Research Interests
Topics: Information disclosure, executive compensation, economics of innovation, management accounting, corporate governance, structural estimation
Methodologies: Analytical, archival
Learning, Accounting Information, and Contracting Dynamics
I develop a dynamic principal-agent model where short/long-term incentives and performance based turnover are jointly used to motivate productive activity in a setting with learning. The agent controls underlying fundamentals and can manipulate earnings at the expense of future reversals. Long-term incentives are optimal due to the interaction between learning and the reversal of earnings manipulations. Positive manipulation becomes optimal as long-term incentives have vested and the agency approaches termination in order to reduce the probability of inefficient turnover. This paper shows how incentive dynamics and turnover decisions are shaped by learning and performance measurement. In doing so, it generates novel empirical predictions on the impact of learning and measurement on the duration of incentive pay, the relationship between contractual convexity and productive effort, and the use of implicit incentives over termination.
Dynamic Moral Hazard and Optimal Accruals
with Jonathan Bonham
We develop a dynamic moral hazard framework in which a principal designs an earnings-based contract and an accrual policy to motivate an agent to take actions that generate current and future cash flows. To incentivize forward-looking actions, the principal can defer compensation until future cash flows realize or make accruals that correct cash flow timing errors but introduce measurement errors into earnings. Our model yields three main results. First, the optimal long-run policy is accrual-heavy and standardized: it is time invariant and driven by measurability rather than agency-specific parameters. Second, deferred compensation and accruals are substitutes in this optimal incentive structure: as measurement error declines, the principal relies less on deferred compensation and more on accruals to incentivize effort. Finally, if the agent is hired in conjunction with a shock to fundamentals, then there is a period early in the agent’s tenure where compensation is more heavily deferred and the accrual policy is temporarily light and non-standardized. Taken together, our model generates novel insights into the relation between incentive duration and the use of GAAP and non-GAAP performance measures in long-term compensation contracts.
Dynamic Information Acquisition, Investment, and Disclosure
with Iván Marinovic
We present a dynamic model of information acquisition and disclosure. The manager seeks to maximize future stock prices and collects information privately about the fi rm’s fundamentals. Information acquisition increases the arrival rate of private information. The manager can choose to disclose his private information or withhold it in perpetuity. We study the impact of information acquisition on the accumulation of private information, disclosure, and the firm’s initial investment.
with Iván Marinovic
We develop a model of disclosure timing in which the firm can commit to disclose its private information at a fixed date (a time-based policy) or after a certain milestone has been reached (a news arrival-based policy). The firm faces a central trade-off: delaying disclosure makes it more informative, increasing its price impact, but shortens the post-disclosure period over which the firm can capitalize on the updated price. With time-based disclosure, more uncertainty over beliefs induces front-loaded (earlier) disclosure. With arrival-based disclosure, thresholds are more stringent when individual transactions are less informative. Arrival‑based disclosure generally dominates time‑based disclosure because it allows the disclosure date to be correlated with the firm’s type, but it can leave information undisclosed if the threshold is not reached. The optimal general policy combines both elements through a time-varying threshold that starts high and declines toward the deadline, ensuring disclosure occurs while preserving the option value of waiting. Finally, without the ability to commit, market pressure pushes firms to disclose prematurely, reducing both informativeness and profitability.
On the Optimal Frequency of Mandatory Disclosure
with Iván Marinovic
We develop a dynamic theory of mandatory disclosure frequency. We analyze the optimal mandatory disclosure frequency from the perspective of a regulator aiming to maximize firm value. The manager makes an investment, acquires information about firm productivity over time, and can choose when to disclose this information to the market, if at all, subject to the mandatory disclosure dates. The optimal mandatory disclosure frequency is non-monotonic in firm profitability; mandatory disclosure is more frequent when the firm profitability is either very low or very high. More frequent mandatory disclosures may crowd out voluntary disclosures, exacerbate moral hazard issues, and lead to lower investments.
Inventory Costing, Disclosure, and Investment Efficiency
with Iván Marinovic
We study a dynamic model of inventory management in which firms have private information about their quality and markets learn about product quality based on the firm’s reported earnings. Earnings are computed according to full absorption costing: producing an additional unit of inventory lowers unit costs since fixed overhead costs are capitalized, but leads to inventory holding costs. We show that overproducing inventory is a noisy signaling device aimed at communicating the underlying product quality to the market. Higher-quality firms that expect more and faster demand arrivals manage their inventory policies to signal/separate themselves from lower-quality firms, and thus induce a higher price at the reporting date. We study the optimal timing of mandatory disclosure under full costing and differing degrees of fixed cost absorption. Absorption costing may be a way for the regulator to decrease the frequency of disclosure while maintaining the incentives to invest in inventory. We also examine the impact of variable costing on signaling incentives.
Social Value of Transparency in R&D Activities
with Sang Wu
This paper examines the welfare implications of mandatory disclosure of intermediate success in multi-stage R&D races under duopoly competition. A leader’s announcement of its intermediate success has a dual effect on its rival. On the one hand, it encourages the follower to stay in the race by resolving uncertainty about project feasibility; on the other hand, it deters the follower by signaling an enlarged technological gap. Under the mandatory disclosure regime, inefficiencies may therefore arise from (i) the firm(s) exiting the race too late or too soon in the absence of intermediate success, and (ii) the follower staying in the race upon the leader’s preliminary breakthrough, even when immediate exit is socially optimal. We show that mandatory disclosure is socially desirable when both firms are sufficiently strong. By contrast, allowing the stronger firm to withhold its intermediate success can be welfare-enhancing when firms’ R&D capabilities lie in an intermediate range.
Learning, Incentives, and CEO Turnover: A Structural Approach
with Iván Marinovic
The rarity of CEO turnover is often attributed to entrenchment. We estimate a dynamic principal-agent model with learning to examine the relationship between performance-induced turnover and entrenchment. The board gradually learns about the CEO’s quality by observing noisy but informative signals over time. The board can terminate the CEO when its beliefs over the CEO’s quality are low enough. When the CEO is fired, he is paid a severance that is a function of his reputation in the labor market. We use this model of performance-induced turnover to estimate the cost to shareholders from firing the CEO and examine the degree to which entrenchment can explain the low incidence of CEO turnover.
Strategic Disclosure Spillovers: Theory and Evidence
with Jinhwan Kim
We study strategic disclosure spillovers when the correlation between firms’ fundamentals is itself uncertain. In our model, market participants and firms learn about this latent correlation from public news and peer disclosures, which endogenously re-weights the value of industry information. Anticipating harmful spillovers, managers may deliberately bias or soften their disclosures, even at a cost. Our theoretical model generates predictions about when peer disclosures amplify or dampen market reactions and how firms strategically adapt. We empirically test these predictions in the setting of patent trolls, where disclosures about innovation outcomes or patent sales shift beliefs about technological overlap and in turn affect litigation threats, settlement behavior, and the market for intellectual property. Our analysis provides novel insights into disclosure under uncertain correlation and its real effects on innovation and markets.
Tangible and Intangible Investment in Long-Term Contracts
I develop a dynamic contracting model where a firm’s manager is tasked with making investments in tangible and intangible capital, which jointly affect underlying firm profitability. Investments in both sources of capital are distinguished by their inputs and measurement rules. Tangible investments are capitalized and subject to adjustment costs. Intangible investments, on the other hand, are noisy, expensed through earnings, and are personally costly to the manager.
Trade Under Asymmetric Information: A Reader’s Companion
(monograph)
with Thomas Hemmer
There are plenty of good books available that provide summaries and overviews of key contributions of information economics to our understanding of the role of rules and contracts for the functioning of markets. Writing another book of this form makes little sense, and this is not our aim. Rather than providing a substitute for reading the fundamental papers we cover, our goal is to help facilitate the reading of the underlying papers. As such, although entirely feasible, this monograph is not meant to be read as a stand-alone document, but instead read in conjunction with the papers that we cover. The individual notes are structured to help readers through some of the technicalities that, in our experience, stand between readers new to this literature and the important insights that these papers contain. While technically rigorous, we also provide intuition and tie the papers together to help the user better “see the forest for the trees.” Although the monograph spans both classical so-called “Disclosure” and “Contracting” papers, we avoid this segmentation and instead emphasize the commonalities to help readers better explore the links between the individual papers and particular market structures and circumstances.