I am an Associate Professor of Accounting at the Fuqua School of Business, Duke University. My research interests lie in the intersection between managerial accounting and other disciplines such as financial accounting, corporate finance, and economics, with a focus on how managerial accounting can mitigate the problems created by information asymmetry and information uncertainty. I teach managerial accounting in the daytime MBA program.
Web: Duke; Google Scholar; SSRN
Address: Fuqua School of Business, 100 Fuqua Drive, Durham, NC, 27708
Email: elia.ferracuti@duke.edu
Phone: +1 (919) 660-1974
This paper investigates how information uncertainty, measured through variation in the decision-relevant information supplied to managers by market institutions, shapes the equilibrium organizational design adopted by firms. I posit that, when faced with higher uncertainty about demand and supply, managers are more likely to establish a link to customer/supplier industries through vertical integration and high-level hiring decisions, thereby facilitating access to information about these industries. Consistent with this hypothesis, I find that firms modify their vertical integration and hiring decisions in response to variation in the ability of market institutions to aggregate and disseminate information about demand and supply. Further, I observe that these organizational design choices correlate with the efficiency of inventory management, cash holdings, and investment sensitivity to growth opportunities; this finding is consistent with organizational design facilitating access information not supplied by market institutions.
We examine whether the quality of firms’ internal information systems influences the relation between inflation shocks and corporate investment, as posited by imperfect information models. Inconsistent with RBC models’ prediction that nominal variables (e.g., inflation) do not affect real variables (e.g., corporate investment) but consistent with the presence of information frictions, we first document a positive relation between inflation shocks and firm-level investment. Next, we show that higher internal information system quality, measured through responses to the World Management Survey, mitigates the positive relation between inflation shocks and firm-level investment. This result suggests that internal information quality serves as a channel through which aggregate-level nominal variables affect firm-level real variables. We then document relatively more efficient investment decisions following inflation shocks for firms with higher internal information system quality. Our inferences are robust to using the 8th EU Company Law Directive as a shock to internal information system quality and to several additional tests.
We investigate the relation between the usefulness of earnings and firm cost structure. We document that the usefulness of earnings to external users decreases in the degree of operating leverage, which measures the proportion of fixed to variable costs, and that this decline extends at least partially from the relation between the degree of operating leverage and two earnings properties: aggressive revenue recognition to meet an earnings target and earnings volatility. Our results illustrate how firm fundamentals influence a firm's information environment and thereby the usefulness of earnings to external users.
Firms' use of accounting discretion to report a smooth earnings profile is commonly believed to be pervasive. We examine whether smoothing, at least partly, reflects managerial attempts to avert unhealthy pressures from outsiders who cannot disentangle the impact of transitory shocks from sustainable trends in value creation. Using variation in firms' ability to hedge foreign currency (forex) exposure through derivatives, we find that firms are less likely to smooth earnings when they can better shield their business from extraneous forex fluctuations. Our findings inform the debate on discretion in accounting rules and illustrate how markets that facilitate efficient reallocation of risk can shape the informational properties of accounting output.
We document an increase in market power for politically active firms during times of heightened policy uncertainty, when their information and influence advantage is greater. The effect is long-lasting and stronger for large politically active firms. We show that relatively large investments during high uncertainty periods serve as a potential mechanism for gains in market power. Industries populated with politically active firms experience lower business dynamism and import penetration, consistent with active firms leveraging investment timing to restrict competition. Results suggest that political activism is a likely contributing factor to the dominance of large firms over the last two decades.
We examine the relation between the cost of debt contract renegotiation and contract design. We use a plausibly exogenous shock to expected renegotiation costs arising from a change in the taxation of debt renegotiations to show that as renegotiation costs decline, the maturity of debt contracts lengthens, the initial likelihood of covenant violation increases, and the use of performance pricing provisions becomes less frequent. The evidence indicates that ex-ante allocation of cash flow rights and ex-post reallocation of decision rights through renegotiation are local substitutes, where the preference for one mechanism versus the other depends, at least in part, on renegotiation costs.
Research shows that investors acquire and process less firm-specific information on days when many firms announce earnings (hereafter earnings clusters). We show that investors gather more macroeconomic information during earnings clusters, that this behavior is amplified during negative economic shocks and concurrent macroeconomic announcements, and that these information acquisition patterns have implications for equity valuations. Our findings are consistent with the benefit of extracting macroeconomic information from earnings announcements increasing during earnings clusters, which we confirm empirically. Thus, our results help explain why investors focus less on individual firm news during earnings clusters: They rationally redirect their attention to the most beneficial information.
This study examines whether and under what conditions customer data collected through mobile apps - primarily for marketing purposes - aids investing and production decisions. After firms release a mobile app, (i) the accuracy of management earnings and revenue guidance increases; and (ii) firms exhibit less underinvestment in capital assets and less overinvestment in inventory, particularly when they have effective internal information systems and the mobile app collects customers’ location and financial information. These findings are consistent with the notion that information obtained through mobile apps leads to improved forecasts of customer demand and thus more efficient investing and production decisions. We also find that privacy regulations intended to protect customers restrict firms’ ability to access these efficiency gains.
Central banks have increased public disclosures of their private information regarding the economy's current and future state over time. While previous research focuses on the benefits of this increase in transparency, we provide an analytical framework and empirical evidence for potential unintended costs. We find that central bank economic transparency (CBET) causes managers to rely less on stock price when making investment decisions. This is consistent with central bank disclosures shifting investors' information collection and pricing from the aggregate-level component of cash flows (where managers do not have an information advantage) to the firm-level component (where managers do have an information advantage). The results are pronounced when the firm does not provide guidance and when noise trading in the firm's stock is low. Further, we show that investors shift their search efforts from aggregate-level towards firm-level information, and that investment efficiency of more exposed firms falls relative to that of less exposed firms. The results are robust to using the Bank of England's Inflation Report amendments as a shock to CBET.
We hand collect true covenant thresholds and realizations from SEC filings and show that estimating covenant slack using data from commercial databases induces large and frequent measurement error, and frequently overestimates but rarely underestimates covenant violations. This asymmetric measurement error, largely driven by differences between true and estimated realizations, meaningfully affects prior research, particularly research that relies on the precise measurement of covenant realizations around a threshold. We show that true violations, but not estimated violations, are associated with stock market reactions and renegotiations. Finally, we investigate ways to reduce measurement error.
Estimating the private value of patents is important, yet challenging. By developing a method that uses stock market returns to produce a distribution of patent values (and not just an estimate of the mean of that distribution, Kogan, Papanikolaou, Seru and Stoffman (2017) (KPSS) opened venues for new research. Researchers have used these estimates to compare average values of different types of patents. In this paper, we characterize the measurement error in KPSS - the difference between the true patent value and the corresponding KPSS estimate. We show the measurement error is negatively correlated with the true patent value. We further show that differences in group means using KPSS values will be under-estimated, and show this to be the case in the context of research on the private returns to scientific patents and other applications. We show how to address this problem by extending the original KPSS method to allow for patents to be drawn from two distinct value distributions.
We investigate the effects of mandatory mutual fund liquidity requirements on fund fragility. After the implementation of SEC Rule 22e-4, as required, bond mutual funds hold more liquid securities. However, we find that additional liquidity does not ameliorate fragility. Post-rule, funds with illiquid securities face greater outflows conditional on past underperformance, and fund exits increase. At the holdings level, funds exhibit a higher likelihood of selling illiquid securities post-rule. In turn, such sales increase fund underperformance, thus completing the vicious cycle of fragility. These results are consistent with the theory that fund-level liquidity does not necessarily reduce fund-run incentives.
We quantify the private returns to government R&D contracts awarded to firms. We present new evidence that R&D contracts not only finance innovation but also embed an implicit government guarantee of noncompetitive future procurement for the winning R&D contractor. We measure its private value by analyzing stock market reactions to news about R&D contract awards. Using all federal R&D contracts awarded to U.S> publicly traded firms from 1984 to 2015, we find that the average private return on an R&D contract is 19 times its maximum potential revenue. However, returns are highly skewed, with only 7.5% of firms receiving at least one top-quartile contract. Private returns are linked to future production contracts, but only for noncompetitive awards to vertically integrated or large firms. These results suggest that a procurement regime bundling R&D and production contracts enhances value for firms with production capability. We develop a conceptual framework to clarify this innovation policy lever.
This discussion of the survey of the literature on financial reporting and corporate investment by Roychowdhury et al. (2019) focuses on an area in this literature that has received less attention — how financial reporting helps managers allocate capital across investment opportunities within their firms in the presence of uncertainty. We discuss the theory on investment under uncertainty and offer suggestions for future research.
Managerial Accounting - Daytime MBA 2024-2025 (Avg. instructor students evaluation 6.8/7.0)
Daytime MBA Excellence in Teaching in an Elective Course Award
Managerial Accounting - Daytime MBA 2023-2024 (Avg. instructor students evaluation 6.8/7.0)
Managerial Accounting - Daytime MBA 2022-2023 (Avg. instructor students evaluation 6.8/7.0)
Daytime MBA Excellence in Teaching in an Elective Course Award Runner-up
Managerial Accounting - Daytime MBA 2021-2022 (Avg. instructor students evaluation 6.7/7.0)
Managerial Accounting - Daytime MBA 2020-2021 (online) (Avg. instructor students evaluation 6.0/7.0)
Managerial Accounting - Weekend Executive MBA 2019-2020 (Avg. instructor students evaluation 6.5/7.0)
2020 WEMBA Excellence in Teaching in a Core Course Award
Survey of Accounting (students evaluation 5.7/6.0)
Doctoral Students Teaching Excellence Department Award