Published Papers

with Alon Kalay and Gil Sadka, 2016. Journal of Financial Markets, Vol 29, 110-143

In contrast to firm-level relations, researchers have found that aggregate earnings changes and aggregate stock returns are negatively related. In this paper, we construct new measures of aggregate earnings news based on revisions in analyst forecasts. The findings suggest aggregate earnings news is positively related to contemporaneous stock returns. The results also show that aggregate stock returns are positively related to unexpected aggregate forecast errors, and negatively associated with expected aggregate earnings growth. Taken together, these findings suggest the negative relation between aggregate earnings changes and aggregate contemporaneous stock returns results from the expected component of aggregate earnings, rather than aggregate earnings surprises.

Working Papers

Accrual Accounting and Resource Allocation: A General Equilibrium Analysis

December 2020. GSB Working Paper #3553. Revising for the third round review, Journal of Accounting Research

I evaluate the role of accrual accounting in improving rms’ production decisions and resource allocation across rms. I introduce both cash ow and accounting earnings as imperfect measures of performance into a general equilibrium model with heterogeneous rms under imperfect information. The model demonstrates rms’ more informed decisions with an improved measure of performance lead to more resources being allocated to potentially high-productivity firms through the product and input markets. The estimated parameter values are consistent with accrual accounting improving managers’ information about future productivity by providing a better measure of performance. The quantitative analysis suggests having accrual accounting information in addition to cash accounting information leads to a 0.5% increase in aggregate productivity and a 0.7% increase in aggregate output through resource allocation in the United States. The estimates are larger in China and India as benchmarks for developing countries: a 1.5%-2.1% increase in aggregate productivity and a 2.3%-3.2% increase in aggregate output. Overall, I demonstrate accrual accounting plays an important role in determining aggregate productivity through resource allocation

Executive Pay Transparency and Relative Performance Evaluation: Evidence from the 2006 Pay Disclosure Reforms

with Brandon Gipper, Shawn X. Shi, December 2020. GSB Working Paper # 3850. Under the first round review, Journal of Accounting Research

Pay for non-performance is among the most prominent arguments of executive rent extraction, especially Bertrand and Mullainathan’s (2001) pay for luck. We revisit their finding over the last two decades, 1997 through 2016. Pay for luck presents in the first decade but declines in the second decade. This decrease is robust to different measures of luck, various industry subsamples, and the financial crisis of 2008-9. The structural break in pay for luck associates with transparency-based regulations, such as option expensing and new performance pay disclosures. These regimes plausibly enhance shareholder monitoring, which pushes compensation committees to decrease pay for luck.

Job Search with Financial Information: Theory and Evidence

with Bong-Geun Choi, Sara Malik, December 2020. Under the first round review, Journal of Accounting Research

This paper examines whether, when, and why job seekers use firms’ financial information in the job search process. We find first evidence of financial information’s relevance to job seekers by documenting a substantial increase in job search activity around earnings announcements in the spirit of Beaver (1968). We also find that financial information acquisition by job seekers is positively related to both job postings and interviews at the firm-county-month level. Spurred by this finding, we develop a theoretical model of job search paired with firms’ heterogeneous earnings to better understand job seeker’s information acquisition behavior. Our model predicts that job seekers trade off the probability of an offer with the value of the employment contract and intensify information acquisition as the number of available positions shrinks relative to the pool of job seekers. Consistent with these predictions, we find that firm performance is positively correlated with both job seekers’ search activities and employers’ posted wages. We also find that the positive association between financial information acquisition and interviews is stronger when the job market is more competitive. Overall, these results indicate that, like capital market participants, job seekers value and use financial reporting.

Informing Entrepreneurs: Public Corporate Disclosure and New Business Formation

with John Manuel BarriosYael V. HochbergJinhwan KimMiao Liu, November 2020. Revising for submission

We examine the relationship between public firm disclosure and aggregate new business formation. Consistent with the notion that public company disclosures provide information spillovers that reduce the extent of uncertainty about new investment opportunities, we find that increased public firm presence is positively associated with new business formation in an industry. Furthermore, using plausibly exogenous information shocks generated by new IPOs in a geographic area, we find that post-IPO, new business registration in the public company’s geographic area rise by 4 to 10%, consistent with soft information channels serving to reinforce hard information in public disclosures. New IPOs are associated with significant increases in Edgar downloading activity in the IPOs’ geographic area, consistent with the notion that public firm disclosures are providing important investment opportunity information that facilitates new business formation.

Breaking it Down: Competitive Costs of Cost Disclosures

with Philip G. Berger and Sorabh Tomar, September, 2020. GSB Working Paper # 3774. Revising for submission

Does decomposing cost of goods sold entail significant competitive costs? We examine this question using a relaxation of disaggregated manufacturing cost disclosure requirements in Korea. Our survey evidence indicates managers perceive these disclosures to provide a competitive edge to competitors. Using archival data, we find firms with distinctive cost structures and high market shares are less willing to disclose, consistent with a desire to protect cost-leadership advantages embedded in production and sourcing. Firms experience higher gross profits and lower liquidity after withholding manufacturing cost details, suggesting these disclosure decisions involve trading off competitive costs (and not managers’ self-interests) against capital market benefits. At the aggregate level, industries with more nondisclosing firms subsequently experience greater profitability dispersion, suggesting uncertainty about competitors’ cost of goods sold helps drive the widely studied performance dispersion observed within industries.

Financial Reporting Quality, Turnover Risk, and Wage Differentials: Evidence from Worker-level Data

with Brandon Gipper, Sara Malik, November 2019. GSB Working Paper # 3844. Revising for the second round review, Journal of Accounting Research

We examine whether financial reporting quality influences employee turnover and wages using employer-employee matched data in the U.S. We find that low financial reporting quality is associated with high employee turnover risk, so workers demand wage premiums to bear this risk. High corporate governance firms exhibit a weaker association between financial reporting quality and turnover rates, suggesting that corporate governance mitigates turnover risk related to low financial reporting quality. We further find that more educated and higher paid workers receive higher wage premiums associated with low financial reporting quality although turnover rates are similar across these different groups of workers, consistent with sophisticated workers identifying financial reporting quality. Using Sarbanes-Oxley mandated reports of internal control weaknesses as a research setting, we show that as a firm’s internal control system weakens, firms pay wage premiums to employees. Overall, these analyses indicate that low financial reporting quality firms compensate for higher turnover risk by paying higher wages to workers, which increases firms’ cost of labor.

Fraudulent Financial Reporting and the Consequences for Employees

with Brandon Gipper, November 2019. GSB Working Paper #3771. Revising for the second round review, Journal of Accounting and Economics

We examine employment effects, such as wages and employee turnover, before, during, and after periods of fraudulent financial reporting. To analyze these effects, we combine U.S. Census data with SEC enforcement actions against firms with serious misreporting (“fraud”). We find, compared to a matched sample, that fraud firms’ employee wages decline by 9% and the separation rate is higher by 12% during and after fraud periods. Employment growth at fraud firms is positive during fraud periods and negative afterward. We explore the heterogeneous effects of fraudulent financial reporting, including thin and thick labor markets, bankruptcy and non-bankruptcy firms, worker movements, pre-fraud wage levels, and period of hire. Negative wage effects are particularly severe in thin labor markets, for bankrupt, fraud firms, and lower wage employees. However, some negative wage effects occur across these sample cuts, indicating that fraudulent financial reporting appears to create meaningful and prevalent consequences for employees. We discuss how our results can be consistent with channels such as labor market disruptions, punishment and stigma.