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Prior research suggests a negative relation between disclosure and costs of capital, but Francis, Nanda, and Olsson (2008; hereafter FNO) find the relation weakens considerably or disappears after controlling for earnings quality. Their results suggest that prior research may incorrectly attribute the capital market benefits of earnings quality to disclosure quality. FNO utilize a self-constructed disclosure measure similar to Botosan (1997), while considerable cost of capital research relies on Association for Investment Management and Research (AIMR) disclosure ratings. We posit that AIMR ratings can capture elements of disclosure quality that affect capital costs even in the presence of earnings quality. We introduce earnings quality into the designs of three prominent studies documenting capital market benefits from higher AIMR-rated disclosures. We find that inferences from prior research suggesting that better disclosure quality is associated with lower costs of equity, bid-ask spreads, and costs of debt are robust to conditioning on earnings quality. Further, the economic significance of disclosure quality and earnings quality for costs of capital are roughly equivalent. Additional analyses using non-AIMR disclosure measures suggest that differences between the AIMR ratings and the FNO disclosure measure, rather than differences in sample period, likely explain the disparity in our and FNO's results. We conclude earnings quality does not generally subsume disclosure quality in explaining costs of capital. Data Availability: Data are available from sources identified in the paper.

The executive compensation literature presumes that shareholders offer risk‐averse managers stock options to entice them to take on more risk, resulting in riskier investment decisions and thus a greater return on investment. However, recent empirical work challenges this assumption, and theoretical research even argues that high levels of option‐based compensation for generally under‐diversified managers may actually lead to greater risk aversion. We evaluate the incentive structure of employee stock options by examining the level of R&D investment and the return on that investment conditional on the portfolio “vega,” which captures the sensitivity of option value to stock price volatility. Our results suggest that both investment in R&D and the return on R&D, as measured by future earnings and patent awards, varies concavely with vega. That is, low to moderate levels of vega correspond to increasing investment in and returns on R&D, consistent with vega inducing more profitable investments, but marginal returns decline as vega increases. Collectively, these results, bolstered by several supplemental analyses, suggest that this surprising relation between vega and risky investment is driven by greater risk aversion at higher levels of vega. Overall, our results imply that employee stock options may not always align the incentives of managers and shareholders.

Motivated by concerns that financial positions impair analyst objectivity, we examine investor perceptions of the financial positions of nonprofessional analysts (hereafter NPAs) writing on the social media outlet Seeking Alpha. We find that NPA positions contribute directly to short-window returns surrounding the article's publication, holding constant the information in the article as well as contemporaneously issued news from professional analysts, managers, and the business press. Contrary to concerns that stock positions are associated with biased analysis, we find no evidence that NPA positions reduce investor responses to the tone of the article. In fact, our evidence suggests that holding a position magnifies investor responses to both positive and negative tone, although this effect is limited to tone that is contrary to the NPA's stock position. Overall, our findings suggest that, contrary to regulators' concerns, NPA stock positions do not decrease the credibility and informativeness of their analyses.