Research

I show that the issuance of a new accounting standard disrupts the cycle of consistency within accounting organizations, leading to improved accounting information. For the recent FASB Revenue Recognition and Leases standards, I show they lead to more error disclosures and more updates to legacy policies within the standards’ topic areas before the accounting standard change is implemented. I do not find a difference in the effects between firms more or less affected by a standard, consistent with the standards being broadly disruptive for all firms. However, I do find stronger effects for more decentralized firms following the Leases standard, implying a mechanism of the disruption: a centralized standard implementation effort that unifies historically dispersed accounting practices. I further demonstrate that the policy updates identified following the disruption result in improvements to accounting information. My results show that accounting standard-setting activity affects financial reporting processes and outcomes even prior to the adoption of the standard in a way that is distinct from the effects of the actual changes in accounting guidance.

Congressional stock trading and its potential for the use of private information for personal gain have been a long-debated topic in the U.S. In 2012, the Stop Trading on Congressional Knowledge (STOCK) Act was passed, explicitly forbidding insider trading by Congresspeople and requiring timely public disclosure of all trades. We examine the market response to these disclosures and find evidence of a significant reaction based on abnormal returns, abnormal volume, and abnormal volatility measures. This reaction indicates that the market views these trades as informed despite recent findings that, since the enactment of the STOCK Act, Congressional trades do not achieve superior returns. We identify several characteristics of trades and disclosures that elicit a greater market reaction, including trades made in smaller market-cap and highly regulated firms, more timely public disclosures of trades, and trades that may represent a potential conflict of interest based on committee membership. Further, we find evidence of spillover effects to competitor peers of the focal (i.e., traded) firm. This evidence is suggestive of the market’s interpretation of the Congressperson’s private information as industry-specific, and not firm-specific.

We examine the effects of the inclusion of Corporate Social Responsibility (CSR)-related incentives in executive compensation contracts on firm performance. We build on the findings of prior work by using a larger, more representative sample of public firms and leveraging compensation peer groups to study peer effects. We find that, after adopting CSR-based compensation, firms’ CSR performance improves but their financial performance worsens. These effects differ between “leader” and “follower” firms within compensation peer groups and, while “leader” firms do not experience a differential CSR performance effect, they perform better financially compared to “follower” firms. We consider two channels through which CSR-based compensation affects financial performance: through better alignment of incentives or through signaling to stakeholders the firm’s commitment to CSR. We find support for both channels.