Anup Srivastava

Using named executive officer (NEO)-level data for Russell 3000 firms from 2021 to 2024, we describe how firms incorporate environmental, social, and governance (ESG) metrics into executive compensation. ESG pay design varies across industries and executive functions in ways broadly consistent with incentive compatibility. However, ESG metrics remain concentrated in short-term incentive plans and are rarely embedded in equity awards. Explicit weights are much more common than modifiers, limiting the extent to which ESG performance affects total pay. In emission-intensive industries, firms quantify goals more often than reported outcomes, creating asymmetry between ex ante expectation and ex post performance. Overall, ESG-linked pay exhibits substantial role alignment, but important design gaps remain. The evidence provides benchmarks for compensation committees designing ESG pay, investors, and stakeholders evaluating pay practices, regulators, and researchers evaluating ESG-linked compensation.

SYNOPSIS: Using named executive officer (NEO)-level data for Russell 3000 firms from 2021 to 2024, we describe how firms incorporate environmental, social, and governance (ESG) metrics into executive compensation. ESG pay design varies across industries and executive functions in ways broadly consistent with incentive compatibility. However, ESG metrics remain concentrated in short-term incentive plans and are rarely embedded in equity awards. Explicit weights are much more common than modifiers, limiting the extent to which ESG performance affects total pay. In emission-intensive industries, firms quantify goals more often than reported outcomes, creating asymmetry between ex ante expectation and ex post performance. Overall, ESG-linked pay exhibits substantial role alignment, but important design gaps remain. The evidence provides benchmarks for compensation committees designing ESG pay, investors, and stakeholders evaluating pay practices, regulators, and researchers evaluating ESG-linked compensation. Data Availability: Data are commercially available from the sources cited in the text. JEL Classifications: M40; M41.

We examine whether accrual accounting loses relevance with the rise of knowledge firms. Investigating a large sample of U.S. firms from 1990 to 2022, we compare magnitudes, components, quality, and pricing of accruals across knowledge- and physical-asset firms. Knowledge firms report lower accruals and poorer accrual quality, but the gap is concentrated in small knowledge firms. Their low-quality accruals reflect largely innate, volatile, uncertain, early-stage operations, not discretionary reporting. As these firms scale, their accrual magnitudes and quality converge to those of similarly sized physical firms. These life-cycle dynamics reconcile the 1990s decline and post-2000 improvement in aggregate accrual quality through offsetting “new-list” and “maturation” effects. Accrual accounting remains decision-useful in a knowledge economy, as the market prices, and thus seems to recognize, the information risk emanating from poor accrual quality, especially for knowledge firms. JEL Classifications: M13; M41.

SYNOPSIS: The North American corporate landscape is undergoing a $30 trillion transformation amid what many consider the fourth or fifth industrial revolution. Nearly half of the $60 trillion in stock market capitalization at the end of 2024 was driven by companies whose primary assets are intangible. This paper highlights the shortcomings of traditional accounting models when applied to modern, technology-driven firms. I propose several solutions to bridge these gaps, with particular emphasis on the most debated reform: recognizing internally developed intangible assets on the balance sheet. The discussion offers practical insights for professionals who are unfamiliar with recent developments or the ongoing controversy in this area. I also raise several questions that merit further research to enhance the relevance and reliability of financial reporting for contemporary corporations. JEL Classifications: M41.

A stark contrast exists between the stated preferences of politicians in the so-called blue states (Democrats) and those in red states (Republicans) on environmental, social, and governance (ESG) matters. We examine whether these polarized political stances are reflected in the investment strategies of respective states’ pension funds. We examine a Texas directive that the state agencies divest from investment companies that profess a pro-ESG stance and allegedly “boycott” energy stocks. We find that funds banned by the Texas directive, despite carrying ESG-focused titles, are largely indexers with a tilt slightly away from energy stocks and slightly toward technology stocks. Banning such funds would make little difference to Texas pensioners or Texas energy companies, because the returns and stock holdings of banned funds are not meaningfully different from those of size-matched funds that do not proclaim an ESG focus. Pension funds in red states do not act per their politicians’ stance and largely follow market trends in their investment strategies. They have similar exposures to technology and energy stocks, as do pension funds in blue states. We conclude that the vehement pro– and anti–fossil fuel proclamations of blue and red states’ politicians, respectively, are not observed in their own state pension funds’ investment policies over which politicians have better control than on external funds. This paper was accepted by Ranjani Krishnan, accounting. Funding: The authors acknowledge financial support from the Social Sciences and Humanities Research Council of Canada. A. Srivastava acknowledges financial support from the Canada Research Chairs Program of the Government of Canada. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.05180 .

The global trend toward regulating climate-risk disclosures reflects both real trends (addressing climate change issues) and reporting trends (demands from investors and stakeholders for more information on these issues). At the 2024 American Accounting Association (AAA) Annual Meeting, the AAA’s International Accounting Section hosted a panel discussion with academic and industry experts on the global trend toward regulation of climate-related disclosures. A panel of experts and the audience discussed some key topics related to climate-risk and sustainability-related disclosures. These discussions underscore the need for global collaboration to align and enhance the consistency, comparability, and reliability of climate-risk disclosures. JEL Classifications: M41.

This study examines firms' hybrid growth strategies, namely, the joint use of internal investment and acquisitions, across three asset classes: property, plant, and equipment (PP&E), organizational capital, and innovation capital. Using recent advances in data extraction, we provide descriptive evidence on which firms pursue hybrid strategies, how they allocate investment dollars across the two channels, and how each channel is associated with future revenue growth and volatility. We conduct rich analysis by firms' life-cycle stages and by technological intensity. We find that acquisitive firms continue to invest heavily in internal capabilities, especially in organizational and innovation capital, suggesting that even active acquirors must continuously build and renew capabilities internally. Performance associations differ by asset class and investment channel. Acquired PP&E is strongly associated with future revenue growth, whereas internal organizational and innovation investments show stronger associations with growth than acquired counterparts. Volatility results complement these findings. Internal investments, particularly internal innovation, are associated with greater future revenue variability, consistent with a high-growth, highvariability channel shaped by experimentation and longer commercialization cycles. Although descriptive instead of causal, our findings provide new evidence on how firms combine internal and acquisition-based investment to pursue growth.

A longstanding debate exists between neutrality and conservatism in financial reporting. This debate has gained momentum following the 2010 Financial Accounting Standards Board (FASB) decision to remove the term conservatism from its Conceptual Framework (FASB, 2010). While neutrality is now promoted as a cornerstone of faithful representation, conservatism remains embedded in numerous accounting standards. We revisit the conceptual and practical tensions between these two principles. We introduce the idea of a spectrum of reporting bias, ranging from aggressive to conservative, with neutrality as the aspirational midpoint. Drawing on the evolution of FASB's framework, historical episodes, and recent standard-setting developments, we examine the economic rationales behind conservatism and assess whether it supports or conflicts with the goal of neutral financial reporting. We identify implications for standard setters and practitioners and outline a research agenda to advance the understanding of this important tenet in financial reporting.

SYNOPSIS: Although much research focuses on informational benefits of new accounting standards, the costs of implementing them remain largely unexamined. We consider one such cost in the adoption of two recent standards: lease accounting and revenue recognition. We find an increase in the number of job postings demanding skills related to accounting for those standards around their issuance. Firms most affected by new standards, measured by accounting complexity and early adoption behavior, post more accounting jobs. Using job postings as a proxy for hiring, we estimate incremental labor costs at about 30 percent of median audit fees for each standard for the most affected firms. Our tests indicate greater regulatory compliance burden for smaller firms. We provide large-sample evidence on the lower bound for the costs of implementing new accounting standards. Our findings should interest standard setters as they evaluate the cost-benefit tradeoffs of issuing new standards. Data Availability: Data are commercially available from the sources cited in the text. JEL Classifications: J23; M41; M51.

Internally developed intangibles are not included in reported assets under U.S. generally accepted accounting principles. The omission of this increasingly important class of assets reduces the usefulness and relevance of financial statement analysis, conducted with reported values of equity and assets. Recent studies overcome this deficiency by capitalizing research and development (R&D) expenses to estimate the value of knowledge capital and by capitalizing selling, general, and administrative (SG&A) expenses to estimate the value of organization capital. Those two estimates are then added to reported values for financial statement analysis. For convenience, many studies rely on two rules of thumb and assume them to be equally applicable in all instances: (1) 30% of SG&A and 100% of R&D expenses are investments, and (2) the useful life of SG&A and R&D investments is three and five years, respectively. We propose a more flexible approach by estimating the capitalization and amortization parameters on an industry–year–specific basis. Our modified values of total assets and equity, inclusive of the value of capitalized intangibles, exhibit greater association with future returns and investments compared with as-reported values and values estimated with uniform rules of thumb. We provide a better estimate of intangible capital for the consumers of financial statements. This paper was accepted by Ranjani Krishnan, accounting. Funding: A. Srivastava and R. Zhao acknowledge financial support from the Social Sciences and Humanities Research Council of Canada. A. Srivastava acknowledges financial support from the Canada Research Chairs Program of the Government of Canada. A. Iqbal acknowledges financial support from the Canadian Securities Institute Research Foundation and Chartered Professional Accountants (Alberta) Education Foundation. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2022.01703 .