This paper examines the link between disclosure and the cost of capital. We exploit an exogenous cost of capital shock created by the Enron scandal in Fall 2001 and analyze firms' disclosure responses to this shock. These tests are opposite to the typical research design that analyzes cost of...

The consequences of information differences across investors in capital markets are still much debated. This paper examines the relation between information differences across investors and the cost of capital, and makes three points. First, in models of perfect competition, information...

Interpreting accruals as working capital investment, we hypothesize that firms rationally adjust their investment to respond to discount rate changes. Consistent with the optimal investment hypothesis, we document that (i) the predictive power of accruals for future stock returns increases with...

We consider a setting in which insiders have information about income that outside shareholders do not, but property rights ensure that outside shareholders can enforce a fair payout. To avoid intervention, insiders report income consistent with outsiders' expectations based on publicly...

The paper examines the effect of international regulatory harmonization on cross-border labor migration. We analyze directives in the European Union (EU) that harmonized accounting and auditing standards. This regulatory harmonization should make it less costly for those who work in the...

This paper develops and tests the hypothesis that accounting rules mitigate the effect of tax policy on firm investment decisions by obscuring the timing of tax payments. I model a firm that maximizes a discounted weighted average of after-tax cash flows and accounting profits. I estimate the...

Technological innovation is not a blessing for all firms, or for investors holding the market. In the late 20th century US, individual firms' stock returns correlate positively with their own productivity growth, yet the market return correlates negatively with aggregate productivity growth,...

We question a deep-ingrained doctrine in asset pricing: If an empirical characteristic-return relation is consistent with investor "rationality," the relation must be "explained" by a risk factor model. The investment approach changes the big picture of asset pricing. Factors formed on...

A large amount of activity in the financial sector occurs in secondary financial markets, where securities are traded among investors without capital flowing to firms. The stock market is the archetypal example, which in most developed economies captures a lot of attention and resources. Is the...

We examine how product market competition affects firm cash flows and stock returns in industry booms and busts. In competitive industries, we find that high industry-level stock-market valuation, investment and new financing are followed by sharply lower operating cash flows and abnormal stock...