Organizations with a mission that extends “beyond profit” to achieve broader objectives are becoming increasingly common. This paper studies such hybrid entities—firms that value the profits they generate, as well as the utility they provide to customers—and details their implications for industry disclosure practices. The findings demonstrate that disclosure incentives are perturbed not just from being a hybrid entity, but also from competing with such entities. Accounting for both competitive and disclosure effects, the paper then assesses the circumstances under which a hybrid firm is economically viable and derives the ensuing equilibrium industry composition. As such, we show that the presence of firms with objectives beyond profit can be an endogenous characteristic of many industries.

No abstract

Q uality testing by suppliers has significant ramifications for downstream supply chain participants and retail consumers. This article focuses on such implications accounting for the fact that suppliers often enjoy discretion in quality testing and reporting. Under a discretionary testing and reporting environment, we show that a supplier can improve the market's perception of product quality by engaging in self-imposed production cuts. Production cuts dampen supplier incentives to engage in excessive quality testing, putting the supplier and the market on a more equal information footing. This reduces the market's need to skeptically discount product quality to protect itself. The improved market perception, then, reduces quality testing demand, introducing cost savings. The result that costly production cuts can improve quality perceptions indicates that the groundwork for influencing market perceptions may have to be laid upfront, even prior to acquiring private information, providing a contrast to routine signaling models.

It is well recognized that stock prices provide relevant feedback that can guide future firm decisions. This paper develops a model to examine how accounting disclosures affect the decision-usefulness of such stock market reactions. We demonstrate that information in accounting reports can prove useful because it helps observers better interpret and isolate the decision-relevant information embedded in the ensuing stock price reaction. This leads to natural synergies between accounting reports and stock prices in directing firm strategies—the more forward-looking information that can potentially be gleaned from stock prices, the more the firm will invest in improving precision of accounting disclosures even when such disclosures pertain to unrelated current activities.

Conventional wisdom suggests that hiring independent boards limit earnings manipulations and promote accurate reporting. In contrast, this study indicates that hiring some insiders to the board facilitates the integrity of the reporting process. The central result is that strengthening board independence curtails earnings overstatements, but heightens the likelihood of understatements. This is because, reinforcing board independence limits the CEO's ability to over-report, but also encourages the auditor to economize on effort. The reduced effort impairs the auditor's ability to verify high earnings and, because auditors tend to favor conservative reports when in doubt, leads to increased incidence of conservative under-reporting.