Wiley: Journal of Business Finance & Accounting: Table of Contents

The Spillover of Value‐Relevant Information About Targets' Peers During Acquisitions

Congcong Li, Danmo Lin, MaryJane Rabier — Mon, 06 Apr 2026 00:00:02 -0700

ABSTRACT

This study examines whether merger announcements and subsequent purchase price allocations (PPAs) transfer value-relevant information about the target's peers. We find that analysts revise earnings estimates for peer firms upward following acquisition announcements that are accompanied by a conference call, relative to revisions for control firms. The magnitude of analyst revision is more pronounced when the ex ante information asymmetry of target peer firms is higher. To provide more direct evidence on the information content of the merger announcements, we further analyze the textual characteristics of conference call transcripts and find that analysts revisions after acquisition announcements (1) increase with the amount of new information released during the merger announcement, (2) increase with the amount of product-, value-, or growth-related information, and (3) increase with the tone of information released in conference calls. We also find greater analyst revisions when PPAs report more write-ups. These results show that disclosures related to mergers and acquisitions reveal value-relevant information about targets' peer firms.

Issue Information

Thu, 02 Apr 2026 02:34:01 -0700

Journal of Business Finance &Accounting, Volume 53, Issue 2, Page 609-611, April 2026.

New Entrants and Contract Redaction

Gary Chen, Xiaoli Tian, Miaomiao Yu — Thu, 02 Apr 2026 02:34:01 -0700

ABSTRACT

Using the US Census data to capture new entrants, we find that incumbents are more likely to redact proprietary information embedded in material contracts when a greater number of new firms establish their businesses in the focal firm's industry. The effect remains significant when we measure new entrants by the net growth in the number of firms within an industry. Moreover, the effect of new entrants on contract redactions is significantly stronger when the focal firm has greater competition risk, lower dependence on external financing, and fewer foreign subsidiaries. Finally, we identify new entrants based on potential product entries through patents. These alternative aspects of new entrants are also linked to a significant increase in incumbents’ contract redactions. These results indicate that the presence of new entrants intensifies the influence of product market threats on incumbents’ disclosure decisions, leading to increased redaction of proprietary information in contracts.

Disclosure Benchmarking by Lawyers: Evidence From the IPO Setting

Michael Drake, Jeff McMullin, Kenneth Merkley, Chase Potter, John Treu — Thu, 02 Apr 2026 02:34:01 -0700

ABSTRACT

Lawyers play an important advisory role in drafting financial reports, yet empirical evidence documenting the influence of external legal counsel on this process remains sparse. This study focuses on a specific aspect of lawyers’ drafting process: the practice of reviewing disclosures previously filed by other issuers—a practice termed “disclosure benchmarking.” Using initial public offering (IPO) disclosures as the setting, we find that disclosure benchmarking is associated with a more efficient Securities and Exchange Commission (SEC) review process. We further find that it is associated with several measures of disclosure quality, including disclosures that are less likely to be revised in subsequent filings, more likely to be viewed by other lawyers in the future, less likely to trigger litigation, and that are associated with lower IPO underpricing and a more efficient price response after the IPO. Overall, the evidence suggests that companies experience several favorable IPO-related outcomes when their legal counsel engages in more disclosure benchmarking.

The Effect of Managers' Mix of Real and Accrual‐Based Earnings Management on Future Performance

Bowe Hansen, E. Scott Johnson, Lijun Lei — Thu, 02 Apr 2026 02:34:01 -0700

ABSTRACT

Prior research finds that firms use both accrual-based earnings management (AEM) and real earnings management (REM) to manage financial reporting outcomes and that each practice influences firm performance. We extend this research by examining how managers’ choices regarding the mix of AEM and REM relate to future performance. We argue that the sequential nature of the two earnings management strategies constrains managers’ ability to obtain a mix of AEM and REM that minimizes the total cost of earnings management, leading to weaker future performance. Consistent with this argument, we find evidence of deviations from the mix of AEM that would be expected based only on their costs: (1) resulting in future earnings and cash flows that are lower than the firm's historical performance, and (2) being significantly negatively associated with future buy-and-hold abnormal returns. We find similar results using commonly used measures of earnings management and recently refined measures designed to capture opportunistic earnings manipulation. Our evidence indicates that deviations from the mix of AEM and REM expected based on their relative costs are costly to firms regardless of whether managers’ intent is to inform or to mislead financial statement users.

The Information Content of Operational Effectiveness

Mary E. Barth, Jonathan Berkovitch, Doron Israeli — Thu, 02 Apr 2026 02:34:01 -0700

ABSTRACT

We address whether and why a firm's operational effectiveness, OpEff$\textit{OpEff}$, has information content for investors and what role that information plays in the price discovery process at quarterly earnings announcements. We measure OpEff$\textit{OpEff}$ using the cash conversion cycle (CCC) multiplied by −1, such that higher OpEff$\textit{OpEff}$ reflects better operational effectiveness. Higher OpEff$\textit{OpEff}$ is associated with higher abnormal stock returns and trading volume at earnings announcements and with higher future earnings and cash flows, which helps explain the positive return and volume relations. Higher OpEff$\textit{OpEff}$ also is associated with larger post-earnings-announcement drift and less timely incorporation of information in earnings announcements into stock prices. However, this relation largely is attributable to firms that announce bad earnings news. Together, we infer that operational effectiveness is informative to investors because it comprises forward-looking information about earnings and cash flows and that announcements of improvements in OpEff$\textit{OpEff}$ along with bad earnings news impede the price discovery process.

Not All Critical Audit Matters (CAMs) Are the Same: Anti‐Herding Behavior in CAM Disclosures

Will Anding, Allen D. Blay, Zahn Bozanic — Thu, 02 Apr 2026 02:34:01 -0700

ABSTRACT

Consistent with herding behavior, prior research generally finds little to no evidence of market reactions to the initiation of critical audit matter (CAM) disclosures in the audit report. We expand upon recent work to identify instances of anti-herding behavior in CAM disclosures, which we capture by examining topically distinct and textually dissimilar CAM disclosures. Consistent with anti-herding behavior, we first document that first-time CAM disclosures with these attributes result in greater equity market responses surrounding the release of the audit report, especially when accompanied by a weaker information environment, greater disclosure specificity, and heightened client litigation risk. Additional evidence indicates that these types of anti-herding CAM disclosures may create confusion among some market participants. We provide further support that distinct and dissimilar CAM disclosures reduce the information gap between auditors and investors by showing that these measures provide explanatory power in an audit fee model. Lastly, we document decreases in each of our measures from the year of CAM implementation to the second year, suggesting a trend toward boilerplate disclosures. Overall, our results provide novel evidence that CAM disclosures that “stick out” from the herd provide information to financial statement users and thus reduce the information gap between auditors and financial statement users.

Does Political Connection Mitigate the Sanctions for Corruptions? Evidence From the Foreign Corrupt Practices Act (FCPA)

Kaishu Wu, Wenjia Yan — Thu, 02 Apr 2026 02:34:01 -0700

ABSTRACT

This paper examines the effect of political connection on sanctions for violations of the US Foreign Corrupt Practices Act (FCPA). Using a sample of revealed FCPA sanctions and two alternative proxies for US firms’ political connections, we find a negative association between political connection and the severity of sanctions, an effect that is more pronounced as the size of bribes increases. In addition, the identity of prosecutors is less likely to be disclosed as political connections become stronger. Further, firms experiencing higher penalties appear to strengthen their political connections after the FCPA sanctions. Finally, we conduct a number of tests to address alternative explanations and endogeneity concerns. Overall, our findings are consistent with firms using their political influence to obtain favorable treatment in FCPA enforcements and therefore provide important policy-making implications.

Liquidity Constraints and Auditor Responses to Repo Transactions

Chris Florackis, Yangxin Yu, John Ziyang Zhang — Thu, 02 Apr 2026 02:34:01 -0700

ABSTRACT

Repurchase agreements (repos) are often used by banks to manipulate their reported quarter-end risk levels. Prior research has documented adverse capital market consequences associated with active window dressing of repo liabilities. In this study, we investigate whether a client bank's repos also affect its auditor's risk assessment. We find that auditor responses to repos are contingent on the bank's liquidity constraints rather than on the extent of repo transactions. Specifically, downward quarter-end deviations in repo liabilities are not perceived by auditors as risky for banks with greater liquidity. For banks with high liquidity constraints, however, we document a strong positive association between repo deviations and audit fees. Our findings suggest that auditors utilize the contextual cue of liquidity constraints to help resolve ambiguity surrounding repo transactions and accordingly charge higher fees for clients with higher liquidity risk. This main finding persists when a change in auditor or the issuance of a going-concern opinion is used instead of audit fee as a measure of auditor response

Learn From Ties: The Effect of Board Interlocks on Asymmetric Cost Behavior

Fengxia Hao, Zhenpeng Yang, Yangxin Yu, Yao Zhang — Thu, 02 Apr 2026 02:34:01 -0700

ABSTRACT

This study investigates the relationship between board interlocks and asymmetric cost behavior. We argue that board interlocks facilitate resource allocation decisions by providing business-related information that can reduce uncertainty about future demand. Using cost stickiness as a proxy for operating decisions related to resource adjustment, we find that firms with a higher proportion of interlocking directors exhibit significantly less sticky cost structures. Moreover, the negative association between board interlocks and cost stickiness is stronger for firms facing greater demand uncertainty, when the value of information is higher, and when interlocking directors demonstrate greater information-processing capabilities. These findings are robust to alternative network-based measures of board interlocks and hold after addressing potential endogeneity. Overall, our study highlights the informational role of interlocking directors in influencing firms’ resource adjustment and cost behavior.

A Positive Theory of Information for Debt Contracting: Implications for Financial Reporting

Peter Demerjian — Thu, 02 Apr 2026 02:34:01 -0700

ABSTRACT

Debt contracting creates demand for information from lenders to facilitate three distinct but related decisions: Lenders gather information prior to contract initiation for screening borrowers; later, once the contract is in force, lenders use information to assess changes in borrower default risk to determine the suitability of the initial contract terms; and finally, lenders collect information to ensure borrower compliance with information-contingent contract terms. I examine what features of information are useful for these decisions, including whether the information is hard or soft; whether it is predictive or reflective; and whether the information includes just recurring components or whether it also admits non-recurring information. Extensions of the base model are discussed to accommodate different institutional features of debt markets. I continue by considering how publicly reported financial information is potentially useful to lenders, and conclude by discussing avenues for future research.

The Sensitivity of Bank Performance to Local Housing Prices: Evidence From Diversified and Local Banks

Christopher James, Nhan Le, Duc Nguyen, Takeshi Yamada — Thu, 02 Apr 2026 02:34:01 -0700

ABSTRACT

This paper examines how local housing price fluctuations affect the performance of geographically diversified versus local banks. We find that local banks exhibit lower sensitivity to housing price fluctuations than diversified banks. Diversified banks tend to pursue more aggressive capital strategies that encourage risk-taking, whereas local banks demonstrate stronger capabilities in managing loan quality, serving niche markets, enhancing customer relationships, and achieving favorable loan pricing. Overall, our results suggest that the elevated risk-taking of diversified banks can offset the potential benefits of geographic diversification. In contrast, local banks—aware of their limited diversification opportunities—adopt conservative funding structures and focus on high-margin market segments. This strategic positioning strengthens their resilience and supports long-term sustainability, even amid continued industry consolidation.

Does Stock Market Listing Really Constrain Corporate Investment: Why US and EU Results Appear To Be Different?

Olga Bogachek, Massimiliano Bonacchi, Paul Zarowin — Thu, 02 Apr 2026 02:34:01 -0700

ABSTRACT

We investigate whether public capital markets facilitate or hinder investment, addressing conflicting findings between US and European studies. While some argue that stock market pressures induce short-termism, others contend that public firms invest more efficiently due to greater access to capital. Using a multi-country European dataset, we show that public firms invest more and are more sensitive to investment opportunities than private firms, and that prior US results suggesting investment myopia in public firms are likely driven by selection bias in private firm datasets. Our analysis shows that the source of the different US versus European results is that the Sageworks database of US private firms likely over-represents more successful firms that raise external capital to fund investment. Unlike the United States, where private firm reporting is voluntary, European financial disclosure requirements present a sample of private firms that is less susceptible to self-selection. We demonstrate that imposing a Sageworks-style selection bias on European private firms reverses the results, replicating the patterns found in the US studies. Our findings underscore the critical role of selection bias in shaping conclusions on capital market effects and call for greater scrutiny in private firm data comparisons.

Media Sentiment and Shareholder Litigation

Richard Cazier, Jianning Huang, Jeff McMullin, Fuzhao Zhou — Thu, 02 Apr 2026 02:34:01 -0700

ABSTRACT

We find a negative association between media sentiment and the likelihood of shareholder litigation following corporate earnings restatements. Our results are robust to the use of an exogenous measure of media bias, controlling for economic determinants of litigation, and a variety of alternative research methods. Media sentiment predicts both meritorious and non-meritorious litigation. Sentiment from highly ranked news outlets primarily predicts meritorious litigation, however, while sentiment from lower-ranked news outlets predicts non-meritorious litigation. Overall, our results suggest that media sentiment plays a significant role in shaping shareholders’ litigation decisions.

Options Market Implied Volatility and Voluntary Disclosure: Managerial Response to Uncertainty Following Earnings Announcements

Yushi Wang, Bharat Sarath, Atul Rai — Thu, 02 Apr 2026 02:34:01 -0700

ABSTRACT

This study examines how managers respond when earnings announcements fail to resolve investor uncertainty, as measured by changes in implied volatility in the options market. Using quarterly earnings announcements from 1996 to 2022, we document that approximately 25% of firms experience an increase in implied volatility following earnings releases, contrary to theoretical predictions. We hypothesize and find that managers learn from this options market feedback and respond with subsequent voluntary 8-K disclosures. Specifically, firms with greater changes in implied volatility (CHIV) exhibit significantly higher voluntary disclosure frequencies, with a one standard deviation increase in CHIV resulting in a 3.7% increase in disclosure frequency. These subsequent disclosures are significantly more informative to investors, as measured by market reactions. Cross-sectional analyses reveal this relationship is stronger when managers have higher stock-price-sensitive compensation (Delta), when earnings announcements attract greater market attention, and when external monitoring by institutional investors and analysts is more intensive. Using a matched-sample analysis, we demonstrate that firms issuing subsequent voluntary disclosures experience greater reductions in implied volatility than similar non-disclosing firms. Our evidence contributes to understanding the complementary relationship between mandatory and voluntary disclosure and highlights managers’ use of options market information feedback in disclosure decisions.

The Influence of Common Institutional Ownership on Corporate Tax Planning

Thomas R. Kubick, Thomas C. Omer, Taylor W. Paskett — Thu, 02 Apr 2026 02:34:01 -0700

ABSTRACT

Common ownership has increased substantially over the past few decades and has become a significant influence on corporate policies. We find that firms owned by the same institution engage in more tax planning. We also observe that the influence of common ownership on corporate tax planning is stronger when the threat of sale is more credible. Further tests show that commonly owned firms exhibit less aggressive income tax reporting and more sustainable corporate tax outcomes. Finally, we revisit inferences from prior literature examining the effect of institutional ownership on tax planning and demonstrate that the magnitudes documented in previous research are strongest when a common owner is present. This latter result underscores the importance of considering the effect of common ownership on corporate tax policies.

Corporate Decision Structure and Tax Efficiency: Evidence From Tax Adjustment Speed

Liangliang Wang, Kaishu Wu, Dan Yang, Haiyang Zhang — Thu, 02 Apr 2026 02:34:01 -0700

ABSTRACT

This paper examines the impact of allocation of decision rights (i.e., decision structure) on tax efficiency, reflected by the speed at which firms adjust toward their target levels of tax avoidance. Relying on a Chinese setting, we find that listed business groups with a centralized decision structure exhibit faster tax adjustment speed, relative to those with a decentralized structure. This baseline finding is robust to a series of sensitivity checks. Cross-sectional analyses indicate that our main findings are conditional on external environment uncertainty, internal information quality, demand for coordination, tax enforcement, managers’ tax expertise, and board busyness. We also show that centralization is associated with higher tax efficiency scores. Overall, our research highlights the importance of decision structure for achieving tax efficiency and thus provides value-relevant implications for stakeholders.

The Real Effects of Commercial Insurance: The Case of Corporate Innovation

Jinlan Huang, Wenlian Gao, Quanxi Liang — Thu, 02 Apr 2026 02:34:01 -0700

ABSTRACT

This study examines the relationship between commercial insurance coverage and corporate innovation activities. Using firm-level data from 2010 to 2019 in China, we find that the coverage of commercial insurance is positively associated with both the quantity and quality of corporate innovation. We further identify three plausible channels through which this effect operates: the risk-sharing channel, the financing channel, and the corporate governance channel. Notably, our results show that firms with higher levels of commercial insurance coverage are more inclined to undertake risky innovation projects. Additionally, the positive relation between corporate insurance and the quantity and quality of innovation is particularly strong for firms in high-tech industries, those facing significant financing needs and greater financial constraints, as well as those with weaker corporate governance. Our findings offer new insights into how the development of the commercial insurance market can promote economic growth by fostering corporate innovation.

The Real Effect of the Investor State: Evidence From China's Belt and Road Initiative

Shenglan Chen, Xiangting Kong, Karen Jingrong Lin, Xiaoling Liu — Thu, 02 Apr 2026 02:34:01 -0700

ABSTRACT

China has been experimenting with a shift toward being an “investor state,” yet little research has examined the real effect of this transition. Using China's Belt and Road Initiative (BRI), an exemplary event reflecting China's investor state experiment, we investigate how BRI affects market efficiency in terms of “revelatory price efficiency” (RPE), which could improve corporate investment efficiency and thereby have real effects on economic growth. Although the Chinese government views BRI highly, we find robust evidence showing that BRI negatively affects market efficiency in RPE, indicating an impairment to China's long-term economic growth. Our analysis reveals that BRI affects RPE through increased policy uncertainty and shifts in the investor base, both in turn affect information acquisition by managers of the BRI-affected firms. The negative effect of BRI on RPE is attenuated when the institutional features allow for greater private information acquisition. Our evidence sheds light on the determinants of RPE in a transition economy and contributes to the broader discussions of the so-called “China puzzle.”

How Do Misvalued Firms Deploy Internal Cash Flow?

Xin Chang, Wing Chun Kwok, Tao Li, George Wong, Jiaquan Yao — Thu, 02 Apr 2026 02:34:01 -0700

ABSTRACT

We examine how firms deploy internal cash flow across primary uses when they are misvalued in capital markets. Our integrated regression framework depicts a complete picture of what firms do with cash flow by jointly estimating the cash flow sensitivities of various uses. The results show that, given an additional dollar of cash flow, overvalued firms allocate more to reduce external financing and less to investment and cash savings. Collectively, our findings illustrate how firms tune cash flow allocation to absorb the valuation shocks, revealing an internal financing channel through which misvaluation impacts corporate decisions and the real economy.

Blessing or Curse? The Effects of Credit Rating Standard Loosening in China

Shida Liu, Hao Wang — Thu, 02 Apr 2026 02:34:01 -0700

ABSTRACT

We document a substantial loosening of credit ratings by Chinese issuer-paid rating agencies from 2006 to 2020. Controlling for firm fundamentals, average ratings rose by 1.73 notches. Although looser ratings lower bond financing costs and support greater borrowing, firms mainly use the proceeds to roll over debt and increase cash holdings rather than to expand investment or research and development (R&D). These firms subsequently show lower profitability and higher default risk, challenging the view that lenient ratings improve performance by easing financing constraints. We identify rating-contingent regulations and conflicts of interest in the issuer-pay business model as key drivers of rating loosening, highlighting structural distortions in China's credit market.

Human and Intellectual Capital Spending Efficiency and Efficacy: Evidence from U.S. Universities

Thu, 02 Apr 2026 02:34:01 -0700

ABSTRACT

We analyze the efficiency and efficacy of human and intellectual capital investment to better understand the effects of social investment. Existing literature in the corporate setting lacks analysis on the impact of human and intellectual capital investment, likely due to data scarcity. We use universities as our research setting because they regularly report standardized data, have similarities with for-profit corporations in terms of size and oversight, and directly support corporate ESG initiatives related to workforce diversity. We find that (1) private donations and government grants increase in human and intellectual capital spending efficiency, (2) graduation rates of underrepresented students are higher at universities with more efficient spending for the lower quantiles of the graduation rate distribution, and (3) post-graduate income is higher for students from the lower parental income quintiles at universities with higher spending efficiency. Collectively, our evidence suggests that more efficient investment in human and intellectual capital can generate improvements in core ESG outcomes.

Investors’ Natural Disaster Experience and Cost of Raising Equity Capital: Evidence From Seasoned Equity Offering Pricing

Shenghao Gao, Xinyu Li, Siyang Tian, Qi Zhang — Thu, 02 Apr 2026 02:34:01 -0700

ABSTRACT

We investigate whether and how investors’ experiences of natural disasters affect the cost of raising new equity in a setting of seasoned equity offerings (SEOs). Our proprietary database contains comprehensive information on geographical distribution, investor profiles, investor office location, and bidding specifics related to SEOs. Our results show that encounters with natural disasters lead investors to demand greater bid discounts. Analysis of economic channels suggests that these investors exhibit reduced risk-taking behavior, influenced by the wealth effects, salience, and changes in background risk associated with the traumatic events. As well, we find that task-specific experience in SEO practice, rather than general professional experience, mitigates disaster experience bias. Further, the bid discount translates into greater SEO underpricing, thereby increasing the cost of raising equity capital. Overall, our study highlights a novel mechanism by which natural disasters can contribute to financial market frictions.

US CEO Political Ideology and Non‐GAAP Earnings

Adam Esplin, Yun Ke, Kari Joseph Olsen, Jiwoo Seo — Thu, 26 Mar 2026 23:40:36 -0700

ABSTRACT

We examine whether the disclosure and quality of non-GAAP earnings are influenced by CEO political ideology in the United States. We find that Republican-leaning CEOs are less likely to disclose non-GAAP earnings than non-Republican-leaning CEOs. The lower likelihood of non-GAAP disclosure from Republican-leaning CEOs is mitigated in the presence of losses and transitory gains. The CEO political ideology is not associated with the magnitude of total or special items non-GAAP exclusions. However, we find that politically conservative CEOs exclude fewer other expense items among firms that disclose non-GAAP earnings. CEO political ideology does not significantly moderate the association between non-GAAP exclusions and both future operating earnings and future operating cash flows. CEOs’ propensities to use non-GAAP disclosure to meet or beat analysts’ street earnings expectations when GAAP earnings fall short of analysts’ GAAP earnings expectations are not moderated by political ideology. Our results shed light on the relation between non-GAAP reporting practices and CEO political ideology.

Do Fair Value Adjustments Excluded From Net Income Convey New Information That Is Complementary to GAAP Earnings?

John L. Campbell, Samuel O. Davidson, Catherine Shakespeare — Wed, 25 Mar 2026 18:10:08 -0700

ABSTRACT

We use banks’ quarterly fair value disclosures to perform the first short-window event study of fair value adjustments excluded from net income and offer three main results. First, we find that fair value adjustments for banks’ loan portfolios are positively associated with short-window stock returns and that they impact investors’ response to (non-fair value) GAAP earnings. These results suggest that supplemental fair value disclosures proide “new” information at the time of their disclosure and that they are complementary to GAAP earnings. Second, we find that this complementary relation is larger when the probability that exit prices will be realized is higher and when GAAP earnings are less informative (i.e., the quality of the loan loss provision is poorer). Importantly, these results are concentrated in periods characterized by changing credit risk and interest rates, suggesting macroeconomic conditions are an important determinant of the informativeness of fair value disclosures. Taken together, our results suggest that loan fair value adjustments reflect new information at their disclosure date that investors incorporate into price, these adjustments help investors better interpret GAAP earnings, and these effects concentrate in periods where fair values diverge significantly from book value. Overall, our study suggests that investors benefit when firms report both GAAP earnings and fair value information.

Firm‐Level Political Risk and Earnings Manipulation

Hui L. James, Thanh Ngo, Jurica Susnjara — Tue, 17 Mar 2026 22:55:18 -0700

ABSTRACT

Using recently developed proxies for firm-level political risk and earnings manipulation, we test the limited attention theory. Contrary to Hirshleifer and Teoh's core prediction that investor attention is associated with less managerial manipulation, we find that firm-level political risk, serving as a proxy for investor attention, is positively associated with manipulative earnings management, using both accruals and real activities. The results are robust to alternative proxies for political risk and earnings manipulation, various techniques addressing endogeneity concerns, and subsamples of firms with different earnings manipulation incentives. Moreover, we find that the negative relation between earnings manipulation and subsequent operating performance is more pronounced among firms exposed to more firm-level political risk, suggesting that firm-level political risk is associated with managerial incentives for manipulation more than its association with the monitoring that comes with greater attention.

Common Equity Investors’ Assessments of the Dilution and Solvency Effects of Preferred Stock Instruments

Thomas J. Linsmeier, Clay Partridge, Catherine Shakespeare — Mon, 09 Mar 2026 23:45:11 -0700

ABSTRACT

Generally accepted accounting principles (GAAP) requires dichotomous classification of financial claims as liabilities or equity. Classifying claims is challenging when instruments have attributes of both liabilities and equity (i.e., hybrid instruments). We examine the conditions under which common shareholders assess one class of hybrid instrument—preferred stock—as similar to liabilities or equity. Preferred stock is similar to liabilities because it is senior to common and thus payments to preferred shareholders reduce net assets available to common shareholders, negatively affecting their expected cash flows (dilution perspective). Preferred stock is similar to equity because its payments cannot cause bankruptcy; thereby, having no obligatory effect on cash flows to common (solvency perspective). We identify expected financial distress costs as the entity-level economic characteristic that distinguishes conditions when each of these perspectives is more important to common shareholders’ assessments. We predict and generally find that common shareholders change their assessments of preferred stock from negative to zero as expected financial distress costs change from low to high, consistent with a dichotomous classification, first as liabilities, then equity. We also find a positive association between preferred stock and common equity prices for high expected financial distress firms (1) issuing additional preferred stock and (2) 1 year prior to delisting. In both situations, common shareholders would expect an increase in cash flows from preferred stock. Last, we find that common shareholders do not assess preferred stock consistent with US GAAP classification guidance that is based on economic characteristics (i.e., contractual provisions) of the instrument. Standard-setting implications are discussed.

Narratives Contextualizing Numeric Disclosures: Insights From Earnings Calls

Imelda Taraj, Ranik Raaen Wahlstrøm — Sun, 08 Mar 2026 22:40:51 -0700

ABSTRACT

We investigate how narrative disclosures during earnings conference calls (ECCs) provide context for quantitative numeric disclosures in quarterly earnings releases, enhancing their informativeness. Drawing on a large sample of 34,918 quarterly ECCs from 1621 US-listed firms from 2007 to 2020, we extract interpretable textual attributes—such as tone, specificity, novelty, and thematic content—from introductions, analyst questions, and management answers. Using stochastic gradient boosting, we model the nonlinear and interactive effects of these attributes with firm fundamentals and financial metrics. Our results reveal that narrative disclosures substantially improve the ability of firm fundamentals and financial metrics to explain market responses, both immediately and over longer horizons. We complement our analysis with Shapley additive explanations (SHAP) to identify which textual features most influence investor reactions and how their effects vary across contexts. Immediate market responses are primarily attributable to direct cues, such as the tone, while longer term responses increasingly reflect more complex content, such as strategic themes and support activities. These effects are especially pronounced when earnings surprises are either very negative or close to zero, and for firms with lower institutional ownership. They have also become more salient over time, suggesting that shifts in investor attention and analytical sophistication may be reshaping how financial narratives are processed. Our results contribute to understanding the contextual role of narrative disclosures in financial communication and illustrate the value of explainable AI in accounting research.

Workers’ Voices Matter: Crowdsourced Employee Reviews and Insider Trading

Yifei Chen, Dan Palmon — Wed, 04 Mar 2026 03:16:45 -0800

ABSTRACT

This study investigates the influence of crowdsourced employee reviews on insider trading behavior. Leveraging the staggered timing of first-time employee reviews about their employers on Glassdoor.com, we employ a stacked difference-in-differences (DID) model comparing firms with review initiations to those without reviews during the same period. Our findings reveal a statistically and economically significant decrease in insider trading activities for firms with review initiations. The results hold across a series of robustness tests, including propensity score matching, entropy balancing, and alternative time windows for the DID setting. Further analyses suggest that insiders scale back their informed trading activities and earn lower abnormal trading profits following review initiations. The effect is stronger for firms with higher litigation risk, greater reputational cost, stronger labor market pressure, recent employee exploitation incidents, and when the reviews are more negative. Overall, these findings suggest that crowdsourced employee reviews discipline unethical insider trading behavior.

Managerial Overoptimism and Discretionary Disclosure

Nikolaj Niebuhr Lambertsen, Matthias Lassak — Mon, 02 Mar 2026 22:45:49 -0800

ABSTRACT

We examine the effect of managerial overoptimism on discretionary disclosure of subjective information, such as earnings forecasts. The market applies a discount upon disclosure to capture the possibility that the revealed subjective expectation is too optimistic. While this discount is correct on average, it is too high (low) for a truly objective (overoptimistic) manager. Consequently, overoptimistic managers disclose more frequently, and their firms are overvalued. We show that higher levels of overoptimism or a greater fraction of overoptimistic managers amplify the market discount, which ultimately reduces overall disclosure in equilibrium.

The Information Value of Disaggregated Credit Ratings

Xucheng Shi, Hui Tan — Wed, 25 Feb 2026 02:48:21 -0800

ABSTRACT

This study examines whether disaggregated credit ratings offer incremental information about corporate credit risk beyond what is conveyed by aggregated ratings. Using a novel hand-collected dataset of ratings by Morningstar Credit Research, we examine the information value of four disaggregated rating components—business risk, distance to default, cash flow cushion, and solvency score. Controlling for aggregated credit ratings, we find that disaggregated components add value by predicting both the magnitude of future credit risk and key aspects of issuers’ future financial fundamentals. Our results further show that the predictive ability of disaggregated ratings depends on issuer-level characteristics, including ex ante financial constraints and the surrounding information environment.

Does Pay Transparency for Employees Affect Product Recalls?

Yangyang Chen, Jeffrey Ng, Emmanuel Ofosu, Xin Yang — Sun, 22 Feb 2026 22:37:10 -0800

ABSTRACT

Pay transparency can affect workers’ behavior and, consequently, firm outcomes. This study exploits the state-level, staggered enactment of pay transparency laws to examine how pay transparency affects firms’ product recalls. We find that firms headquartered in pay-transparency-law states see an increase in product recalls. This outcome suggests that pay transparency may lower workforce quality. Lending further support to this theory, our evidence shows that the increase in recalls is more pronounced for more labor-intensive firms, and those that are more at risk of losing key employees. An additional analysis reveals that pay transparency increases both the likelihood and severity of product recalls. Finally, we document that when pay transparency negatively impacts firms’ product quality, the firms’ future performance also declines.

Intrinsic Benchmark Beating

Jeppe Christoffersen, Thomas Plenborg, Morten Seitz — Fri, 20 Feb 2026 00:25:09 -0800

ABSTRACT

We examine the role of intrinsic motivations—psychologically based, non-economic factors—in earnings benchmark beating by focusing on owner-managed firms that are largely free from external pressures from shareholders, analysts, and the media. We observe benchmark beating as instances in which owner-managers decrease their salaries to transform a loss into a profit. Two key results emerge. First, managers’ earnings benchmark beating correlates with their private, non-economic benchmark beating, such as earning more than their spouses and marrying near base-ten-year ages. Second, even when accounting for various extrinsic motivations, such as reporting pressures from debt-holders, employees, and suppliers, we find that benchmark beating remains highly prevalent when these motivations are negligible. Overall, our results suggest that reference-dependent preferences from psychology literature complement economic arguments in explaining earnings benchmark beating.

Political Risk and the Demand for Voluntary Disclosure

Megan Grady, Jiwon Nam — Sun, 08 Feb 2026 21:36:36 -0800

ABSTRACT

In this study, we examine the impact of firm-level political risk on the demand for voluntary disclosure. When firms face higher levels of political risk, they not only face greater uncertainty relating to political outcomes but also a number of potentially significant negative consequences that can stem from them. We investigate if firms facing higher levels of political risk experience greater demand for disclosure from investors who are concerned with protecting against costs associated with this risk. Our results indicate that firms facing higher levels of political risk not only experience greater demand for disclosure, in general, but also experience greater demand for political disclosure, in particular. In a subsequent analysis, we investigate whether these findings are concentrated in firms that publicly disclose a relation with a public official (or a relation with someone closely tied to the political circle). We find that the demand for disclosure is concentrated in firms that provide such public disclosure.

Decomposing the Spillover Effects of Financial Restatements on Corporate Investment

Jan Ditzen, William Grieser, Patrick Hopkins, Stephen Lusch — Sun, 08 Feb 2026 21:31:44 -0800

ABSTRACT

A firm's financial disclosures can (i) influence its own investment (own-firm effects), (ii) influence peers’ investment directly through the information they convey (contextual peer effects), and (iii) influence other firms indirectly through a chain of strategic investment responses that propagate through the network (endogenous peer effects). Each channel carries distinct implications for disclosure economics, making it essential to quantify its relative influence. We employ a network-based empirical design and financial restatements within a unified framework that addresses well-known challenges in estimating peer effects. We find that firms’ investment decisions are tightly linked to their own disclosures. Moreover, disclosure-induced investment spillovers operate predominantly through the endogenous channel (peers’ strategic investment responses that propagate through the network) while direct informational spillovers (contextual effects) are economically modest at most. Our estimates of the magnitudes of all three channels differ considerably from prior research, thereby altering the understanding of how financial reporting quality relates to investment.