Pingyang Gao | Searcharxiv

arXiv2026

A Theory of Covenant Accounting Adjustment

We develop an incomplete-contracting model with accounting-based covenants to study how covenant accounting adjustments are made and what properties they exhibit. Standard accounting rules (e.g., GAAP) can generate false-alarm errors or undue-optimism errors. The manager can exert costly effort to privately identify these errors and propose adjustments. If errors are not corrected, control rights may be inefficiently allocated, leading to costly renegotiation. We show that (1) adjustments always correct false-alarm errors, but correct undue-optimism errors only when their magnitude is small; and (2) the manager may expend socially wasteful effort to identify these errors. The model yields testable empirical predictions and policy implications.

econ.GN↗

arXiv2024

A Theory of Investors' Disclosure

We investigate investors voluntary disclosure decisions under uncertainty about their information endowment (Dye 1985). In our model, an investor may receive initial evidence about a target firm. Conditional on learning the initial evidence, the investor may receive additional evidence that helps interpret the initial evidence. The investor takes a position in the firms stock, then voluntarily discloses some or all of their findings, and finally closes their position after the disclosure. We present two main findings. First, the investor will always disclose the initial evidence, even though the market is uncertain about whether the investor possesses such evidence. Second, the investors disclosure strategy of the additional evidence increases stock price volatility: they disclose extreme news and withhold moderate news. Due to the withholding of the additional evidence, misleading disclosure arises as an equilibrium outcome, where the investors report decreases (increases) price despite their news being good (bad). These results remain robust when considering the target firms endogenous response to the investors report.

econ.GN↗