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Firms often undertake activities that do not necessarily increase cash flows (e.g., costly investments in corporate social responsibility or CSR), and some investors value these non cash activities (i.e., they have a "taste" for these activities). We develop a model to capture this phenomenon and focus on the asset-pricing implications of differences in investors' tastes for firms' activities and outputs. Our model shows that, first, investor taste differences provide a basis for investor clientele effects that are endogenously determined by the shares demanded by different types of investors. Second, because the market must clear at one price, investors' demands are influenced by all dimensions of firm output even if their preferences are only over some dimensions. Third, information releases cause trading volume, even when all investors have the same information. Fourth, investor taste provides a rationale for corporate spin-offs that help firms better target their shareholder bases. Finally, individual social responsibility can lead to corporate social responsibility when managers care about stock price because price reacts to investments in CSR activities. AbstractFirms often undertake activities that do not necessarily increase cash ‡ows (e.g., costly investments in corporate social responsibility, or CSR), and some investors value these noncash activities (i.e., they have a "taste"for these activities). We develop a model to capture this phenomenon and focus on the asset-pricing implications of di¤erences in investors'tastes for …rms' activities and outputs. Our model shows that, …rst, investor taste di¤erences provide a basis for investor clientele e¤ects that are endogenously determined by the shares demanded by di¤erent types of investors. Second, because the market must clear at one price, investors'demands are in ‡uenced by all dimensions of …rm output even if their preferences are only over some dimensions. Third, information releases cause trading volume, even when all investors have the same information. Fourth, investor taste provides a rationale for corporate spin-o¤s that help …rms better target their shareholder bases. Finally, individual social responsibility can lead to corporate social responsibility when managers care about stock price because price reacts to investments in CSR activities.

This paper studies the propensity of firms to commit to disclose information that is subsequently biased, in the presence of other firms also issuing potentially biased information. An important aspect of such an analysis is the fact that firms can choose whether to disclose or withhold information. We show that allowing the number of disclosed reports to be endogenous introduces a countervailing force to some of the empirical predictions from the prior literature. For example, we find that as more firms issue reports or as the correlation across firms' cash flows increases, the firm biases its report less. However, when we treat firms' disclosure choices as endogenous, we show that the number of firms that commit to disclose decreases as the correlation across these cash flows increases, and this, in turn, offsets the direct effect of the correlation on bias. AbstractThis paper studies the propensity of …rms to commit to disclose information that is subsequently biased, in the presence of other …rms also issuing potentially biased information. An important aspect of such an analysis is the fact that …rms can choose whether to disclose or withhold information. We show that allowing the number of disclosed reports to be endogenous introduces a countervailing force to some of the empirical predictions from the prior literature. For example, we …nd that as more …rms issue a report or as the correlation across …rms' cash ‡ows increases, the …rm biases its report less. However, when we treat …rms' disclosure choices as endogenous, we show that the number of …rms that commit to disclose decreases as the correlation across these cash ‡ows increases, and this, in turn, o¤sets the direct e¤ect of the correlation on bias.

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This paper complements the ongoing empirical discussion surrounding participative budgeting by comparing its economic merits relative to a top-down budgeting alternative. In both budgeting regimes, private information is communicated vertically between a principal and a manager. We show that top-down budgeting incurs fewer agency costs than bottom-up budgeting whenever the level of information asymmetry is relatively low. Although the choice between top-down and bottom-up budgeting ultimately determines who receives private information within the firm, we find that both the principal and manager's preferences over the allocation of private information remain qualitatively similar across the two budgeting paradigms. Specifically, while the principal always prefers either minimal or maximal private information, the manager prefers an interim or maximal level of private information regardless of who is privately informed. Last, we use our model to address empirical inconsistencies relating the firm's choice of budgeting process, the resulting budgetary slack, and performance.

We examine the impact of identity preferences on the interrelation between incentives and performance measurement. In our model, a manager identifies with an organization and loses utility to the extent that his actions conflict with effort-standards issued by the principal. Contrary to prior arguments in the literature, we find conditions under which a manager who identifies strongly with the organization receives stronger incentives and faces more performance evaluation reports than a manager who does not identify with the organization. Our theory predicts that managers who experience events that boost their identification with the firm can decrease their effort in short-term value creation. We also find that firms are more likely to employ less precise but more congruent performance measures, such as stock prices, when contracting with managers who identify little with the organization. In contrast, they use more precise but less congruent measures, such as accounting earnings, when contracting with managers who identify strongly with the firm.

While researchers and practitioners alike estimate firms' exposures to systematic risk factors, the disclosure literature typically assumes that exposures are common knowledge. We develop a model where the firm's exposure to a factor is unknown, and analyze the effects of factor-exposure uncertainty on share price and the effects of disclosure about the exposure. We find that: (1) factor-exposure uncertainty introduces skewness and excess kurtosis in the cash flow distribution relative to the commonly used normal distribution; (2) risk-factor disclosure affects all moments of that distribution; and (3) the pricing of higher moments affects the price response of disclosure and the incentives to disclose. For example, factor-exposure uncertainty may actually increase price when the uncertainty implies positive skewness in the cash flow distribution. Hence, a reduction in uncertainty through disclosure may increase cost of capital. We also extend our model to multiple firms and show that factor-exposure uncertainty manifests as uncertainty about a firm's CAPM beta. JEL Classifications: G12; M41.