I distribute current versions of my working papers on my SSRN webpage
Are the Fama French Factors treated as Risk? Evidence from CEO compensation, with E. Cheynel and M. Liu-Watts, European Financial Management (forth.)
We prove and implement a new asset pricing test, showing that an association to performance-pay indicates that a factor contains systematic risk.
Voting over disclosure standards, with R. Magee and G. Schneider, European Accounting Review (forth.)
For any accounting standard, there is always another that's near-unanimously preferred. If one only allows small changes to standards, a qualified majority of 2/3 or more will implement agreement on full-information.
Verifiable disclosure, with D. Cianciaruso, Economic Theory (forth.)
A refinement and algorithm to construct unique equilibria in general disclosure games. Sender is always worse-off if an uninformed regulator enforces more disclosure.
Optimal conservatism with earnings manipulation, with M. Darrough and W. Xue, Contemporary Accounting Research (2017)
A theory of earnings management, contracting and conservatism: comparative statics provide empirical predictions about accounting quality, manipulation, bonus/PPS, etc.
A theory of hard and soft information, with I. Marinovic, The Accounting Review (2016)
A theory of financial reporting when some information is unverifiable.
Asset measurement in imperfect credit markets, with E. Cheynel, Journal of Accounting Research (2015)
Optimal persuasion before a firm seeks financing from the credit market. The firm may increase or decrease information release as a function of its need for collateral.
Political pressures and the evolution of disclosure regulation, with R. Magee, Review of Accounting Studies (2015)
The process of political regulation slowly raises the amount of reporting, and then suddently regulates. The resulting cycle repeats.
Mandatory Disclosure and asymmetry in financial reporting, with R. Magee, Journal of Accounting and Economics (2015)
In a political game, an endogenous mandatory disclosure level emerges with mandatory reporting for low events. This need not be what is efficient ex-ante.
Disclosure policy and industry fluctuations, with P. Liang, Management Science (2015)
Firms optimally manage their disclosure dynamically in an oligopoly, censoring disclosures over extreme events.
Incentive contracts, market risk and the cost of capital, Contemporary Accounting Research (2015)
Agency problems do not directly affect the economy-wide cost of capital, except possibly via their effect of total output.
Economic Consequences of Equity Compensation Disclosure, Journal of Accounting, Auditing and Finance (2013)
A model in which better firms signal quality to the market with higher pay-performance coefficients, so that public disclosure distorts contracts.
Toward a positive theory of disclosure regulation: in search of institutional foundations, with E. Cheynel, The Accounting Review (2013)
A comparison of various forms of accounting regulation; competing standard-setting bodies largely solves the problem.
From low quality reporting to financial crises: politics of disclosure regulation along the economic cycle, with R. Magee, Journal of Accounting and Economics (2011)
The quality of acconting regulation declines before a recession, implying entry by 'bad' firms, and furthering the demand for bad accounting: things blow up when the economy becomes sufficiently bad.
Capital structure, voluntary disclosures and cost of capital, with A. Beyer and R. Dye, The Accounting Review (2011)
Design an optimal security for a firm that will make a voluntary disclosure.
Endogenous shakeouts, International Journal of Industrial Organization (2009)
Entry game that rationalizes features excess entry, due to strategic uncertainty, followed by excess exit.
Surveys, discussions and notes
From Casual to Causal Inference in Accounting Research: The Need for Theoretical Foundations, with A. Beyer and D. Taylor, Foundations and Trends in Accounting (2016)
Disclosure and the Cost of Capital: a Survey of the theoretical literature, with E. Cheynel, Routledge Companion to Accounting Theory (2015), republished in Abacus (2016)
Discussion of earnings manipulation and the cost of capital, Journal of Accounting Research (2013)
Can labor markets help resolve collusion, Economic Letters (2007)
Detailed SummarIES below:
Jeremy Bertomeu, Edwige Cheynel and Michelle Liu-Watts
Forthcoming at European Financial Management
We test whether factors that explain the cross-section of expected returns are also used as risk factors in management contracts, based on simple theory that links wealth effects implied factors to optimal incentive pay. Some evidence for Fama French, and stronger evidence for momentum and bond price factor; evidence for the market factor (CAPM) only in the recent period.
Jeremy Bertomeu, Robert Magee and Georg Schneider
Forthcoming at European Accounting Review
How do we agree when many privately informed parties jointly vote over their preferred partition? Surprisingly, if any partition can be considered, any status-quo partition can be defeated in a vote against a suitably chosen alternative even if near-unanimous vote were required to change the status-quo. If we require partitions to rank events from best to worst, however, full-disclosure is the only rule that can survive votes, and for a class of distributions with thin tails, the required majority for full-disclosure to survive is about 2/3 (the required super-majority increases with heavy tails).
Jeremy Bertomeu and Davide Cianciaruso
Forthcoming at Economic Theory
A methodology to solve any static persuasion game, i.e., a sender-receiver problem in which the sender's only cares about the receiver's posterior expectation. The approach extends the results of 'classic' disclosure theory even when disclosure costs or information-endowment are type-specific (plausible) and shows that, typically, a sender is made worse-off by disclosure regulation.
Jeremy Bertomeu, Masako Darrough and Wenjie Xue
Contemporary Accounting Research, Vol. 34, No. 1, 252-284 (published version here).
Summary: All other things being equal, an increase to conservatism would increase earnings management (i.e., incentives to cheat are greater for a 'hard' exam) but also increases contracting efficiency. The optimal level of conservatism is positively correlated to the initial quality of the projects and of the accounting system, suggesting that better firms choose to be conservative, not that conservatism causes better economic outcomes.
Jeremy Bertomeu "Diagnostics to Evaluate Cost of Capital Measures: A Discussion "
Abacus Special Issue Advances in Equity Valuation, Vol. 52, No. 1, 211-219 (published version here).
Summary: If market prices are too volatile, we cannot use them to build useful cost of capital measures for firm-level decisions or, even, evaluate those measures: What should we do then? I argue that the linear information framework of Clubb-Feltham-Ohlson does offer offer simple testable exclusions about its implied cost of capital measures, which do not rely on price. The recent paper of Christodoulou, Clubb and McLeay (in the same issue of Abacus) offers a perfect setting for these tests. Based on the test results, I argue that the model may have to be adjusted for intangible capital.
Jeremy Bertomeu, Anne Beyer and Dan Taylor,
Foundations and Trends in Accounting, Vol.10 No.2-4, 263-313 (published version here).
Summary: A primer about (i) 'why' and (ii) 'how to' leverage on explicit theory to establish a credible causal statement, organized as a synthesis of the 2014 Stanford Causality conference. Here is a representative introductory quote (p.3) "making assumptions should not be taken as a scientific compromise, or something to hide; instead, assumptions should be presented and opened for discussion. The message is simple: assumptions should be explicit, transparent, and deliver new insights. Without a clear understanding of the assumptions of empirical tests and measures, causal inferences will remain elusive."
Jeremy Bertomeu and Ivan Marinovic, "A Theory of Hard and Soft Information"
The Accounting Review, January 2016, Vol. 91, No. 1, 1-20 (published version here).
Summary: Choice of reporting over soft (unverified) or hard (verified) channels of communication, e.g., audited reports vs. soft disclosures, or hard tangibles vs. soft intangibles.
We prove that (i) unfavorable soft information, including no hard report, is the most informative report, (ii) a firm issuing hard information is more likely to misreport its soft information, (iii) soft reports are typically unbiased, (iv) the relative use of soft vs. hard information depends on the manager's credibility, and (v) mandating more hard information can reduce communication.
Note: there is a typo in A1, the definition of thin tail reads "lim d ln f(y)/d(y)=inf" while it should be "lim e^(a y) F(-y)=0 for all a>0".
Jeremy Bertomeu and Edwige Cheynel, "Asset Measurement in Imperfect Credit Markets"
Journal of Accounting Research, forthcoming, December 2015, Vol.53, No.5, Pages: 965–984 (published version here).
Summary: What is the optimal measurement of productive assets used in collateral in loan agreements? The argument is weaved around the following idea: firms with the lowest-valued collateral, defined as lowest alternative use, are precisely those that should operate but fail to get loans. To resolve this, in response to more credit frictions, the measurement may increase opacity and the amount of inefficient termination. The model also develops comparative statics about the equilibrium collateral and its relation to measurement.
Jeremy Bertomeu and Robert P. Magee, "Political Pressures and the Evolution of Disclosure Regulation"
Review of Accounting Studies, June 2015, Vol. 20, No. 2, 775-802.
Summary: Accounting standards are evolved institutions, demands by preparers are fundamental drivers of this evolution.
We show that a politically weak standard-setter lead to regulatory cycles - slow increases in disclosure requirements followed by abrupt deregulation. This is inefficient from the perspective of production and we advocate for a more independent, strong, standard-setting body.
The Routledge Companion to Financial Accounting Theory, edited by Stewart Jones, Chapter 14, p.366-395, 2015 (Amazon link).
Summary: A primer on the various theories on disclosure and the cost of capital.
Jeremy Bertomeu and Robert P. Magee, "Mandatory disclosure and asymmetry in financial reporting"
Journal of Accounting and Economics, April–May 2015, Vol. 59, No. 2–3, 284–299.
Summary: A model of collective political choice over mandatory disclosure (e.g., a positive theory of GAAP).
Political choice implies that a pivotal firm (the median) implements the regulation it prefers, i.e., do not disclose jointly with other good news firm but bad news must be disclosed. This asymmetry is more pronounced with more uncertainty and if information is easy to verify.
Jeremy Bertomeu and Pierre J. Liang, "Disclosure policy and industry fluctuations"
Management Science, June 2015, Vol. 61, No. 6, 1292-1305 (published version here).
Summary: Examines how voluntary disclosures covary with industry-wide shocks in a collusive industry.
More concentrated industries feature less disclosure and, in more competitive industries, extreme high and low events are withheld. Industry leaders have more cyclical profits.
Jeremy Bertomeu, "Incentive contracts, Market risk and Cost of capital"
Contemporary Accounting Research, Winter 2015, Vol. 32, No. 4, 1337–1352 (published version here).
Summary: Optimal incentive contracts should be a function of uncontrollable market risk.
Performance pay increases in total market performance but the agency problem typically does not affect the cost of capital.
Jeremy Bertomeu, "Economic Consequences of Equity Compensation Disclosure"
Journal of Accounting, Auditing and Finance, October 2013, Vol. 27, No. 4, 471-495 (published version here).
Summary: The board of directors signals future profitability to investors by disclosing a certain level of CEO performance pay.
If market prices respond more to information, or the manager is more risk-averse or earnings are more noisy, the board chooses more pronounced incentives, in turn implying higher future earnings.
Journal of Accounting Research, Vol. 51, No. 2, May 2013, 475-493 (published version here).
Summary: A discussion of Gunter Strobl's JAR conference paper, offering various novel predictions about the link between earnings management (EM) and cost of capital.
I disagree with G. Strobl's ambiguous result and formally show that EM decreases the cost of capital under plausible scenarios. Extending the framework, I show that an aggregate accounting quality measure explains the cross-section of expected returns.
Jeremy Bertomeu and Edwige Cheynel, "Toward a Positive Theory of Disclosure Regulation: In Search of Institutional Foundations"
The Accounting Review, Vol. 88, No. 3, May 2013, 789-824 (published version here).
Summary: Horse race between three pure institutional formats for standard-setting: (1) fully political (e.g., Congress), (2) self-regulation (e.g., AICPA) or (3) competition (e.g., USGAAP vs. IFRS). Competition seems to implement the outcome preferred by investors (maximizes prices); by contrast, political choice implements too little regulation and self-regulation implements too much. This finding supports the thesis of Ronald A. Dye and Shyam Sunder "Why not allow the FASB and the IASB to compete in the U.S.", Accounting Horizons, Vol. 15, No. 3, 2011, 257-271).
Jeremy Bertomeu and Robert P. Magee, "From Low Quality Reporting to Financial Crises: Politics of Disclosure Regulation along the Economic Cycle"
Journal of Accounting and Economics, Vol. 52, No. 2-3, November 2011, 209-227 (published version here).
Summary: Macro cycles cause variations in accounting quality and may magnify financial crises.
Accounting quality is minimal just prior to a downturn and increases again during and after a recession. The counter-cyclical increase in accounting quality makes accounting magnify the real effects of a financial crisis, when it hits.
Jeremy Bertomeu, Anne Beyer and Ronald A. Dye, "Capital Structure, Voluntary Disclosures and Cost of capital"
The Accounting Review, May 2011, Vol. 86, No. 3, 857-886 (published version here).
Summary: A security design approach to disclosure and the cost of capital in illiquid markets.
Voluntary disclosure is negatively associated with the cost of capital, and positively associated with volatility, illiquidity and financial leverage.
Jeremy Bertomeu, "Endogenous Shakeouts"
International Journal of Industrial Organization, Vol. 27, Issue 3, May 2009, 435-440 (published version here).
Summary: New industries usually feature a phenomenon knows as a shake-out: quick entry, followed by exit of most first-period entrants. In a model of strategic uncertainty, the greater the p0tential benefits of monopoly rents, the greater the entry, and the greater the follow-up shake-out.
Jeremy Bertomeu, "Can Labor Markets help resolve collusion"
Economics Letters, Vol. 95, Iss. 3, June 2007, 355-361 (published version here).
Summary: Tacit collusion in a team can be eliminated by leaving open job postings if the labor market is competitive.