Research Interests: theoretical research in financial & managerial accounting.
Mirko Heinle teaches Managerial Accounting in the undergraduate program. He joined the Wharton School in 2011 after receiving his doctoral degree from the University of Mannheim, Germany. Mirko’s research interests concern accounting disclosure in capital markets, the regulatory process of such disclosure, and internal capital allocation. Current research includes the disclosure of risk related information, the effect of regulatory uniformity on lobbying incentives, and the optimal allocation of non-monetary resources.
Abstract: Standard Bayesians' beliefs converge when they receive the same piece of new information. However, when agents have uncertainty about the precision of a signal, their beliefs might instead diverge more despite receiving the same information. We demonstrate that this divergence leads to a unimodal effect of the absolute surprise in the signal on trading volume. We show that this prediction is consistent with the empirical evidence using trading volume around earnings announcements of US firms. We find evidence of elevated volume following moderate surprises and depressed volume following more extreme surprises, a pattern that is more pronounced when investors are more uncertain about earnings' precision. Because investors can disagree even further after receiving the same piece of news, the relationship between news and trading volume is not necessarily linear, suggesting that trading volume may not be an appropriate proxy for market liquidity.
Henry Friedman, Mirko S. Heinle, Irina Luneva (Working), A Theoretical Framework for ESG Reporting to Investors.
Abstract: We provide a theoretical framework for reporting of firms' environmental, social, and governance (ESG) activities to investors. In our model, investors receive an ESG report and use it to price the firm. Because the manager is interested in the firm's price, disclosing an ESG report provides effort and greenwashing incentives. We analyze the impact of different reporting characteristics on the firm's price, cash flows, and ESG performance. In particular, we investigate the consequences of whether the report captures ESG inputs or outcomes, how the report aggregates different ESG dimensions, and the manager's tradeoffs regarding ESG efforts and reporting bias. We find that, for example, an ESG report that weights efforts by their impact on the firm's cash flows tends to have a stronger price reaction than an ESG report that focuses on the ESG impact per se. ESG reports aligned with investors' aggregate preferences provide stronger incentives and lead to higher cash flows and ESG than reports that focus on either ESG or cash flow effects individually. Additionally, in the presence of informative financial reporting, ESG reports that focus on ESG impacts lead to the same cash flow and better ESG results than reports focusing on cash flow impacts alone.
Abstract: We consider a cheap-talk setting with two senders and a continuum of receivers with heteroge- nous preferences. Each receiver is constrained to listen to one of the senders but can choose which sender to listen to. The introduction of a second sender facilitates more informative com- munication and even enables full communication for a large set of sender preference pairs. We use the model to assess the size and characteristics of sender audiences, the amount of informa- tion communicated, and the impact of the senders’ biases on the receivers’ actions.
Abstract: A growing empirical literature suggests managers view mandatory and voluntary disclosure as substitutes. We formalize the intuition in this literature in the context of a simple model of mandatory and voluntary disclosure. We use our model to highlight the limitations of existing empirical intuition, and discuss conditions under which mandatory and voluntary disclosure are (and are not) substitutes. We consider a setting where mandatory disclosure is a disaggregated disclosure (e.g., a financial statement), voluntary disclosure is an aggregate disclosure (e.g., an earnings forecast), and the costs of voluntary and mandatory disclosure are distinct. In this setting, we show that concerns about the proprietary cost of mandatory disclosure motivate managers to reduce the quality of mandatory disclosure and substitute voluntary disclosure. We test our predictions using a comprehensive sample of mandatory disclosures where the SEC allows the firm to redact information that would otherwise jeopardize its competitive position. Consistent with our predictions, we find strong evidence that redacted mandatory disclosure is associated with greater voluntary disclosure.
Abstract: 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 effect of factor-exposure uncertainty on share price and disclosure about the exposure. We find that: (i) factor-exposure uncertainty introduces skewness and excess kurtosis in the cash-flow distribution relative to the commonly used normal distribution; (ii) risk--factor disclosure affects all moments of that distribution; and (iii) 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.
Abstract: In this paper, we consider the price effects of risk disclosure. We develop a model in which investors are uncertain about the variance of a firm’s cash flows and the firm releases an imperfect signal regarding this variance. In our model, uncertainty over the riskiness of a firm’s cash flows leads to a variance uncertainty premium in its price. We demonstrate that risk disclosure decreases the firm’s cost of capital by reducing this premium and that the market response to risk disclosure is small when the expected level of risk is high. Moreover, we find that firms acquire and disclose more risk information when their cash flow risk is greater than expected. Finally, we demonstrate that in a multi-asset setting, only risk disclosure concerning systematic risks will impact the cost of capital.
Henry Friedman and Mirko S. Heinle (2016), Taste, Information, and Asset Prices: Implications for the Valuation of CSR, Review of Accounting Studies, 21 (3), pp. 740-767.
Abstract: 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.
Alex Edmans, Mirko S. Heinle, Chong Huang (2016), The Real Costs of Financial Efficiency When Some Information Is Soft, Review of Finance, 20 (6), pp. 2151-2182.
Abstract: This article shows that improving financial efficiency may reduce real efficiency. While the former depends on the total amount of information available, the latter depends on the relative amounts of hard and soft information. Disclosing more hard information (e.g., earnings) increases total information, raising financial efficiency and reducing the cost of capital. However, it induces the manager to prioritize hard information over soft by cutting intangible investment to boost earnings, lowering real efficiency. The optimal level of financial efficiency is non-monotonic in investment opportunities. Even if low financial efficiency is desirable to induce investment, the manager may be unable to commit to it. Optimal government policy may involve upper, not lower, bounds on financial efficiency.
Henry Friedman and Mirko S. Heinle (Work In Progress), Influence activities, coalitions, and uniform policies.
Abstract: This study examines the costs and benefits of uniform accounting regulation in the presence of heterogeneous firms who can lobby the regulator. A commitment to uniform regulation reduces economic distortions caused by lobbying by creating a free-rider problem between lobbying firms at the cost of forcing the same treatment on heterogeneous firms. Resolving this trade-off, an institutional commitment to uniformity is socially desirable when firms are sufficiently homogeneous or the costs of lobbying to society are large. We show that regulatory intensity for a given firm can be increasing or decreasing in the degree of uniformity, even though uniformity always reduces lobbying. Our analysis sheds light on the determinants of standard-setting institutions and their effects on corporate governance and lobbying efforts.
Strategic Cost Analysis is the process of analyzing and managing costs in order to improve the strategic position of the business. This goal can be accomplished by having a thorough understanding of which activities and costs support an organization's strategic position and which activities and costs either weaken it or have no impact. Subsequent cost management efforts can then focus on reducing or limiting expenditures on activities that add little or no strategic value, while increasing expenditures on activities that support the strategic position of the organization. Performance can then be evaluated to ensure that the chosen actions are taken, and that these actions are yielding improved strategic performance. Throughout the course, a strategic cost analysis and management framework will be applied across functions and organizations to highlight the cost analysis and performance evaluation methods available to forecast financial performance and improve strategic position.
This is Part II of a theoretical and empirical literature survey sequence covering topics that include corporate disclosure, cost of capital, incentives, compensation, governance, financial intermediation, financial reporting, tax, agency theory, cost accounting, capital structure, international financial reporting, analysts, and market efficiency. Please contact the accounting doctoral coordinator for information on the specific upcoming modules/topics that will be taught.