Driving a More Prosperous Future
The Changing Nature of Firm Innovation: Short-Termism and Influential Innovation in U.S. Public Firms
Management Science
We examine the link between short-term pressures and technologically significant innovation in U.S. public firms in 1997–2015. Using a market-based measure of short-term pressure, we estimate its relationship with influential and novel patents. We find that firms facing more intense short-term pressures are less likely to patent highly influential or novel innovations. To evaluate whether this relationship is causal, we use changes in ownership styles following financial institution mergers as instruments. Our analysis suggests that changing short-term pressures from investors had a causal impact on firm innovative outcomes; this finding is robust to a wide variety of empirical specifications. While public firms as a whole retained a constant share of highly influential patents, this activity has become more concentrated in fewer firms. This shift does not appear to be fully compensated by an increase in technologically significant patents by nonpublic firms such as venture-capital (VC)-backed start-ups. These findings raise questions about capital markets’ impact on firm R&D strategy and the nature of innovative activities in public firms
Yuan Shi (Cornell University), Rachelle Sampson (University of Maryland), Brent Goldfarb (University of Maryland), Rafael Corredoira (Newcastle University)
Does earnings management matter for strategy research?
Strategic Managment Journal, August 2025
Strategic management research often uses accounting data, despite well-known concerns that earnings management could obscure the link between actual and measured performance. We apply methods from the econometric literature on bunching to estimate that around 15 percent of firm-year observations in Compustat manipulate accounting earnings to achieve profitability. We show that cash-based performance measures are less susceptible to manipulation and that the choice of accrual versus cash-based measures “matters” for two classic strategy research questions: a decomposition of ROA variance and an analysis of persistence in firm performance. These findings underscore the importance of robustness testing and contribute to an emerging literature that reconsiders the link between theoretical constructs and empirical performance measures.
Gibbs (Purdue), Simcoe (Boston U), and Waguespack (Maryland)
Building credible commitments via board ties: Evidence from the supply chain
November 2025
Using a novel dataset that provides a comprehensive coverage of U.S. firms' industrial supply chain relationships, we find that firms with innovation specific to a buyer are more likely to share a common director with that buyer. This association is stronger when the buyer has a larger number of alternative suppliers. We further find that when a supplier–buyer pair shares a common director, the supplier's R&D investment is more sensitive to the investment opportunities of its buyer. Moreover, such pairs tend to have longer supply chain relationships. Taken together, our findings demonstrate that board ties serve as a credible commitment mechanism to support exchange along the supply chain and safeguard suppliers' buyer-specific investments.
Rebecca Hann, University of Maryland-College Park; Musa Subasi, University of Maryland-College Park; Yue Zheng, Hong Kong University of Science and Technology
Status-Amplified Deterrence: Paul Manafort’s Prosecution Under the Foreign Agents Registration Act
Organization Science, September 2025
Social control agents often struggle to deter organizational deviance. We propose a theory of “status-amplified deterrence” wherein enforcement’s deterrent effects are amplified when carried out against high-status organizational actors. First, this enforcement is interpreted as willingness and ability for far-reaching enforcement. Next, amplified deterrence occurs as these episodes become widely known through (1) extensive media coverage and (2) the marketing efforts of third-party compliance advisors. We examine this theory in the context of the U.S. Department of Justice’s enforcement against Paul Manafort for violating the Foreign Agents Registration Act (FARA). Using a difference-in-differences design, we demonstrate that enforcement against Manafort caused a widespread, sustained, and economically significant reduction in FARA noncompliance. We show supplementary evidence consistent with the idea that deterrence was amplified in significant part by media attention and by law firms referencing the episode while successfully marketing FARA advisory services. We contribute to literature illuminating how organizations, in conjunction with third-party compliance advisors, adjust deviant activities in response to shifting regulatory environments.
Reuben Hurst, Jin Hyung Kim (George Washington University) and Jordan Siegel (University of Michigan)
Biodiversity Entrepreneurship
Review of Finance
We study an emerging class of start-up organizations focused on biodiversity conservation and the challenges they face in financing these ventures. Using a novel machine learning method, we identify 630 biodiversity-linked start-ups in PitchBook and compare their financing dynamics to other ventures. Biodiversity start-ups raise less capital but attract a broader coalition of investors, including not only venture capitalists (“value investors”) but also mission-aligned impact funds and public institutions (“values investors”). Values investors provide incremental capital rather than substituting value investors, but funding gaps persist. We show biodiversity-linked start-ups use social media activity to help connect with value investors. Our findings can inform policy and practice for mobilizing private capital toward biodiversity preservation, emphasizing hybrid financing models and strategic communication.
Sean Cao, Robert H. Smith School of Business, University of Maryland
EPA Scrutiny and Voluntary Environmental Disclosures
Review of Accounting Studies
Market participants have called on the SEC to address the lack of disclosures about firms’ environmental impacts, investments, and exposures. However, the frictions that obstruct the flow of environmental information are not well understood. I shed light on these frictions by examining whether scrutiny by the Environmental Protection Agency (EPA) restricts the firm’s voluntary environmental disclosures in earnings conference calls. Consistent with the notion that EPA scrutiny gives rise to disclosure frictions, I find a negative relation between EPA scrutiny and the environmental disclosures of scrutinized firms. This negative relation is concentrated among firms without environmental expert directors, suggesting that environmental governance mitigates the chilling effect of EPA scrutiny. In terms of disclosure quality, I show that environmental disclosures include fewer quantitative details under EPA scrutiny. Collectively, these findings provide insights into the frictions that restrict the flow of environmental information to market participants, an important issue given the SEC’s efforts to improve current disclosure practices.
Mark Zakota, Assistant Professor, Robert H. Smith School of Business, University of Maryland
How to Talk When a Machine Is Listening: Corporate Disclosure in the Age of AI
The Review of Financial Studies, March 2023
Growing AI readership (proxied for by machine downloads and ownership by AI-equipped investors) motivates firms to prepare filings friendlier to machine processing and to mitigate linguistic tones that are unfavorably perceived by algorithms. Loughran and McDonald (2011) and BERT available since 2018 serve as event studies supporting attribution of the decrease in the measured negative sentiment to increased machine readership. This relationship is stronger among firms with higher benefits to (e.g., external financing needs) or lower cost (e.g., litigation risk) of sentiment management. This is the first study exploring the feedback effect on corporate disclosure in response to technology.
Sean Cao, Associate Professor (with tenure), Robert H. Smith School of Business, University of Maryland, United States of America
Site Visits and Corporate Investment Efficiency
April 2024
Site visits allow visitors to physically inspect productive resources and interact with on-site employees and executives face to face. We posit that, by allowing visitors to acquire investment-related information and monitor the management team, site visits offer disciplinary benefits for corporate investments. Using mandatory disclosures of site visits in China, we find that corporate investments become more responsive to growth opportunities as the intensity of site visits increases, consistent with the notion that site visits yield disciplinary benefits. We also find that the positive association between site visits and investment efficiency is more pronounced when visitors can glean more investment-related information and when they have stronger incentives and greater power to monitor managers. This positive association is also stronger among firms with more severe agency problems and higher asset tangibility. The overall evidence supports the notion that site visits serve as a unique venue for institutional investors and financial analysts to acquire valuable information and serve a monitoring function, which generates disciplinary benefits for corporate investments.
Sean Cao, Associate Professor (with tenure), Robert H. Smith School of Business, University of Maryland, United States of America
Applied AI for finance and accounting: Alternative data and opportunities
February 2024
Big data and artificial intelligence (AI) have transformed the finance industry by altering the way data and information are generated, processed, and incorporated into decision-making processes. Data and information have emerged as a new class of assets, facilitating efficient contracting and risk-sharing among corporate stakeholders. Researchers have also increasingly embraced machine learning and AI analytics tools, which enable them to exploit empirical evidence to an extent that far surpasses traditional methodologies. In this review article, prepared for a special issue on Artificial Intelligence (AI) and Finance in the Pacific-Basin Finance Journal, we aim to provide a summary of the evolving landscape of AI applications in finance and accounting research and project future avenues of exploration. Given the burgeoning mass of literature in this field, it would be unproductive to attempt an exhaustive catalogue of these studies. Instead, our goal is to offer a structured framework for categorizing current research and guiding future studies. We stress the importance of blending financial domain expertise with state-of-the-art data analytics skills. This fusion is essential for researchers and professionals to harness the opportunities offered by data and analytical tools to better comprehend and influence our financial system.
Sean Cao, Associate Professor (with tenure), Robert H. Smith School of Business, University of Maryland, United States of America