Robert Verrecchia

Education:  Ph.D., Graduate School of Business, Stanford University (1976); M.S., University of North Carolina at Chapel Hill (1972); Sc.B., Brown University (1970).

Some recent contributions to the literature

“Information Precision, Information Asymmetry, and the Cost of Capital,” with Richard A. Lambert and Christian Leuz, Review of Finance 16, 2012, 129.  Awarded the 2012 Spaengler IQAM Best Paper Prize by the Review of Finance.

“When Does Information Asymmetry Affect the Cost of Capital?,” with Christopher S. Armstrong, John E. Core, and Daniel J. Taylor, Journal of Accounting Research 49, 2011, 140.

 “Accounting Information, Disclosure, and the Cost of Capital,” with Richard A. Lambert and Christian Leuz, Journal of Accounting Research 45, 2007, 385420.  Awarded a 2011 “Citation of Excellence” by the Emerald Management Reviews Editorial Judging Panel.

“Information Precision, Information Asymmetry, and the Cost of Capital,” with Richard A. Lambert and Christian Leuz, Review of Finance 16, 2012, 129.  Awarded the 2012 Spaengler IQAM Best Paper Prize by the Review of Finance.

“Accounting Information, Disclosure, and the Cost of Capital,” with Richard A. Lambert and Christian Leuz, Journal of Accounting Research 45, 2007, 385420.  Awarded a 2011 “Citation of Excellence” by the Emerald Management Reviews Editorial Judging Panel. 

“Disclosure Bias,” with Paul E. Fischer, Journal of Accounting and Economics 38, 2004, 223250. 

“Essays on Disclosure,” Journal of Accounting and Economics 32, 2001, 97180. 

“Reporting Bias,” with Paul E. Fischer, The Accounting Review 75, 2000, 229245. 

“PreAnnouncement and EventPeriod Private Information,” with Oliver Kim, Journal of Accounting and Economics 24, 1997, 395419. 

“Market Liquidity and Volume around Earnings Announcements,” with Oliver Kim, Journal of Accounting and Economics 17, 1994, 4167. 

“Market Reaction to Anticipated Announcements,” with Oliver Kim, Journal of Financial Economics 30, 1991, 273309. A Journal of Financial Economics All Star Paper.

 “Disclosure, Liquidity and the Cost of Capital,” with Douglas W. Diamond, Journal of Finance 46, 1991, 13251359. 

“Constraints on ShortSelling and Asset Price Adjustment to Private Information,” with Douglas W. Diamond, Journal of Financial Economics l8, 1987, 277311. 

“Discretionary Disclosure,” Journal of Accounting and Economics 5, 1983, 179194.

 “Information Acquisition in a Noisy Rational Expectations Economy,” Econometrica 50, 1982, 14151430. 

“Information Aggregation in a Noisy Rational Expectations Economy,” with Douglas W. Diamond, Journal of Financial Economics 9, 1981, 221235.  A Journal of Financial Economics All Star Paper.

Wayne Guay and Robert E. Verrecchia (Working), Conservative Disclosure.

Stephanie Sikes and Robert E. Verrecchia (Under Revision), Aggregate Corporate Tax Avoidance and Cost of Capital.

Abstract: We identify a pecuniary externality arising from corporate tax avoidance. As firms engage in more avoidance, the cost of capital increases for all firms. The intuition is that firms share risk with the government via taxation. The lower the tax rate applied to a firm’s earnings, the more risk is borne by its shareholders. As firms avoid more taxes in the aggregate, the variance of the market’s aftertax cash flow increases. Consequently, covariance risk, and thereby the cost of capital, increases for all firms. Consistent with our prediction, we find that firms’ implied cost of capital is positively related to aggregate corporate tax avoidance. This result holds for taxavoiding and nontaxavoiding firms, and is stronger for firms whose cash flow covaries more with the market cash flow. U.S. multinationals’ tax avoidance drives the pecuniary externality, consistent with only strategies that reduce a firm’s marginal tax rate on income reducing risksharing.

Jeremy Michels and Robert E. Verrecchia (Working), Is Disclosure Priced Ex Ante?.

Christopher Armstrong, Daniel Taylor, Robert E. Verrecchia (2016), Asymmetric Reporting, Journal of Financial Reporting, 1 (1), pp. 1532.

Abstract: We extend the CAPM to a setting where a firm reports earnings prior to selling shares to investors. We show that an entrepreneur, as representative of a firm's initial owners, will choose to report earnings that asymmetrically reflect future cash flow. In modeling the entrepreneur's reporting choice, we deliberately abstract away from the stewardship role of accounting. In our model, the sole purpose of reported earnings is to facilitate valuation by the firm's equity investors. Nevertheless, we show that a firm's earnings will reflect future cash flow to a greater (lesser) extent in bad states (good states) when that cash flow is anticipated to be low (high). Importantly, we also show that the asymmetry in reporting generates asymmetry in the firm's systematic risk. When a firm's earnings reflect future cash flow to a greater extent in bad states, the firm's covariance with the market portfolio will be lower in bad states.

Paul Fischer, Mirko S. Heinle, Robert E. Verrecchia (2016), Beliefsdriven price association, Journal of Accounting and Economics, 61 (23), pp. 563583.

Abstract: In addition to being a function of traditional fundamentals such as cashflow persistence and the discount rate, the equilibrium association between a security price and a valuerelevant statistic can simply be a function of what rational investors believe the association will be. We refer to this phenomenon as beliefsdriven 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 riskfree interest rate and investor preferences are static and the earnings/cash flow generating process is stable. This observation suggests, for example, that pricetoearnings 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.

Mirko S. Heinle and Robert E. Verrecchia (2016), Bias and the Commitment to Disclosure, Management Science, 62 (10), pp. 28592870.

Abstract: 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.

Karthik Balakrishnan, Rahul Vashishtha, Robert E. Verrecchia (Under Review), Aggregate Competition, Information Asymmetry and Cost of Capital: Evidence from Equity Market Liberalization.

Daniel Taylor and Robert E. Verrecchia (2015), Delegated Trade and the Pricing of Public and Private Information, Journal of Accounting and Economics, 60 (23), pp. 832.

Abstract: We extend a standard, rational expectation model of trade to incorporate the possibility of individual investors delegating their trades to an informed financial intermediary. In the presence of delegated trade, we show that a firm's risk premium is a function of both the firm's exposure to a common risk factor and idiosyncratic characteristics of the firm's information environment. We show that even in a large economy, priced risks can manifest in the form of both idiosyncratic firm characteristics and common risk factors; as a consequence, factorbased asset pricing tests cannot rule out that a particular risk is priced.

Stephanie Sikes and Robert E. Verrecchia (2015), Dividend Tax Capitalization and Liquidity, Review of Accounting Studies, 20 (4), pp. 13341372.

Abstract: We provide a new explanation for crosssectional variation in dividend tax capitalization. Our analysis is twofold. First, we conduct a theoretical analysis that shows that liquidity (illiquidity) mitigates (magnifies) the positive effect of dividend taxes on expected rates of return documented in prior literature. Second, we conduct an empirical analysis centered around the Jobs and Growth Tax Relief and Reconciliation Act of 2003, which reduced the difference between the maximum statutory dividend and capital gains tax rates, and find results consistent with our theory. We also provide results suggesting that institutional ownership’s mitigating effect on dividend tax capitalization documented in prior studies is attributable to stocks with greater institutional ownership being more liquid and not to the “marginal investor” being insensitive to dividend taxes.

Richard A. Lambert and Robert E. Verrecchia (2015), Information, Illiquidity, and Cost of Capital, Contemporary Accounting Research, 32 (2), pp. 438454.

Abstract: This paper makes two contributions to the literature. First, we extend results on the impact of asymmetric information on cost of capital to a multiasset environment. Second, we develop a transformation of the impact that allows equilibrium conditions to be expressed in closedform. Using these closedform expressions, we derive a variety of comparative static results about the behavior of cost of capital. Our results are relevant to a large empirical literature that examines the relation between various information attributes and the cost of capital.

Past Courses

ACCT243 ACCT FOR COMPLX FIN STRU

The objective of this course is to discuss and understand the accounting that underlies merger, acquisition, and investment activities among firms that result in complex financial structures. Key topics include the purchase accounting method for acquisitions, the equity method for investments, the preparation and interpretation of consolidated financial statements, tax implications of mergers and acquisitions, earningspershare considerations, the accounting implications of intercompany transactions and nondomestic investments, etc.

ACCT399 SUPERVISED STUDY

Intensive reading and study with some research under the direction of a faculty member. Approval from one of the departmental advisers must be obtained before registration.

ACCT612 ACCELERATED FIN ACCT

The intended audience for this course is students with prior knowledge of financial accounting who understand: (1) the recording of economic transactions in the accounting records; (2) the basic financial statements that summarize a firm's economic transactions (the balance sheet, the income statement and the statement of cash flows) and (3) the fundamental concepts needed to prepare or understand published financial statements (e.g. use of accrual accounting). Exploiting prior knowledge, the course aims in six weeks to help students become effective users of financial statements.

ACCT743 ACCT FOR COMPLX FIN STRC

This class studies how complex financial structures account for their activities. Primary emphasis is on the application of purchase accounting for mergers and acquisitions, the equity method for investments, and preparing and interpreting consolidated financial statements. Other topics covered include translations and remeasurements for nondomestic investments, and earnings per share calculations for complex financial structures. Tax considerations and acquisition strategies are of only peripheral interest in this class, and students who are concerned primarily with those topics are advised to seek a different elective.

ACCT910 ACCT THEORY RESEARCH

The course includes an introduction to various analytical models and modeling/mathematical techniques that are commonly used in accounting research as well as related empirical applications.

Lifetime achievement award for contributions to the financial reporting literature from the Financial Accounting and Reporting Section (FARS) of the American Accounting Association, 2015

Knowledge @ Wharton

You Say IASB, I Say FASB, You Say…, Knowledge @ Wharton 09/25/2002 Pro Forma Earnings Reports: A Deceptive View of Performance, Knowledge @ Wharton 12/19/2001 Oh, the Games Enron Played, Knowledge @ Wharton 11/21/2001 Plan to Prohibit Pooling in M&A Accounting Causes Tidal Wave of Controversy, Knowledge @ Wharton 01/31/2001