Irina Luneva

What Does The Market Know?

(solo-authored)

3rd round Revise & Resubmit - Journal of Accounting Research

Investors’ information about different aspects of financial reporting - firms' fundamentals and managers’ incentives to misreport these fundamentals - unambiguously affects earnings quality (Fischer and Stocker, 2004), making proper measurement of these types of information important for researchers and policymakers. Potential managerial incentives and investors' multiple information sources are not easily observable to researchers. I develop a structural approach that uses earnings reports, firms' prices, and analyst forecasts to measure how much information about firms' fundamentals and their managers' misreporting incentives investors know. I estimate the amount of information an average U.S. investor has, earnings informativeness, and the magnitude of the trade-off between earnings quality and price efficiency. I also apply the technique to complement prior reduced-form studies. In particular, I study the extent to which expanded compensation disclosures increased investors' information about managers' incentives and the extent to which early reporting firms' earnings reports spill over and subsume the information conveyed by late reporting firms.

Implications of Investor-Focused ESG Reporting

(with Henry L. Friedman and Mirko S. Heinle)

Revise & Resubmit - The Accounting Review

Firms and jurisdictions are increasingly adopting ESG reporting, affecting empirical research on its consequences. We develop a model to understand the nuanced effects of ESG reporting introduction. In our model, a firm provides ESG and financial reports, which investors use to price the firm's stock, influencing management's real and reporting incentives. We characterize how ESG reporting affects ESG performance, expected cash flows, and financial misreporting. We provide conditions under which the introduction of ESG reporting discourages corporate ESG, and under which it encourages corporate ESG but lowers equity price at the same time. Comparative statics show how investor preferences (e.g., concern for ESG) and ESG efforts' cash flow implications (e.g., penalties, subsidies, physical or transition risk) affect market responses to reports, misreporting, and outcomes, suggesting effect heterogeneity in empirical tests.

Explaining Debt Covenant Amendments: a Structural Approach

(solo-authored)

Job market paper

Financial covenants, which use financial information to determine control rights in corporate loan contracts, are frequently amended (Roberts, 2015). Despite the strong evidence, prior literature has not found an explanation for the high frequency. In this paper, I offer a model of debt covenant amendments and structurally estimate it using data on amendments of financial covenants in U.S. companies' loan contracts. The model offers three conditions under which financial covenants get amended: (1) the degree of contractual incompleteness is high, (2) non-contractible post-contract information is highly predictive of the future, and (3) the costs of amendments are small, while the costs of misallocating control rights are high. The estimation results suggest the first and the third forces play a major role, while the role of the second force is limited. I calculate that the amendment option ex ante saves about 2.32% of control misallocation cost.

Preemptive Disclosure

(with M. Bloomfield and M. Heinle)

We analyze voluntary disclosure practices in the presence of a leak risk. In a standard model of voluntary disclosure, managers are less forthcoming when negative information may be leaked by external sources. However, if managers prefer to be the bearer of their firm’s bad news, potential leaks motivate managers to disclose negative information, preemptively. Empirically, we document that when the probability of a leak is higher, firms offer earnings guidance more frequently and generate systematically lower returns on their voluntary disclosure dates, but subsequently perform better at the time of the potential leak. Poor disclosure-day returns are explained by potential imminent leaks, but not leaks that may have recently occurred. These patterns are consistent with our model of leak preemption; when facing a potential leak, managers become more forthcoming in order to preempt the leaks.

A Theoretical Framework for ESG Reporting to Investors

(with Henry L. Friedman and Mirko S. Heinle)

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.

The ESG Divide: How Banks and Bondholders Differ in Financing Brown Firms

(with S. Sarkisyan)

We study credit providers and costs of debt for firms with low ESG performance.  First, we find that, while both banks and public bondholders charge low-ESG borrowers a higher interest rate compared to high-ESG borrowers, the premium charged by banks is lower than by bondholders. Second, while bondholders reduce the amount of financing when borrowers' ESG performance deteriorates, banks keep the size of their loans the same or even increase loans issued to low-ESG borrowers. We provide evidence that the difference in creditors' policies is driven by banks' superior information about low-ESG borrowers' ESG materiality and by banks' different preferences regarding their borrowers' ESG performance.