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Co-authored with Lindsey A. Gallo, Karen Ton, and Teri L. Yohn

We study the role of information intermediaries in the non-GAAP disclosure environment and find that investor uncertainty is increasing in the amount of I/B/E/S's non-GAAP adjustments but not in managers' non-GAAP adjustments. These results expand our understanding of the influence of I/B/E/S on capital markets.

Co-authored with Jonathan Berkovitch, Cassandra Estep, and Doron Israeli

Motivated by the observation that investor trust facilitates greater informational price efficiency, we find that firms with more CSR enjoy faster incorporation of earnings news into stock prices and lower investor uncertainty around earnings announcements. Using a regression discontinuity design, we strengthen our identification of the effect of CSR on the speed with which stock prices reflect earnings news.

Co-authored with Lindsey A. Gallo and Hengda Jin

We propose and find that aggregating a small number of earnings signals from highly macroeconomically exposed firms yields an informative leading indicator of future GDP. This challenges the view that there is a mechanical link between aggregate earnings and GDP. We shed light on the “black box” of how market participants form expectations by showing that forecasters across organizations fail to efficiently incorporate the news contained in top macro-exposed firms. Overall, our results highlight the importance of aggregation for forming macroeconomic expectations and clarify the mechanism underlying the relation between aggregate earnings and GDP.

Co-authored with Sonakshi Agarwal, Lisa Y. Liu, Shiva Rajgopal, Yifan Yan and Teri L. Yohn

Despite growing investor reliance on environmental, social, and governance (ESG) ratings, we know relatively little about how such ratings are constructed. Recent evidence of disagreement across ESG ratings raises concerns about their credibility. We note that while reputational concerns likely motivate ESG raters to issue credible and accurate ratings, several leading ESG raters also construct index products based on their ESG ratings. We examine whether the incentives associated with deriving revenue from ESG rating-based indices contribute to the variation in ESG ratings. Consistent with this notion, we find that raters with strong index licensing incentives issue higher ESG ratings for firms with better stock return performance relative to raters with weaker licensing incentives, after controlling for the firm's fundamental ESG performance. We also find that raters that construct ESG-based indices more often include and place greater weight on stocks with better stock return performance in the ESG-based indices. Overall, our findings suggest that index construction incentives affect the construction of ESG ratings, highlighting the need for greater transparency in the production of ESG ratings.

Co-authored with Mary E. Barth and Doron Israeli

Equity book-to-market ratios (BTM) should not exceed one if a firm’s return on equity exceeds its cost of capital or it employs conservative accounting. Yet, BTM is above one for many firms. We find that this occurs because BTM above one reflects macroeconomic risk. We find that hedge returns for BTM above one are concentrated in recession years. We also find that BTM above one reflects potentially overstated equity book values, but only in non-recession years. Our study calls into question using HML as a return prediction factor for BTM above one and using BTM as a generic measure of conservative accounting or as the key indicator of overstated asset book values.

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