We explore the capabilities and dangers of artificial intelligence (AI) usage in accounting research. We focus on mining U.S. securities regulations as an economic shock, testing the causal effect of these shocks on U.S. firms’ voluntary disclosure, and writing a complete academic paper, conditional upon finding statistically significant results. Overall, this research experiment demonstrates the capacity for AI to provide efficiencies in research. AI-generated papers are not ready to be submitted to top accounting journals, but they constitute a useful starting point for accounting researchers and using AI saves valuable time in identifying exogenous shocks that significantly affect an outcome of interest. When we repeat the same experiment to explore the causal effect of non-U.S. securities regulations on U.S. firms’ voluntary disclosure practices, AI writes many professional looking papers with spurious results and unsubstantiated economic arguments, highlighting the potential dangers of AI for accounting scholarship.

Using a large sample of executive performance equity grants over 2006-2019, we provide a comprehensive representation of the single-and multi-metric vesting schemes used by U.S. public firms and investigate the incentives provided by alternative functional forms of vesting formulas that combine earnings with stock returns and other nonearnings targets. Our results indicate that, compared to earnings-vesting single-and multi-metric summative grants, binding schemes that require the contemporaneous achievement of both earnings and nonearnings targets for grant vesting limit executive fixation on earnings and the associated incentives to maximize grant payouts by managing earnings around the targets. The findings confirm the expectation of different incentive effects from alternative (linear versus nonlinear) aggregations of multiple performance targets in the grant vesting formulas, with binding schemes being more effective in mitigating the risk of executives prioritizing earnings relative to other targets in multi-metric grants.

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ABSTRACT The Securities and Exchange Commission permits companies to redact proprietary information from material contract filings, so long as the redacted information (1) would cause competitive harm if disclosed, and (2) the information is legally immaterial. Because these joint criteria are inherently contradictory, we examine whether legally immaterial redacted information is economically material to investors. We find that firms’ stock price discovery process is significantly slower and insider trading is significantly greater after companies file redacted contracts compared to nonredacted contracts. We then examine the impact of the 2019 FAST Act, which reduced the SEC’s oversight of redacted contracts. Companies redact more frequently and insider trading (but not speed of stock price discovery) is more pronounced after the FAST Act. Taken together, these findings suggest that at least some redacted information is economically material to investors and that reducing SEC oversight of redacted information may not be in investors’ best interests. JEL Classifications: M41.

This paper examines the properties of accounting numbers used in compensation contracts for S&P 500 firms from 2006 to 2017. Our data reveal wide variation in the accounting performance metrics used in compensation contracts, with some recent movement from bottom-line earnings-based measures to top-line measures. Investigating specific exclusions made to GAAP-based financial measures to arrive at realized compensation performances, we identify 27 different types of exclusions and document significant heterogeneity in tailoring across firms. We test whether exclusions are made to remove noise in performance measures and better isolate managerial effort (efficient contracting theory) or to camouflage managerial rent extraction (managerial power theory). We find evidence consistent with both explanations.

We investigate the impact of bank disclosure regulations on local business activities by exploiting the 2005 Community Reinvestment Act (CRA) reform, which exempted a group of banks from federal mandatory disclosure requirements for geographic loan distribution. We fnd that low and moderate income (LMI)- neighborhoods experience a signifcant decline in small business growth, small business employment, and wages following the disclosure reform. The negative impact on small businesses is particularly pronounced in LMI areas with a high proportion of racial minority population. Using hand-collected data, we also document that non-disclosing banks indeed reduce lending to LMI areas after the reform, consistent with our results being driven by the bank credit channel. Together, our fndings suggest that the disclosure elimination causes negative externalities on marginalized communities that the CRA specifcally targets to protect. Overall, our fndings highlight the efectiveness of mandatory disclosures as a policy tool in incentivizing banks’ social behavior. This fgure shows an excerpt of Salin Bank & Trust Company (RSSD #123646)’s Performance Evaluation (PE) report published on November 3, 2008. The FRB examined the bank between December 5, 2006 and November 3, 2008 using the Interagency Intermediate Small Bank Examination Procedures. The PE report includes various information related to the banks’ CRA performance such as the overall CRA rating, the lending test rating, the community development test rating, geographic distribution of small business loans, total small business loans, assessment areas, and other community development activities. We manually collect information in the PE reports to analyze whether non-disclosers change their lending behaviors in target (versus non-target) areas after the 2005 CRA reform. For example, the fgure below describes geographic distribution of small business loans for years 2006 and 2007 originated by Salin Bank & Trust Company.

We study executive equity contributions to nonqualified deferred compensation plans, which consist of the election to defer part or all of the executive's annual base salary and other cash pay into the company's stock. These transactions provide executives with an alternative channel to purchase shares in the firm while benefiting from an affirmative defense against illegal insider-trading allegations. Using a large sample of executive equity deferrals over 2000–2014, we find evidence that executives use these transactions as a means to acquire the company's stock during blackout windows. Consistent with the conjecture that deferrals can benefit from lower litigation costs that inhibit insider trades before the release of corporate news, we also find that the deferred amounts are significantly higher (lower) before the disclosure of good (bad) earnings news. These results suggest that executives can use equity deferrals to circumvent Rule 10b5 trading restrictions and generate significant returns through the timing and content of corporate disclosures around these transactions. Together, our evidence supports the recent concerns that executives might be engaging in strategic information releases around Rule 10b5 transactions.

ABSTRACTWe study executive equity contributions to nonqualified deferred compensation plans, which consist of the election to defer part or all of the executive's annual base salary and other cash pay into the company's stock. These transactions provide executives with an alternative channel to purchase shares in the firm while benefiting from an affirmative defense against illegal insider‐trading allegations. Using a large sample of executive equity deferrals over 2000–2014, we find evidence that executives use these transactions as a means to acquire the company's stock during blackout windows. Consistent with the conjecture that deferrals can benefit from lower litigation costs that inhibit insider trades before the release of corporate news, we also find that the deferred amounts are significantly higher (lower) before the disclosure of good (bad) earnings news. These results suggest that executives can use equity deferrals to circumvent Rule 10b5 trading restrictions and generate significant returns through the timing and content of corporate disclosures around these transactions. Together, our evidence supports the recent concerns that executives might be engaging in strategic information releases around Rule 10b5 transactions.

The Securities and Exchange Commission permits companies to redact proprietary information from material contract filings so long as the redacted information 1) would cause competitive harm if disclosed, and 2) the information is legally immaterial. Because these joint criteria are inherently contradictory, we examine whether legally immaterial redacted information is economically material to investors. We find that firms’ stock price discovery process is significantly slower and insider trading is significantly greater after companies file redacted contracts compared to non-redacted contracts. We then examine the impact of the 2019 FAST Act which reduced the SEC’s oversight of redacted contracts. Companies redact more frequently and insider trading (but not speed of stock price discovery) is more pronounced after the FAST Act. Taken together, these findings suggest that at least some redacted information is economically material to investors and that reducing SEC oversight of redacted information may not be in investors’ best interests.

ABSTRACT We use path analysis to investigate how corporate tax avoidance is priced in bond yields and bank loan spreads. We find that approximately one half of the total effect of tax avoidance on bond yields is explained through the negative effect of tax avoidance on future pre-tax cash flow levels and volatility and, to a lesser extent, lower information quality. The effects of these mediating variables are much less pronounced for bank loan spreads. The results of additional cross-sectional analyses indicate that, relative to bond investors, banks are able to reduce information asymmetry problems more effectively, given their access to firms' private information and greater ability to monitor borrowers. JEL Classifications: G31; G32; M10; O16.

Prior studies on the relation between corporate taxes and future macroeconomic growth present contradictory evidence. We argue this mixed evidence is at least partly due to the use of statutory corporate tax rates which ignore the complexity of tax exemptions, tax deductions, tax enforcement and firms’ tax planning. We propose an alternative tax rate measure that aggregates cash effective tax rates of listed firms, which reflect not only statutory tax rates, but also other features of the tax code, enforcement, and firms' tax planning. We find a strong robust negative relation between country-level effective tax rates and future macroeconomic growth.

Using a comprehensive sample hand-collected from the original texts of management earnings forecasts from 27 countries, we provide descriptive evidence on the country-level institutional determinants and economic consequences of forecast characteristics. Using principal component factors constructed from a number of country-level institutional variables, we find that forecast disaggregation, frequency, precision, and attribution vary significantly with the business and accounting environment of a country. We further document that better quality management forecasts are generally associated with stronger stock market reactions and higher investment efficiency. Together, our findings suggest that country-level institutions play a vital role in voluntary disclosure characteristics.

The Securities and Exchange Commission permits companies to redact proprietary information from material contract filings so long as the redacted information 1) would cause competitive harm if disclosed, and 2) the information is legally immaterial. Because these joint criteria are inherently contradictory, we examine whether legally immaterial redacted information is economically material to investors. We find that firms’ stock price discovery process is significantly slower and insider trading is significantly greater after companies file redacted contracts compared to non-redacted contracts. We then examine the impact of the 2019 FAST Act which reduced the SEC’s oversight of redacted contracts. Companies redact more frequently and insider trading (but not speed of stock price discovery) is more pronounced after the FAST Act. Taken together, these findings suggest that at least some redacted information is economically material to investors and that reducing SEC oversight of redacted information may not be in investors’ best interests.

In response to the criticism that firms keep a significant amount of financing off-balance sheet through operating leases, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have worked together to produce a new set of standards that will require firms to capitalize most leases starting in 2019. Exploiting intertemporal variations in lease accounting rules in 41 countries over the 1995-2015 period, we show that lease capitalization rules negatively affect firm-level investment. This result does not seem to be driven by pretreatment differences between treatment and control firms and is robust to a long list of sensitivity checks and alternative design choices. We also find that lease capitalization rules negatively impact firm-level profitability. Our results are stronger for lease-intensive firms suggesting that our results are due to lease capitalization rules rather than concurrent accounting changes or macroeconomic shocks. Finally, the impact of lease capitalization rules on investment and profitability is more pronounced for financially distressed firms consistent with the notion that our results are driven, at least in part, by a financing channel. Taken together, our findings provide support for the argument that lease capitalization rules may have negative consequences for firm investment and profitability. * We appreciate helpful comments and suggestions from Aleksander Aleszczyk, Andy Bauer, Karthik Balakrishnan, Darren Bernard, Bill Bosco, Stefano Cascino, Valentin Dimitrov, Aytekin Ertan, John Hepp, David Koo, Laura Li, Shiva Shivakumar, Li Zhang, and workshop participants at London Business School, Rutgers University, and University of Illinois at Urbana-Champaign. We thank Ryan Erhard, Lauren Fan, Alexander Gu, and Jared Kahl for excellent research assistance. Chen and Urcan gratefully acknowledge financial support from the Accountancy Department at the University of Illinois at Urbana-Champaign.

We examine the real effects of lease capitalization rules (i.e., standards that require firms to capitalize finance leases) on corporate investment. We show that the introduction of these rules leads to a decrease in investment, which is more pronounced for firms with high reliance on leases. We posit and find that lease capitalization affects investment via a learning channel and a contracting channel. Regarding the first channel, we argue that managers identify areas of overinvestment and activities that should be discontinued or downsized because of the information they collect and analyze to comply with lease capitalization rules. Accordingly, we find that the effect of lease capitalization is stronger when learning opportunities are higher. Regarding the second channel, we argue that lease capitalization affects investment via its effect on contracts. Accordingly, we document an increase in the likelihood of covenant breaches and a stronger decline in investment for financially constrained firms.

Prior studies on the relation between corporate taxes and future macroeconomic growth present contradictory evidence. We argue this mixed evidence is at least partly due to the use of statutory corporate tax rates which ignore the complexity of tax exemptions, tax deductions, tax enforcement and firms’ tax planning. We propose an alternative tax rate measure that aggregates cash effective tax rates of listed firms, which reflect not only statutory tax rates, but also other features of the tax code, enforcement, and firms' tax planning. We find a strong robust negative relation between country-level effective tax rates and future macroeconomic growth.

We propose two explanations for the previously documented relation between aggregate earnings growth and future inflation: one based on firms changing their investment in response to earnings growth, and the other based on consumers varying their consumption in response to wealth effects of profitability growth. As the supply of goods and services is relatively inelastic in the short run, our arguments imply that changes to near-term demand for investment (consumption) will affect the prices of investment (consumption) goods and services. Consistent with the investment-based argument, we find that profitability changes predict investment and Producer Price Index (PPI) shifts in subsequent quarters. Our analyses also reveal that aggregate earnings growth predicts future investment and PPI forecast errors. We find, at best, weak evidence for the consumption-based link between aggregate earnings growth and future inflation.

Exploiting intertemporal variations in employment protection across OECD countries, we show that laws increasing employee protection (EPL) positively impact operating profits over the 1985-2013 period. This result does not seem to be driven by pre-treatment differences between treatment and control firms and is robust to a long list of sensitivity checks and alternative design choices. Consistent with the EPL effect being due to changes in employment protection laws, the evidence also indicates that the effect is largely driven by the labor-intensive firms. While firms reduce employment and capital expenditures after an increase in employee protection, we find little evidence that they reduce their sales volumes, consistent with EPL increasing labor productivity. The positive EPL effect disappears as the level of unionization in a country increases, consistent the notion that very high levels of employee protection reduce firms’ operating flexibility and can result in lower operating profitability.

This study investigates the determinants and trading performance of outside directors’ equity deferrals, which represent the choice to convert part or all of their annual cash compensation into deferred company stock. Using a large sample of S&P 1500 firms that allowed directors to defer their cash fees into equity between 1999 and 2009, we find significant associations between equity deferral choices and specific features of the director compensation plans, proxies for directors’ outside wealth diversification, and future firm stock market performance. Trading performance analyses indicate that outside directors earn substantial abnormal returns from their deferrals, with a significant proportion of the deferral transactions occurring during blackout periods. These results are consistent with companies structuring director equity deferral plans to circumvent U.S. Securities and Exchange Commission Rule 10b-5’s trading restrictions. This paper was accepted by Mary E. Barth, accounting.