We examine whether insider trading law affects firms' innovation disclosures. Our setting exploits United States v. Newman, a 2014 circuit court decision that made it more difficult for prosecutors to establish insider trading liability in some U.S. states. Using a difference-indifferences design, we find that firms headquartered in states affected by the decision increase their patenting rates and reduce their reliance on trade secrecy after the ruling. Patent disclosures also become more detailed, with more claims, figures, and numerical references. These effects are stronger for firms with greater incentives to mitigate agency problems and for firms with higher pre-ruling insider trading intensity. Overall, the evidence is consistent with agency theory: by making insider trading liability harder to establish, the ruling heightened agency costs, inducing firms to provide more transparent innovation disclosures to limit insiders' ability to exploit private information.

We examine the effect of algorithmic trading on forced CEO turnover and how boards respond to it. We find that the sensitivity of forced CEO turnover to stock returns declines with algorithmic trading, suggesting that algorithmic trading weakens directors’ learning from market prices. Boards respond to this information loss by placing greater weight on nonmarket-based performance measures, such as accounting performance and analyst expectations, and by meeting more frequently to gather information. Despite these efforts, boards make worse CEO turnover decisions when algorithmic trading is higher. Overall, our findings suggest that, while directors try to compensate for the reduction in price informativeness caused by algorithmic trading, their adjustments fail to fully offset its negative impact on board effectiveness.

We examine whether financial disclosures affect firm sustainability practices. Using mandatory segment reporting in the United States as the setting, we find that disclosing financial information about previously hidden segments in polluting industries reduces toxic emissions from firm plants. This effect is consistent with the notion that segment disclosures enhance monitoring of firm pollution by highlighting the financial materiality of polluting segments and drawing stakeholders’ attention to their environmental impact. The effect is stronger when the newly disclosed segments are more polluting. Disclosing firms achieve this reduction by implementing better pollution prevention practices, reducing waste generation, and increasing green innovation. Overall, our study highlights the role of mandatory financial disclosures in shaping corporate practices beyond the scope of the disclosed information.

We study how public scrutiny affects the supply chain carbon performance of large firms. Using S&P 500 index inclusions as a plausibly exogenous increase in public scrutiny, we find that newly indexed firms experience a significant reduction in their supply chain carbon emission intensity. The effect operates through benchmarking relative to index peers, leading firms to narrow their carbon performance gap. We present evidence that these reductions are achieved through both ex-ante selection of lower-emissions suppliers and ex-post monitoring of supplier emissions. The effects are concentrated among first-tier suppliers, where customer firms exert greater influence. Cross-sectional analyses show that the effects are stronger when the newly indexed firm's incumbent suppliers are more polluting and when the firm has greater bargaining power over them. We further show that increased public scrutiny curbs climate-related incidents among suppliers. Overall, the results highlight the role of public scrutiny in shaping supply chain decarbonization and the importance of large firms in improving upstream environmental outcomes.

We examine whether major corporate customers can deter misconduct among their suppliers. Our findings indicate that firms with concentrated customer bases are less likely to commit misconduct and face lower penalties in equilibrium. We also observe a significant decline in supplier misconduct following the establishment of a major customer relationship. Furthermore, the deterrent effect of major customers is more pronounced when customer pressure to reduce supplier misconduct risk is higher. Additional analyses suggest that major customers exercise their exit option to penalize suppliers after acute violations. Overall, our results suggest that major customers play a crucial role in deterring supplier misconduct.

We investigate banks’ social media disclosure during the 2023 U.S. banking crisis. We leverage large language models to identify depositor-relevant content from a comprehensive sample of bank tweets. Using a difference-in-differences design, we find that during the crisis, banks with higher pre-crisis uninsured deposit ratios issue more tweets conveying financial information about their fundamental performance. Cross-sectional analyses show that this effect is stronger in healthier banks, as measured by smaller mark-to-market losses. Moreover, we find that among banks with higher pre-crisis uninsured deposit ratios, those that issue these tweets during the crisis experience higher uninsured deposit growth in the subsequent year than those that remain silent. This deposit-stabilizing effect is concentrated among banks with smaller mark-to-market losses, when bank tweets receive greater engagement from Twitter users, and when bank tweets reference the most recent publicly available financial results before the crisis. Overall, our findings highlight banks’ strategic disclosure on social media to mitigate panic contagion among uninsured depositors during a banking crisis in the digital era.

Abstract The objective of this book is to spell out accounting’s economic roles. The thesis is that earnings and other accounting outputs help firms function more efficiently. Within the firm, accounting information makes contracts work better and aids managerial decisions in the absence of available prices. In capital market exchanges, accounting information ameliorates information asymmetry, thereby enabling price discovery and reducing trading costs. The authors argue that accounting information is useful in stewardship and valuation despite its limitations. For pedagogical purposes, the book first examines the attributes of accounting earnings as produced and received in the market without delving into how the preparers’ incentives influence the fineness of information produced or its properties. Readers can view this discussion as a reduced-form analysis of accounting earnings and their relation to stock prices. After mapping this landscape, the book then presents a strategic analysis of accounting earnings. This analysis recognizes that accounting information affects users’ and producers’ decisions, which, combined with self-interested behavior, influences the properties of the accounting information produced and affects how it is used in valuation, contracting, and firms’ investment decisions. Shareholder value is the primary efficiency measure, and the book also discusses regulatory, social, and contract efficiency. The authors note that shareholder value maximization and stakeholder protection are not at odds and that accounting information facilitates firms’ commitment to stakeholder protection, which, in turn, leads to more value creation for shareholders.

Abstract This chapter discusses accounting’s economic functions, the logic of accounting, and the limitations of accounting information. Accounting helps firms function more efficiently. Within the firm, accounting information makes contracts work better and aids managerial decisions in the absence of available prices. In capital market exchanges, accounting information ameliorates information asymmetry, thereby enabling price discovery and reducing trading costs. Double-entry bookkeeping converts economic events into accounting information, and accrual-basis accounting mitigates the timing and matching problems that arise from dividing the firm’s life into subperiods for measurement. The chapter argues that accounting information is useful in stewardship and valuation despite its limitations.

We examine whether corporate segment disclosure affects firm environmental performance. Using mandatory segment reporting in the United States as a shock, we find that mandatory disclosure of previously hidden segments that belong to pollutive industries reduces toxic pollution of firm plants. Consistent with the notion that segment disclosure enhances the monitoring of firm pollution by highlighting the materiality of pollutive segments and drawing stakeholders' attention to underlying environmental issues, the effect is stronger when other forms of regulatory or public scrutiny are weaker and when the newly disclosed segments are more pollutive. Disclosing firms reduce pollution by enhancing pollution prevention practices and increasing green innovation, which in turn reduces environmental violations. Overall, this study uncovers the role of segment disclosure in curbing corporate pollution.

Abstract This chapter describes imperfect and incomplete markets as a prelude to understanding why firms arise and why the need for an earnings measure follows. Markets are imperfect and incomplete when transaction costs exist and certain goods or claims cannot be traded. The notion that earnings somehow enhance the efficiency of firms yields three implications. First, the firm’s value differs from the value of its separable assets and liabilities. Second, the incentive conflicts inherent in imperfect and incomplete markets leave an indelible mark on the earnings report. Finally, the objective of accounting rules cannot be merely to measure the change in value or provide information to assess value. Accounting must have efficiency effects to be demanded and supplied. To make this discussion more concrete, the chapter describes the income-statement and balance-sheet approaches to computing earnings as a means of organizing and highlighting specific limitations and efficiency considerations that arise in the earnings computation.

Tracking the movement of top managers across firms, we document the importance of manager-specific fixed effects in explaining heterogeneity in firm exposures to systematic risk. In equilibrium, manager fixed effects on systematic risk are positively related with manager fixed effects on stock returns. These differences in systematic risk are partially explained by managers’ corporate strategies, such as their preferences for internal growth and financial conservatism. The early career experiences of managers starting their first job in a recession also contribute to differential loadings on systematic risk. These effects are more pronounced when managers wield more influence, as in smaller firms and firms that do not have an independent board. Overall, our results suggest that managers play an important role in shaping a firm’s systematic risk. This paper was accepted by Victoria Ivashina, finance. Funding: A. Schoar acknowledges financial support from the MIT Sloan School of Management. K. Yeung acknowledges financial support from City University of Hong Kong and the Cornell SC Johnson College of Business. L. Zuo acknowledges financial support from the Cornell SC Johnson College of Business and the University of Toronto Roger Martin Award for Emerging Leaders. Supplemental Material: Data and the online appendix are available at https://doi.org/10.1287/mnsc.2023.4710 .

Abstract This chapter describes research on the magnitude and determinants of the relation between stock returns and accounting earnings, that is, the earnings response coefficient (ERC). ERC research is motivated by its potential use in valuation and fundamental analysis as well as in performing more powerful tests of contracting or disclosure hypotheses in accounting. The literature documents two prominent phenomena: (1) the estimated ERC is relatively small compared to its predicted value, and (2) the incremental slope on negative returns is positive in a piecewise linear regression of earnings on returns. To explain these empirical patterns, researchers advance several hypotheses, such as prices leading earnings and accounting conservatism. This chapter emphasizes that economic fundamentals and accounting practices jointly determine the observed earnings-return relation.

Abstract This chapter describes the relation between accounting earnings and stock prices in an uncertain world where earnings are deterministically related to cash flows and price is related to discounted future cash flows. We also describe the ideas that gave rise to research on these relations, including positive economics theory and the efficient market hypothesis. This reduced-form analysis takes earnings as given. It does not seek to understand the costs and benefits that shape earnings characteristics. It also ignores the equilibrium choices of actors that might produce earnings in a competitive world with information asymmetry and incentive conflicts. Still, understanding these reduced-form, valuation-based relations remains relevant because research continues to estimate variants of this research design to test economic stories.

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. We conduct an extensive set of analyses to mitigate the concern that our results are driven by endogenous matching between auditors and clients. The positive relation between auditor industry range and audit adjustments exists regardless of whether the industries covered by an auditor's portfolio exhibit strong or weak economic co-movement, and the relation is stronger for more complex clients, in more uncertain environments, and for auditors with more years of audit experience. Overall, our findings suggest that an auditor's diverse experiences in different industries can enhance audit quality.

Using the implementation of the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system from 1993 to 1996 as a shock to information dissemination technologies, we examine how a significant reduction in disclosure processing costs affects the real economy. We find that the EDGAR implementation leads to an increase in corporate investment and that this effect is concentrated in value firms. We provide evidence that improved equity financing and enhanced managerial incentives are likely the underlying mechanisms. Specifically, the EDGAR implementation leads to an increase in a firm's stock liquidity, a decrease in the cost of equity capital, and an increase in the level of equity financing. Consistent with the monitoring effect of broad information dissemination, the EDGAR implementation leads to an increase in a firm's operating performance. Our findings suggest that it is important to consider information dissemination beyond information production when examining the real effects of corporate disclosures.

ABSTRACTWe use a case study to illustrate how different acquisition methods can result in different amounts of goodwill recognised on financial statements in China. China Merchants Bank adopted a two-step acquisition method: first, it acquired 53% of the shares of Hong Kong’s Wing Lung Bank to gain corporate control in 2008; second, it acquired the remaining 47% of shares in 2009. Using this method, China Merchants Bank recognised the acquisition premium as goodwill only in the first step and recognised the acquisition premium in the second step as a decrease in additional paid-in capital. This two-step acquisition method significantly reduces the amount of goodwill shown on financial statements and lowers the likelihood and amount of subsequent goodwill impairment. Different acquisition methods can lead to different amounts of goodwill initially recognised when accounting standards permit the partial goodwill method and regard the transactions between the parent and non-controlling shareholders as equity transactions.

Using the implementation of the EDGAR system from 1993 to 1996 as a shock to information dissemination technologies, we examine the potential benefits and costs of modern information technologies on the real economy. On the one hand, we document that broader information dissemination leads to a decrease in the cost of capital and an increase in the level of equity financing and corporate investment. On the other hand, we provide evidence that greater dissemination of corporate disclosures crowds out investors’ private information acquisition and reduces managerial learning from stock prices. Our findings suggest that it is important to consider this tradeoff between improved equity financing and reduced managerial learning when evaluating the economic effects of modern information technologies. Our evidence suggests that the former effect dominates in value firms while the latter effect dominates in high-growth firms. Itay Goldstein The Wharton School University of Pennsylvania 3620 Locust Walk Philadelphia, PA 19104 and NBER itayg@wharton.upenn.edu Shijie Yang School of Management and Economics The Chinese University of Hong Kong, Shenzhen 2001 Longxiang Avenue, Longgang District Shenzhen, Guangdong 518172 China sjyang@cuhk.edu.cn Luo Zuo Johnson Graduate School of Management Cornell University 114 East Avenue 349 Sage Hall Ithaca, NY 14853 luozuo@cornell.edu

This monograph provides an overview of the theories of disclosure regulation and recent developments in the disclosure regulation literature. We organize our discussion around three basic questions. First, why do we need to regulate corporate disclosure in the financial market? Second, which theories explain the current state of disclosure regulation? Third, what are the economic consequences of disclosure regulation? In exploring the third question, we discuss several examples of disclosure regulation related to information production, dissemination, and presentation. Then, we provide an overview of the current debate on mandating environmental, social and governance (ESG) disclosure and reporting. Finally, we conclude by discussing emerging issues of disclosure regulation and potential avenues for future research.