving and may even harm the overall information environment when firms’ disclosures are endogenous. Although the regulated firms’ increased disclosure directly reduces all firms’ cost of capital, it crowds out the unregulated firms’ voluntary disclosure and thus increases
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Who Really Matters in Corporate Tax? J. Account. Econ. (IF 7.293) Pub Date : 2023-05-04 Andrew Belnap, Jeffrey L. Hoopes., Jaron H. Wilde.
Internal and external parties meaningfully shape corporate tax outcomes. However, we lack a holistic understanding of the major parties involved and their comparative effects. Using proprietary IRS data for public and private firms, we identify the top executives, corporate accountants, external accounting firms, and individual tax preparers and examine the comparative importance of these parties on
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Locked-in at home: The gender difference in analyst forecasts after the COVID-19 school closures J. Account. Econ. (IF 7.293) Pub Date : 2023-04-29 Mengqiao Du
This paper explores the shock of school closures caused by the COVID-19 pandemic to study the effect of childcare responsibilities on analyst forecasts. With manually collected data on whether analysts have children, I find that female analysts with children (mother analysts) are less likely to issue timely forecasts after school closures, compared to male analysts with children (father analysts).
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Calling For Transparency: Evidence From A Field Experiment J. Account. Econ. (IF 7.293) Pub Date : 2023-04-28 T.j. Wong, ,
We examine how firms respond to requests for enhanced disclosure that we make on an online investor platform. Exploiting variation in firms’ customer and supplier disclosures, we ask a randomized set of non-disclosing firms to provide information on their customers’ and suppliers’ identities. We find that the firms’ probability of disclosure depends on the basis we give for the demand—requests appealing
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Not just for investors: The role of earnings announcements in guiding job seekers J. Account. Econ. (IF 7.293) Pub Date : 2023-04-15 Bong-Geun Choi, Jung Ho Choi, Sara Malik
We study the information content of earnings announcements and its relevance for job search using detailed search data from half a million anonymous job seekers. We find evidence consistent with job seekers initiating job-search activity in response to a prospective employer's earnings announcements. Job seekers search more intensely for employers with media coverage and earnings growth, consistent
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Retail bond investors and credit ratings J. Account. Econ. (IF 7.293) Pub Date : 2023-03-16 Ed deHaan, Jiacui Li, Edward M. Watts
Using comprehensive data on U.S. corporate bond trades since 2002, we find evidence that retail bond investors overrely on untimely credit ratings to their financial detriment. Specifically, they appear to select bonds by first screening on a credit rating and then sorting by yield, buying the highest-yielding bonds within each rating level. Because yields lead credit rating changes, selecting on yield-within-rating
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