Publications

The usefulness of financial disclosures is a source of considerable debate in the municipal setting, given their lack of timeliness. This paper empirically examines the extent to which municipal financial disclosures have information content. Using the entire universe of annual financial disclosures from 2009 to 2020, we show that trading activity in the secondary market for municipal bonds increases after the disclosures are filed. Both institutional and retail trades increase around disclosure filings, but the effect is pronounced for retail traders, for whom the reports are more likely to provide new information. Moreover, the heightened trading is pronounced for timelier disclosures, consistent with regulators' views that untimely disclosures are less likely to provide new information. We also find a pronounced response when investors' risk is high and when the disclosures contain risk-related discussions. Our results contrast with earlier research and provide the first large-scale evidence that participants in the U.S. market for municipal bonds perceive financial disclosures to have informational value.

The lack of board diversity across gender and race has been one of the most controversial topics in corporate board governance in recent years. Given the central role that shareholders have in approving director appointments, we investigate whether shareholders value diversity on corporate boards by analyzing their voting patterns in director elections. Despite many shareholders’ public commitments of supporting board diversity, we show that shareholders have not historically been proactive in using their votes to motivate companies to increase diversity among corporate boards. This finding persists over time and across key shareholders who have been some of the most outspoken proponents of board diversity.

We study how changes in disclosure processing costs affect managers’ ability to learn from their own firms’ stock prices. To provide evidence on this issue, we examine country-level adoptions of centralized electronic disclosure systems (CEDS). These systems, which digitize and centralize firm disclosures, reduce disclosure processing costs for investors. We find a significant decrease in managers’ investment sensitivity to price following the adoption of CEDS, consistent with managers relying less on the information contained in their firms’ stock prices for their investment decisions. We observe this decrease is most pronounced in countries with the largest reductions in information processing costs. We provide evidence that the decrease is directly attributable to CEDS crowding out investors’ private-information production and indirectly to improvements in the relative informativeness of peer disclosures and prices. Overall, our results show that disclosure technologies that reduce processing costs have real effects on the global economy.

Environmental, social and governance (ESG) considerations have dominated the discussion of corporate purpose in recent years. We examine commonly accepted notions about ESG that are foundational to the discussion but receive little critical analysis. We conclude that decisions about ESG would improve if they were based on empirical evidence and theoretical research in this field.

Using comprehensive data on U.S. corporate bond trades since 2002, we find evidence that retail bond investors appear to over-rely on untimely credit ratings, neglect firm fundamentals, and misunderstand the trade-off between bond risk and yields. Specifically, retail investors appear to select bonds by first screening on a credit rating level and then sorting by yield, buying the highest-yielding bonds within each rating level. Because yields lead credit ratings, selecting on yield-within-rating means that retail investors systematically trade in the opposite direction of accounting fundamentals, buy in advance of credit downgrades and defaults, and generate negative average future returns. Overall, our findings suggest that retail bond investors systematically mislearn from prices, which is hard to reconcile with standard notions of rationality. Our study provides new evidence of ill-informed trading in a market that is thought to be relatively sophisticated, and contributes to our understanding of the roles and consequences of credit ratings in debt markets.

This study examines how an increase in tick size affects algorithmic trading (AT), fundamental information acquisition (FIA), and the price discovery process around earnings announcements (EAs). Leveraging the SECs randomized Tick Size Pilot experiment, we show a tick size increase results in a decline in AT and a sharp drop in absolute cumulative abnormal returns and volume around EAs. More importantly, we find increased FIA in the pre-announcement period. Specifically, we show: (a) treatment firms pre-announcement returns better anticipate next quarters standardized unexpected earnings; (b) these firms experience an increase in EDGAR web traffic prior to EAs; and (c) they exhibit a drop in price synchronicity with index returns. Taken together, our evidence suggests that while an increase in tick size reduces AT and abnormal market reaction after EAs, it also increases FIA activities prior to EAs.

This paper provides evidence that disclosing corporate bond investors' transaction costs (markups) affects the size of the markups. Until recently, markups were embedded in the reported transaction price and not explicitly disclosed. Without explicit disclosure, investors can estimate their markups using executed transaction prices. However, estimating markups imposes information processing costs on investors, potentially creating information asymmetry between unsophisticated investors and bond-market professionals. We explore changes in markups after bond-market professionals were required to explicitly disclose the markup on certain retail trade confirmations. We find that markups decline for trades that are subject to the disclosure requirement relative to those that are not. The findings are pronounced when constraints on investors' information processing capacity limit their ability to be informed about their markups without explicit disclosure.

In this study, we investigate whether investors are willing to trade off wealth for societal benefits. We take advantage of unique institutional features of the municipal securities market to provide insight into this question. Since 2013, states and other governmental entities have issued over $23 billion of green bonds to fund eco-friendly projects. Comparing green securities to nearly identical securities issued for non-green purposes by the same issuers on the same day, we observe economically identical pricing for green and non-green issues. In contrast to a number of recent theoretical and experimental studies, we find that in real market settings investors appear entirely unwilling to forgo wealth to invest in environmentally sustainable projects. When risk and payoffs are held constant and are known to investors ex-ante, investors view green and non-green securities by the same issuer as almost exact substitutes. Thus, the greenium is essentially zero.