This paper studies how mandatory greenhouse gas disclosure affects new business formation. We find a significant increase in business entry following the implementation of the Greenhouse Gas Reporting Program in affected industries, relative to unaffected controls. We propose two channels. First, through a production channel, disclosure pressures incumbent firms to reduce emissions by scaling back production or reallocating resources toward cleaner technologies, weakening incumbents’ competitive positions and creating space for new entrants. Second, through an information channel, public disclosure of previously proprietary emissions data helps potential entrepreneurs identify viable entry opportunities. We present evidence consistent with both channels. Incumbent firms reduce economic activity and experience declines in profitability, and entry is concentrated in industries facing greater emissions reductions and public scrutiny. Additionally, regulatory and industry commentary highlights concerns over the proprietary nature of disclosed emissions data. Overall, our findings reveal an unintended yet economically meaningful consequence of environmental disclosure mandates.

Biodiversity loss is now widely recognized as an environmental crisis of our times. Besides ecological harm, biodiversity loss carries substantial potential economic costs. In an earlier study we document elevated levels of toxic chemicals around plants operated by firms that have likely boosted earnings to meet earnings benchmarks (MEB). It appears that these firms release more toxic chemicals because they cut pollution abatement to save costs in those years.In this study, we first show that the increased pollution leads to biodiversity loss. Drawing on a novel dataset of millions of birdwatching records, collected across the U.S. from 2002 to 2018, we document a significant decline of 2.4 percent in bird abundance (population size) and a significant decline of 0.5 percent in richness (number of unique species) near manufacturing plants that release toxic chemicals during MEB quarters.We then document answers to three related issues. First, from a temporal perspective, we find that the impact on birds begins at least as early as the second month in the MEB quarter and is only partially reversed even 8 quarters later. Second, from a spatial perspective, the birds move to distant locations as they do not resurface in areas within a 10-kilometer radius of the plants Finally, we find cross-sectional variation in the impact of different emission types and across different bird species. The biodiversity loss varies with toxicity of emissions and bird traits, such as resident varieties are affected more than migratory ones and small birds more than large ones. Which confirms that the diversity loss is likely due to the chemical releases from these plants.We provide the first large-scale evidence of biodiversity loss due to the activity of US public firms. The immediacy, magnitude, and persistence of biodiversity loss is remarkable given that the cause is a relatively innocuous effort to meet financial targets. If minor corporate activities are associated with so much discernable harm, the biodiversity harm from more substantial corporate events could be greater still. Our results strengthen the case for firm-level disclosure of biodiversity impact.

We document strikingly opposite time‐series patterns of analyst forecast errors (FEs) and associated market reactions, illustrating that analyst forecasts have become a less useful benchmark of the market's earnings expectations in recent years. The mean FE has increased from negative one to two cents in the 1990s to positive one to two cents in the 2010s, whereas average earnings announcement returns have declined from 0.30% in the 1990s to −0.30% in the 2010s, turning negative in the past 17 years. Underlying the time‐series pattern of increasing FEs is a secular trend where firms move away from just meeting or beating, to which the market reaction has become increasingly negative, toward a large beat, while the frequency of meeting or beating the consensus analyst forecast remains stable during the same period. We develop a parsimonious predictive model of earnings surprises based on peer and past analysts' FEs and find that our predicted FE closely mirrors reported FE, with the average value hovering around one to two cents in most years of the past two decades. The market reaction to “around zero” unexpected FE (FE minus predicted FE) is indistinguishable from zero over time, suggesting that our model serves as a good benchmark of the market's expectation. Our evidence has broad implications for appropriate earnings benchmarking, for the disappearing discontinuity of the earnings surprise distribution around zero, for earnings management to beat analysts' forecasts, for empirical designs when examining the earnings‐return relation, and for the disappearing earnings announcement premium.

Consensus analyst target prices are widely available online at no cost to investors. In this paper, we examine how the amount of dispersion in the individual target prices comprising the consensus affects the predictive association between the consensus target price and future returns. We find that returns implied by consensus target prices and realized future returns are positively correlated when dispersion is low, but they become highly negatively correlated when dispersion is high. Further analyses suggest that the differing effect of dispersion stems from incentive-driven staleness in price targets by some analysts after bad news. As a stock performs poorly and some analysts are slow to update their target prices, dispersion increases, and the consensus target price becomes too high. This has important implications for how consensus analyst target prices should inform investment decisions. We show that a hedge strategy taking a long (short) position in stocks with the highest predicted returns among stocks with the lowest (highest) dispersion earns more than 11% annually. Finally, we show that the negative correlation between consensus-based predicted returns and future realized returns for high-dispersion stocks exists mainly for stocks with high retail interest, suggesting that unsophisticated investors are misled by inflated target prices that are available freely online. This paper was accepted by Suraj Srinivasan, accounting. Funding: The authors acknowledge financial support from Indiana University and Yale University. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2021.03549 .

We investigate an unexplored mechanism of earnings management: income shifting from not-wholly-owned subsidiaries to help the parent company avoid losses at the expense of subsidiaries. Consolidated net income attributable to the parent company (i.e., net income) increases through this mechanism, as the parent company enjoys the full amount of the shifted earnings rather than sharing them with minority investors. We design an empirical model to directly estimate the amount of income shifted from subsidiaries to parent firms. Employing this measure, we find that firms opportunistically decrease earnings of their not-wholly-owned subsidiaries to manage net income upward to avoid losses. The results are stronger for firms with high noncontrolling ownership, firms with large subsidiaries, firms with strong influence over not-wholly-owned subsidiaries, and firms with a high level of related-party transactions. Our results are robust to alternative research designs, including controls for within-firm variations, alternative earnings thresholds, propensity score matching, and entropy balancing techniques. Our mechanism of earnings management is generalizable to other earnings management scenarios, such as share pledging. This paper was accepted by Brian Bushee, accounting. Funding: X. Zhang thanks the National Natural Science Foundation of China [Grant 72102243] for financial support. M. Luo thank the financial support from National Natural Science Foundation of China [Grant 71840011], and the Research Center for Digital Financial Assets at School of Economics and Management of Tsinghua University. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.03090 .

We investigate the generalizability of widely perceived notions that buy-side analysts try to influence or manipulate a firm's stock price by praising or criticizing management during a public earnings conference call. Despite two institutional factors that make it difficult to detect empirically, we find some evidence of stock influence behavior by using a combination of data on conference call transcripts and trading by the institutions that employ the buy-side analysts. However, we also find evidence consistent with the null hypothesis that buy-side analysts are acquiring information rather than manipulating the stock price. Subsample analyses suggest that stock influence is more detectable among hedge funds, while information acquisition is the norm among traditional buy-and-hold institutions. The evidence we provide on each behavior should be of interest to firm managers who host conference calls, market participants who use conference calls to collect company information, as well as regulators who monitor for possible market manipulation.

Using a comprehensive measure, the Macroeconomic News Index (MNI), we examine how analysts use macroeconomic news in their earnings forecasts. We find that analysts incorporate but underreact to quarterly macroeconomic news. Cross-sectionally, analysts' reaction to macroeconomic news varies in a predictable way. Analysts incorporate macroeconomic news more efficiently when firms have lower exposure to the macro economy, when macroeconomic uncertainty is low, and when analysts have more industry-specific experience. Finally, we examine the implications of macroeconomic news on earnings formation and stock returns. We find that quarterly MNI is informative about the procyclicality of firms' sales and costs and analysts underreact only to sales-side information. We also document that quarterly MNI is predictive of subsequent earnings announcement returns, indicating that investors also underreact to macroeconomic news.JEL Classifications: G12; G14; G24

ABSTRACT We explore whether accounting fraud can be detected using the information of firms economically linked to a focal firm. Specifically, we examine whether customer information disclosed by a supplier firm, combined with customers’ accounting information, helps to detect the supplier’s revenue fraud. We first confirm the economic link between the supplier and customers by showing a strong positive correlation between the supplier’s sales growth and the growth rate of total customer purchases. We then introduce two variables based on customer accounting information—the discrepancy between supplier sales growth and customer purchase growth and customer excess purchases—and show that they are predictive of supplier revenue fraud. We conduct a battery of cross-sectional tests and generally find results to vary cross-sectionally in a predictable way. Finally, the out-of-sample tests indicate that adding the two variables to Dechow, Ge, Larson, and Sloan (2011) model increases fraud prediction accuracy. JEL Classifications: G14; M40; M41; M42.

Disclosure is of fundamental interest to accounting research. When the sign/magnitude of disclosed news is unclear, the information in disclosure events is inferred using the ratio of return volatilities during event and non-event windows (Beaver, 1968). We show that return noise due to microstructure frictions and mispricing affects this ratio and that effect is comparable to or exceeds that of information content. We use the SEC’s Tick Size Pilot program to confirm the causal effect of return noise on the ratio, and to evaluate alternative ways to control for it. The most promising approach is to use the difference between, rather than the ratio of, return volatilities during event and non-event windows. We illustrate its benefits by showing how it alters prior inferences regarding time-series and cross-sectional variation in information content as well as changes in the information content of earnings announcements around the 2004 amendments to Form 8-K filings.

We investigate two related questions about the trade-off between the short-term pressures on managers to meet earnings targets and the long-term environmental benefits of reduced pollution. Do firms release more toxins by cutting back on pollution abatement costs to boost earnings in years they meet earnings benchmarks? If so, is that relation weaker for firms with higher environmental ratings? Using Environmental Protection Agency (EPA) data on toxic emissions, we find that U.S. firms pollute more when they meet or just beat consensus earnings per share (EPS) forecasts, suggesting that meeting expectations is a more important goal than reducing pollution. We find this relation is stronger, not weaker, for firms with higher environmental ratings: they increase pollution even more when meeting earnings benchmarks than firms with lower ratings. This suggests that highly rated firms build regulatory and reputational slack over time and use it when needed to soften the negative impact of increased pollution. We contribute to the real earnings management and environmental economics literatures by documenting a negative externality of financial reporting incentives on the environment and society. We also contribute to the corporate sustainability literature by showing that an environmental, social, and governance (ESG) focus does not curb managerial short-termism.

The literature shows that earnings have come to explain less stock price movement over time, suggesting that firm fundamental information has become less important. In this paper, we replace earnings with earnings announcement returns as a measure of firm fundamental news and find that these firm fundamentals have come to explain more price movement over time. In the years after 2003, earnings announcement returns explain roughly 20% of the annual return—almost twice as much as they did before, indicating that fundamental information has become more important, not less, in explaining stock returns. This pattern occurs for other forms of firm fundamental information. Collectively, the returns around earnings announcements, management guidance, analyst forecasts, analyst recommendations, and 8-K filings went from explaining 17% of annual returns on average in the late 1990s to 39% on average in the early 2010s. In exploring possible explanations for the increase in the explanatory power of fundamental information, we find evidence consistent with regulatory changes, such as new 8-K filing requirements and Sarbanes-Oxley, collectively making disclosures more informative.

In this paper, we examine the time-series properties of the earnings-return relation and explore the implications of its changing landscape for the literature. We document strikingly opposite time-series patterns of earnings surprises and associated market reactions. Earnings surprises have increased over time, with the mean analyst forecast error (FE) rising from negative 1 to 2 cents in the 1990s to positive 1 to 2 cents in the 2010s, whereas average earnings announcement returns have declined from 0.30% in the 1990s to -0.30% in the 2010s, turning negative in the past 17 years. We develop a parsimonious predictive model of FEs based on peer and past analysts' forecast errors, and find that our predicted FE closely mirrors reported FE, with the average value hovering around 1 to 2 cents in most years of the past two decades. The market reaction to "around-zero" true FE (FE minus predicted FE) is indistinguishable from zero over time, suggesting that our model serves as a good benchmark of the market expectation. Our evidence has broad implications for appropriate earnings benchmarking, for a disappearing discontinuity in the earnings surprise distribution around zero, for empirical designs when examining the earnings-return relation, and for a disappearing earnings announcement premium.

In this paper, we document a previously unknown cost of stock splits: failure to sufficiently beat earnings targets and its associated capital markets punishment. We show that both firms’ earnings announcement returns and likelihood of beating analysts’ expectations by at least two cents decline post-stock split. This patterned decline in both split activity and post-split returns only occurs for publicly-listed firms, whereas abnormal returns for closed-end funds do not consistently vary over time. Overall, the results suggest that declining signaling benefits and increasing costs led to fewer stock splits in recent years.

Prior literature documents that short sale activity clusters around mandated short sale position disclosures. We investigate two competing, yet non-mutually exclusive, hypotheses for this finding: herding- versus information-based trading. First, consistent with herding-based trading, we find that future firm-level short interest exhibits a significantly smaller reversal for stocks that had short-sale disclosures than for non-disclosure stocks using an entropy-balanced sample. Further, the cumulative abnormal stock returns after the disclosure are lower for disclosure stocks relative to non-disclosure stocks in the short run but recover over time. The recovery in stock prices for disclosure stocks is in line with the initial excessive short-selling pressure abating and fundamental investors buying the dip, a result consistent with herding-based trading. Second, we explore the role of new information about firm fundamentals on short selling activities and find that the degree of short-sale disclosure clustering is similar across the pre-earnings announcement, post-earnings announcement, and no-news periods, regardless of whether the earnings news is good or bad, suggesting that information shocks are not driving short-sale disclosure clustering. Overall, the evidence is consistent with short sellers herding into short positions after observing short-sale disclosures.

Both theory and evidence are mixed regarding the impact on prices of trading on “dark” venues partially exempt from National Market System requirements. Theory predicts that price discovery improves as dark venues siphon noisy uninformed trades, but increased adverse selection reduces liquidity. Empirical studies, which focus on intraday inefficiency, also find contradictory results. We extend that literature to investigate the impact of dark trading on a long-standing inefficiency based on under-reaction to quarterly earnings. We study a randomized controlled trial created by the “trade-at” rule of the Securities and Exchange Commission’s Tick Size Pilot Program that exogenously shocks dark trading. We supplement that with ordinary least squares and two-stage least squares regressions on a more representative Compustat/Center for Research in Security Prices sample. All our results suggest that under-reaction increases with dark trading, consistent with reduced liquidity limiting arbitrage. We contribute to the literature on dark trading and inefficient processing of accounting disclosures, highlighting the role of advances in trading technology. This paper was accepted by Brian Bushee, accounting.

Consensus analyst target prices are widely available online at no cost to investors. In this paper we examine how the amount of dispersion in the individual target prices comprising the consensus affects the predictive relationship between the consensus target price and future returns. We find some evidence that when dispersion is low, returns predicted by consensus target prices are more positively associated with realized future returns. However, we document a strong negative association between predicted and realized returns for stocks with high target price dispersion. Further analyses suggest that this effect of dispersion reflects distortions from analysts being slow to update price targets after bad news. As a stock performs poorly and some analysts are slow to update their target prices, dispersion increases and the consensus target price becomes too high. This has important implications for the informativeness of the consensus analyst target price. Finally, we show that the negative correlation between consensus-based predicted returns and future realized returns for high-dispersion stocks exists mainly for stocks with high retail interest, suggesting that unsophisticated investors are misled by inflated target prices available freely online.

Mutual funds do not always join hands with hedge funds in activism campaigns. In this study, we explore how the incentive divergence between hedge funds and mutual funds affects hedge funds’ activism (HFA) campaign decisions, objectives and tactics. Such divergence arises when hedge funds aim at single target value maximization while mutual funds holding same-industry peers pursue for joint portfolio maximization. We find that hedge fund activists are less likely to target firms with co-owned peers (through a common mutual fund blockholder) and the effect is more pronounced when a higher fraction of firm shares is held by actively managed mutual funds and when the firm operates in industry of higher common ownership concentration. We also find that hedge funds pursue more specific objectives but choose less confrontational tactics when targeting firms with co-owned peers, consistent with hedge funds’ cost benefit trade-offs. Additionally, targets with co-owned peers experience higher market reaction on campaign announcement and greater post-activism operational performance improvement. To further establish causality, we use annual reconstitution of Russell index as the instrumental variable of mutual fund common ownership. Collectively, our findings suggest that common ownership constitutes a subtle cost deterring activism intervention by hedge funds.

We explore a unique regulatory change in China in 2007 that moves investment income in an income statement from below the line of operating income to above the line. We find that, post-regulatory change, firms report high investment income when core earnings (operating income excluding investment income) are low and vice versa. Investment income and core earnings exhibit a significantly negative correlation every year post regulation, in contrast to a significantly positive correlation beforehand. We also find that investors do not fully see through the change. Before the regulation, both core earnings and investment income are positively correlated with contemporaneous stock returns and uncorrelated with future stock returns, suggesting appropriate pricing of the information. However, afterward, the results on core earnings are similar to those in the pre-regulation period, but investment income is negatively correlated with future stock returns, implying that the stock market overreacts to the information in investment income in the contemporaneous year.