(solo-authored)
3rd round Revise & Resubmit - Journal of Accounting Research
Investors in financial markets have some information about firms’ fundamental earnings and managers’incentives to manage earnings reports. These two types of information affect earnings quality indifferent ways (Fischer and Stocken, 2004). Researchers cannot observe all of the investors’ informationsources. I develop a structural approach that uses firms’ earnings reports and stock prices alongwith analysts’ forecasts to measure how much information investors have about firms’ fundamentals andmanagers’ misreporting incentives. I estimate the amount of information an average investor has abouta firm and the implied quality of earnings. I find that investors know substantially more about firms’fundamentals than about managers’ misreporting incentives. Moreover, between 1.7 and 8.3 percent ofthe variance in reported earnings is driven by reporting noise.
(with Henry L. Friedman and Mirko S. Heinle)
Firms and jurisdictions are increasingly adopting ESG reporting, driving agrowing empirical literature on the consequences of ESG reporting for investors, firms, andother stakeholders. We develop a model to understand the nuanced effects of the introductionof ESG reporting. In our model, a firm provides ESG and financial reports, whichinvestors use to price the firm’s stock, influencing management’s real and reporting incentives.We characterize how investors respond to new ESG reporting; how the introduction ofESG reports affects corporate performance, stock prices, and market responses to financialdisclosures; and trace these effects to ESG performance, expected cash flows, and financialmisreporting. We provide conditions under which the introduction of ESG reporting discouragescorporate ESG, and under which it encourages corporate ESG but lowers equityprice at the same time. We discuss empirical implications of our results and how our modelcan be applied to settings involving non-ESG disclosures.
(solo-authored)
Financial covenants, which allocate control rights in corporate loan contracts based on financialinformation, are often renegotiated (Roberts, 2015), often resulting in long-term amendments. Yet,the economic mechanisms behind these amendments remain understudied. I develop and estimate astructural model of covenant amendments using U.S. loan contract data. The model highlights threeforces: high contractual incompleteness, highly informative non-contractible post-contract information,and lowamendment costs relative to the cost of misallocating control rights. I find that contractsare highly incomplete, amendments are cheaper than misallocating control rights, and post-contractinformation is moderately informative. Ex ante, amendments save 2.32% in misallocation costs.
(with M. Bloomfield and M. Heinle)
We analyze voluntary disclosure practices in the presence of a leak risk. In a standard model of voluntary disclosure, managers are less forthcoming when negative information may be leaked by external sources. However, if managers prefer to be the bearer of their firm’s bad news, potential leaks motivate managers to disclose negative information, preemptively. Empirically, we document that when the probability of a leak is higher, firms offer earnings guidance more frequently and generate systematically lower returns on their voluntary disclosure dates, but subsequently perform better at the time of the potential leak. Poor disclosure-day returns are explained by potential imminent leaks, but not leaks that may have recently occurred. These patterns are consistent with our model of leak preemption; when facing a potential leak, managers become more forthcoming in order to preempt the leaks.
(with S. Sarkisyan)
We study credit providers and costs of debt for firms with low ESG performance. First, we find that, while both banks and public bondholders charge low-ESG borrowers a higher interest rate compared to high-ESG borrowers, the premium charged by banks is lower than by bondholders. Second, while bondholders reduce the amount of financing when borrowers' ESG performance deteriorates, banks keep the size of their loans the same or even increase loans issued to low-ESG borrowers. We provide evidence that the difference in creditors' policies is driven by banks' superior information about low-ESG borrowers' ESG materiality and by banks' different preferences regarding their borrowers' ESG performance.