Job Market Paper
Innovation and Welfare Impacts of Disclosure Regulation: A General Equilibrium Approach
I develop a general equilibrium model to examine the innovation and welfare effects of expanding mandatory financial disclosure to a broader set of firms. In the model, disclosure by small firms reveals proprietary information about their local markets, which helps large firms to enter and compete. Consistent with previous empirical findings, the model predicts that mandatory disclosure encourages (discourages) innovation of large (small) firms. More importantly, I identify conditions for when disclosure by small firms increases aggregate innovation and/or welfare. I structurally estimate the model using innovation data and plausibly exogenous variation in the extent of disclosure regulation in Europe. The estimated model suggests that subjecting 15% more firms to full reporting requirements decreases aggregate innovation by around -0.26%, but increases welfare by around 1%. This disparity in aggregate innovation and welfare is driven by the fact that production shifts to large firms that innovate less but are more efficient in exploiting the fruits of innovations.
Presented at: Accounting Rookie Camp (scheduled), EAA Talent Workshop, The Dopuch Conference (poster session presentation), Columbia University, 2022 AAA/Deloitte Foundation Doctoral Consortium
Awards: Chazen Institute Research Grant, Deming Doctoral Fellowship, The Eugene Lang Entrepreneurship Center Fellowship
Publication
Stability and Regime Change: The Evolution of Accounting Standards with Hui Chen
The Accounting Review (2023) 98 (3): 135–152
We examine the evolution of accounting regulation by linking disclosure policies and investments in a dynamic voting model. The disclosure policies are the outcome of voting by entrepreneurs, whose preferences are influenced by their investments. The investments are in turn endogenously determined by current and future disclosure policies. Absent external influences, accounting regimes are stable. A disclosure regime of high (low) quality and a strong (weak) economy coexist and reinforce each other. However, regulatory interventions can result in regime changes by changing the entrepreneurs’ expectations, even without direct enforcement. Unexpected shocks could also result in regime changes by impacting economic conditions and hence voter composition. Our analysis provides a framework to study the interaction between accounting regulation and firms’ economic decisions.
Working Papers
Innovation in Firms: Experimentation and Strategic Communication with Tim Baldenius
Revise and resubmit at Journal of Accounting and Economics
How is innovation affected by information asymmetry within firms? A CEO privately learns valuable project information and communicates it to the board. Based on the report, the board decides how much to invest and which project to continue with going forward. This project guidance motive can result in more experimentation than under symmetric information. In fact, experimentation may be optimal even if, conditional on an early success, it offers no better future profit prospects than a routine project. Strategic communication creates innovation convexity, favoring radical or incremental over moderate experimentation. A policy implication of our results is that information frictions within firms can alleviate the economy-wide underprovision of innovation due to free-riding.
Award: 2023 Bernstein Center Doctoral Research Grant
Presented at: DAR&DART Accounting Theory Seminar (Baldenius), U.C. Berkeley (Baldenius), 14th Workshop on Accounting and Economics (Yang), Stanford University (Baldenius), University of Vienna (Baldenius), Carnegie Mellon University (Baldenius), Columbia University (Yang)
Media coverage: The Finance Bro podcast (interview with Max Peiron)
Diversity Targets with Wei Cai, Yue Chen and Shiva Rajgopal
Revise and resubmit at Review of Accounting Studies; invited presentation at 2023 Review of Accounting Studies Conference
From 2008 to 2020, 180 firms out of S&P 1500 have disclosed employee diversity targets. We conduct the first comprehensive analysis of firms’ employee diversity targets and ask three research questions: (i) which firms tend to announce diversity targets? (ii) do firms deliver on their diversity targets? (iii) what are the potential implications associated with disclosure of such targets for employee hiring and investors? We find that firms with a greater willingness (proxied by past ESG penalties, a higher CEO-to median-employee pay ratio, and after #Metoo and BLM movements) and ability (proxied by financial strength, a blue-collar heavy labor force, and gender and ethnic minorities on boards) to improve employee diversity are more likely to disclose diversity targets. Exploiting the Revelio dataset, of 15,639 firm-years for 1,203 distinct firms from 2008 to 2020, we observe that firms that disclosed a diversity target have indeed hired more diverse employees, but such diversity levels have already increased substantially prior to the target disclosure. Firms with numerical, forward-looking, and rank-and-file employee-targeted goals are associated with greater employee diversity relative to firms that announce other types of goals. Moreover, improved diversity performance does not seem to occur at the cost of employee quality, as measured by the Revelio dataset. Overall, our results have practical implications for how investors and stakeholders might want to interpret corporate diversity targets.
Presented at: 2023 Hawaii Accounting Research Conference (Chen), 2022 AAA Joint Meeting of Diversity and TLC Section (Chen), Columbia University (Yang)
Media coverage: CBS Newsroom
Firm Disclosures and Investors’ Capital Rationing Incentives with Jeroen Suijs
This paper analyzes firm disclosures and associated consequences in an entrepreneurial financing setting. We construct a model where two entrepreneurs compete for a private equity investor's capital and use disclosure to influence the investor's belief. We show that disclosure in such markets increases firms' real investment in productive activities, but may also result in capital rationing by the investor. This finding contrasts with the conventional wisdom that disclosure alleviates information asymmetry and improves firms' access to external capital. When the investor allocates capital based on firms' disclosures, a disclosure contest results and firms increase their productive investment to enhance the disclosure outcomes. We show that such a disclosure contest can result in over-investment and that equity investors can limit over-investment by reducing the amount of capital that they make available to the firms. Consequently, more disclosure in private equity markets may reduce firms' access to equity capital.
Presented at: 2023 AAA FARS Midyear Meeting (Yang), BI Norwegian Business School (Suijs), 12th Accounting Research Workshop (Yang), Columbia University (Yang)