Paul Fischer

Paul Fischer, Mirko S. Heinle, Jung Min Kim, Christina Zhu (Working), Rational Information Acquisition Screens.

Abstract: We develop a model of information acquisition in capital markets and test its predictions in the data. In the model, investors are uncertain about the returns to acquiring private information before they acquire it. As a result, investors use prior prices and public information as a screen to estimate the value of private information acquisition and efficiently allocate their limited information-processing capacity across firms. The model predicts that larger unexplained price movements lead to more private information acquisition, higher future price volatility, and higher future trading volumes. Using fine-grained data measuring information acquisition on Edgar and Bloomberg, we provide empirical evidence in support of the model's predictions.

Paul Fischer, Mirko S. Heinle, Kevin C. Smith (2021), Constrained Listening, Audience Alignment, and Expert Communication, RAND Journal of Economics, 51 (Winter), pp. 1037-1062.

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.

Paul Fischer, Mirko S. Heinle, Robert E. Verrecchia (2016), Beliefs-driven price association, Journal of Accounting and Economics, 61 (2-3), pp. 563-583.

Abstract: In addition to being a function of traditional fundamentals such as cash-flow persistence and the discount rate, the equilibrium association between a security price and a value-relevant statistic can simply be a function of what rational investors believe the association will be. We refer to this phenomenon as beliefs-driven price association (BPA). By explicitly considering the phenomenon of BPA, we show that the price response to information releases can vary over time even if the risk-free interest rate and investor preferences are static and the earnings/cash flow generating process is stable. This observation suggests, for example, that price-to-earnings associations and price volatility can vary over time even if a stable pattern of economic fundamentals suggests otherwise. The possibility of BPA suggests that measures of the cost of capital, information content, and growth prospects inferred from observed market prices will be confounded. While we do not predict when periods of BPA will arise, we provide empirically testable predictions about how prices should behave during periods of BPA. In particular, we predict that, during sufficiently long periods of high (positive or negative) BPA, price volatility, price levels, and expected returns will be higher than would be implied by a fundamental valuation framework. Finally, while BPA in the pricing of one security does not cause BPA in the pricing of other securities, the price levels of those other securities will be affected if the securities with BPA are sufficiently large relative to the market as a whole.

Samuel B. Bonsall IV, Zahn Bozanic, Paul Fischer (2013), What Do Management Earnings Forecasts Convey About the Macroeconomy?, Journal of Accounting Research, 51 (2), pp. 225-266.

Abstract: We decompose quantitative management earnings forecasts into macroeconomic and firm-specific components to determine the extent to which voluntary disclosure provided by management has macroeconomic information content. We provide evidence that the forecasts of bellwether firms, which are defined as firms in which macroeconomic news explains the greatest amount of variation in the forecasts, provide timely information to the market about the macroeconomy when bundled with earnings announcements. Further, we show that bellwether firms provide timely information about both industry-specific events and broader economic events. Finally, we document that the macroeconomic news in individual forecasts is more pronounced for bad news and point forecasts.

Robert Bloomfield and Paul Fischer (2011), Disagreement and the Cost of Capital, Journal of Accounting Research, 49 (1), pp. 41-68.

Abstract: We assess how forms of disagreement among investors affect a firm's cost of capital. Firms experience a lower cost of capital if investors perceive that other investors are ignoring relevant disclosures (perceived errors of omission), but a higher cost of capital if investors perceive that others are responding to irrelevant disclosures (perceived errors of commission). The impact of these two sources of disagreement on the cost of capital is determined by the distribution of opinion and the nature of disclosure. For example, even though aggregated disclosures reveal less to investors, aggregated disclosures may decrease the cost of capital by eliminating disagreement associated with perceived errors of commission. These and additional results arise because the cost of capital is driven not only by investors’ uncertainty about the firm's future earnings performance, but also by investors’ uncertainty about the evolution of beliefs, which partly determines the path of prices.

Paul Fischer and Phillip Stocken (2010), Analyst Information Acquisition and Communication, The Accounting Review, 85 (6), pp. 1985-2009.

Abstract: We examine a communication game between an analyst and a decisionmaker and investigate how the presence of public information affects the precision of the information the analyst gathers and communicates to the decision-maker. We characterize conditions under which public information causes the analyst to underinvest or overinvest in the information gathered relative to the case where analyst credibility is not an issue. We then discuss when the presence of public information causes the analyst to reduce the depth of coverage of the firm, suggesting that the introduction of public information can make the decision-maker strictly worse off.

Paul Fischer, Jeffrey D. Gramlich, Brian Miller, Hal D. White (2009), Investor Perceptions of Board Performance: Evidence from Uncontested Director Elections, Journal of Accounting and Economics, 172-189.

Abstract: This paper provides evidence that uncontested director elections provide informative polls of investor perceptions regarding board performance. We find that higher (lower) vote approval is associated with lower (higher) stock price reactions to subsequent announcements of management turnovers. In addition, firms with low vote approval are more likely to experience CEO turnover, greater board turnover, lower CEO compensation, fewer and better-received acquisitions, and more and better-received divestitures in the future. These findings hold after controlling for other variables reflecting or determining investor perceptions, suggesting that elections not only inform as a summary statistic, but incrementally inform as well.

Paul Fischer and Steven Huddart (2008), Optimal Contracting with Endogenous Social Norms, American Economic Review, 1459-1475.

Abstract: Research in sociology and ethics suggests that individuals adhere to social norms of behavior established by their peers. Within an agency framework, we model endogenous social norms by assuming that each agent’s cost of implementing an action depends on the social norm for that action, defined to be the average level of that action chosen by the agent’s peer group. We show how endogenous social norms alter the effectiveness of monetary incentives, determine whether it is optimal to group agents in a single or two separate organizations, and may give rise to a costly adverse selection problem when agents' sensitivities to social norms are unobservable.

Paul Fischer and Henock Louis (2008), Financial Reporting and Conflicting Managerial Incentives: The Case of Management Buyouts, Management Science, 1700-1714.

Abstract: We analyze the effect of external financing concerns on managers' financial reporting behavior prior to management buyouts (MBOs). Prior studies hypothesize that managers intending to undertake an MBO have an incentive to manage earnings downward to reduce the purchase price. We hypothesize that managers also face a conflicting reporting incentive associated with their efforts to obtain external financing for the MBO and to lower their financing cost. Consistent with our hypothesis, we find that managers who rely the most on external funds to finance their MBOs tend to report less negative abnormal accrual prior to the MBOs. In addition, the relation between external financing and abnormal accruals is tempered when there are more fixed assets that can serve as collateral for debt financing.

Stanley Baiman, Paul Fischer, Madhav Rajan, Richard Saouma (2007), Resource Allocation Auctions Within Firms, Journal of Accounting Research, Vol. 45, December, pp. 915 – 946.

Abstract: There is growing interest in the use of markets within firms. Proponents have noted that markets are a simple and efficient mechanism for allocating resources in economies in which information is dispersed. In contrast to the use of markets in the broader economy, the efficiency of an internal market is determined in large part by the endogenous contractual incentives provided to the participating, privately informed agents. In this paper, we study the optimal design of managerial incentives when resources are allocated by an internal auction market, as well as the efficiency of the resulting resource allocations. We show that the internal auction market can achieve first-best resource allocations and decisions, but only at an excessive cost in compensation payments. We then identify conditions under which the internal auction market and associated optimal incentive contracts achieve the benchmark second-best outcome as determined using a direct revelation mechanism. The advantage of the auction is that it is easier to implement than the direct revelation mechanism. When the internal auction mechanism is unable to achieve second-best, we characterize the factors that determine the magnitude of the shortfall. Overall, our results speak to the robust performance of relatively simple market mechanisms and associated incentive systems in resolving resource allocation problems within firms.