Financial Accounting & Auditing

The US Securities and Exchange Commission is considering a proposal to require some companies to disclose information relating to the risks they face from climate change. But the agency is coming under pressure to scrap or water down the proposal because of a recent Supreme Court decision.

Although businesses and investors stand to make a lot of money if they can properly navigate the new risk environment, no one seems to have a good explanation for why we are where we are. Climate risks, in particular, have been systematically underestimated, and thus mispriced, for decades.

Many organizations rely on formal management control systems that align employee values with organizational values (i.e., culture-fit) to shape organizational culture. Using proprietary data from a highly-decentralized organization, I examine the employee performance consequences of adopting a formal culture-fit measurement system in employee selection. I exploit the staggered feature of the adoption of the system, and find that employees selected with the system perform significantly better than those without the system.

This paper recasts the consumption asset pricing model in terms of observable accounting outcomes by recognizing accounting principles that connect those outcomes to consumption and the risk to consumption. The model prompts the construction of a pricing factor from observed accounting information. The factor performs well relative to extant factors in explaining cross-sectional returns. Further, it delivers out-of-sample expected returns that forecast the actual returns and the forward betas that investors actually experience.

We use supervisory loan-level data to document that small firms (SMEs) obtain shorter maturity credit lines than large firms, post more collateral, have higher utilization rates, and pay higher spreads. We rationalize these facts as the equilibrium outcome of a trade-off between lender commitment and discretion. Using the COVID recession, we test the prediction that SMEs are subject to greater lender discretion. Consistent with this hypothesis, SMEs did not draw down whereas large firms did, even in response to similar demand shocks.

We investigate the impact of reporting regulation on corporate innovation. Exploiting thresholds in Europe’s regulation and a major enforcement reform in Germany, we find that forcing firms to publicly disclose their financial statements discourages innovative activities. Our evidence suggests that reporting regulation has significant real effects by imposing proprietary costs on innovative firms, which in turn diminish their incentives to innovate.

We investigate the impact of uneven transparency regulation across countries and industries on the location of economic activity. Using two distinct sources of regulatory variation—the varying extent of financial-reporting requirements and the staggered introduction of electronic business registers in Europe—, we consistently document that direct exposure to transparency regulation is negatively associated with the focal industry’s economic activity in terms of inputs (e.g., employment) and outputs (e.g., production).

This article provides an applied introduction to Bartik instruments. The instruments attempt to reduce familiar endogeneity concerns in differential exposure designs (e.g., panel regressions with unit and time fixed effects). They isolate treatment variation due to the differential impact of common shocks on units with distinct pre-determined exposures. As a result, the instruments purge the treatment variation of possibly confounding factors varying across units over time.