Richard A. Lambert

• Kevin Chen, Wayne Guay, Richard A. Lambert, Multidimensional Corporate Governance: Board Independence, Board Expertise, and Equity Incentives. Abstract

  Corporate governance is a multidimensional construct, with many interactive mechanisms that must be simultaneously managed for efficiency. We develop a model where three ubiquitous governance mechanisms—board independence, board expertise, CEO equity incentives—are endogenously selected to encourage information sharing by the CEO and to optimize the board’s ability to monitor and advise the CEO. We find that, in equilibrium: (i) board expertise and equity incentives are substitutes (complements) when the board has high (low) independence; (ii) boards with greater independence also have higher expertise; and (iii) equity incentives may be positively or negatively related to board independence, depending on the nature of board advice.

• Carlo Gallimberti, Richard A. Lambert, Liang (Jason) Xiao (Working), Bank Relations and Borrower Corporate Governance Structure.
• Henry Friedman and Richard A. Lambert (Working), Performance Measurement and Long Term Investment Incentives.
• Richard A. Lambert and Robert E. Verrecchia (2015), Information, Illiquidity, and Cost of Capital, Contemporary Accounting Research, 32 (2), pp. 438-454. 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 multi-asset environment. Second, we develop a transformation of the impact that allows equilibrium conditions to be expressed in closed-form. Using these closed-form 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.

• Richard A. Lambert, Christian Leuz, Robert E. Verrecchia (2012), Information Asymmetry, Information Precision, and the Cost of Capital, Review of Finance, 16 (1), pp. 1-29. Abstract

  This paper examines the relation between information differences across investors (i.e., information asymmetry) and the cost of capital and establishes that with perfect competition information asymmetry makes no difference. Instead, a firm’s cost of capital is governed solely by the average precision of investors’ information. With imperfect competition, however, information asymmetry affects the cost of capital even after controlling for investors’ average precision. In other words, the capital market’s degree of competition plays a critical role for the relation between information asymmetry and the cost of capital. This point is important to empirical research in finance and accounting.

• Richard A. Lambert (2010), Discussion of ‘Implications for GAAP from an Analysis of Positive Research In Accounting, Journal of Accounting and Economics, (December), pp. 287-295. Abstract

  This paper discusses the paper “Implications for GAAP from an Analysis of Positive Research in Accounting,” by Kothari, Ramanna, and Skinner (in press). I discuss the role that information can play in efficiently allocating capital in the economy, and I argue that the GAAP is not primarily designed with the objective of addressing “control” issues, i.e., resolving contracting problems between shareholders and managers or between shareholders and bondholders. I also discuss the impact that conservatism has on the properties of accounting numbers, and on how it affects the usefulness of these numbers in managerial incentive contracts and in contracts with bondholders.

• Richard A. Lambert (2009), Discussion of On the Relation Between Expected Returns and Implied Cost of Capital, Review of Accounting Studies, (June/September), pp. 260-268. Abstract

  This paper discusses the paper “On the relationship between expected returns and implied cost of capital” by Hughes, Liu, and Liu. The discussion focuses on developing the intuition behind the mathematical results and on extensions of the analysis that future research could address.

• Richard A. Lambert, Christian Leuz, Robert E. Verrecchia (2007), Accounting Information, Disclosure, and the Cost of Capital, Journal of Accounting Research, (May), pp. 385-420. Abstract

  In this paper we examine whether and how accounting information about a firm manifests in its cost of capital, despite the forces of diversification. We build a model that is consistent with the CAPM and explicitly allows for multiple securities whose cash flows are correlated. We demonstrate that the quality of accounting information can influence the cost of capital, both directly and indirectly. The direct effect occurs because higher quality disclosures reduce the firm’s assessed covariances with other firms’ cash flows, which is non-diversifiable. The indirect effect occurs because higher quality disclosures affect a firm’s real decisions, which likely changes the firm’s ratio of the expected future cash flows to the covariance of these cash flows with the sum of all the cash flows in the market. We show that this effect can go in either direction, but also derive conditions under which an increase in information quality leads to an unambiguous decline the cost of capital.

• Richard A. Lambert, “Agency Theory and Management Accounting”. In Handbook of management of Accounting, edited by C. Chapman, A. Hopwood, M. Shields, (Oxford: Elsevier Press, 2006), pp. 247-268
• Richard A. Lambert (2004), Discussion of analysts’ treatment of non-recurring items in street earnings and loss function assumptions in rational expectations tests on financial analysts’ earnings forecasts, Journal of Accounting and Economics, (December), pp. 205-222. Abstract

  This article discusses papers by Gu and Chen, “Analysts’ Treatment of Non-recurring Items In Street Earnings” and by Basu and Markov, “Loss Function Assumptions in Rational Expectations Tests on Financial Analysts’ Earnings Forecasts.” These two papers address issues associated with the rationality or expertise of analysts, and both papers interpret their evidence as supporting the hypothesis that analysts do a good job of processing information and forecasting earnings, results that contrast with a growing literature that is critical of the incentives and abilities of analysts. My article critiques their methods and conclusions, and suggests areas for future research.

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Current Courses

• ACCT2420 - Accounting And Business Analysis

  In the course, students learn how to analyze firms' financial statements and disclosures to determine how a firm's particular accounting choices reflect the underlying economics of the firm. As a result, the course strengthens students' ability to use financial statements as part of an overall assessment of the firm's strategy and valuation. The course is especially useful for anyone interested in working on the buy or sell side. The course provides both a framework for and the tools necessary to analyze financial statements. At the conceptual level, it emphasizes that preparers and users of financial statements have different objectives and incentives. At the same time, the course is applied and stresses the use of actual financial statements. For example, students learn how to detect when firms are managing earnings and/or balance sheets. It draws heavily on real business problems and uses cases to illustrate the application of the techniques and tools. If ACCT 2420 is not offered in a given year, Undergraduate students can take ACCT 7420. Please submit a permission request through Path@Penn.edu.

  ACCT2420401 ( Syllabus )

  ACCT2420402 ( Syllabus )

• ACCT7420 - Financial Reporting And Business Analysis

  This intensive one-semester course focuses on how to extract and interpret information in financial statements. The course adopts a user perspective of accounting by illustrating several specific accounting issues in a decision context.

  ACCT7420401 ( Syllabus )

  ACCT7420402 ( Syllabus )

Past Courses

• ACCT2420 - Acct & Business Analysis

  In the course, students learn how to analyze firms' financial statements and disclosures to determine how a firm's particular accounting choices reflect the underlying economics of the firm. As a result, the course strengthens students' ability to use financial statements as part of an overall assessment of the firm's strategy and valuation. The course is especially useful for anyone interested in working on the buy or sell side. The course provides both a framework for and the tools necessary to analyze financial statements. At the conceptual level, it emphasizes that preparers and users of financial statements have different objectives and incentives. At the same time, the course is applied and stresses the use of actual financial statements. For example, students learn how to detect when firms are managing earnings and/or balance sheets. It draws heavily on real business problems and uses cases to illustrate the application of the techniques and tools. If ACCT 2420 is not offered in a given year, Undergraduate students can take ACCT 7420. Please submit a permission request through Path@Penn.edu.

• ACCT6110 - Financial Accounting

  The objective of this course is to provide an understanding of financial accounting fundamentals for prospective consumers of corporate financial information, such as managers, stockholders, financial analysts, and creditors. The course focuses on understanding how economic events like corporate investments, financing transactions and operating activities are recorded in the three main financial statements (i.e., the income statement, balance sheet, and statement of cash flows). Along the way, students will develop the technical skills needed to analyze corporate financial statements and disclosures for use in financial analysis, and to interpret how accounting standards and managerial incentives affect the financial reporting process. This course is recommended for students who want a more in-depth overview of the financial accounting required for understanding firm performance and potential future risks through analysis of reported financial information, such as students intending to go into security analysis and investment banking.

• ACCT6130 - Fin and Mngl Acct

  This course provides an introduction to both financial and managerial accounting, and emphasizes the analysis and evaluation of accounting information as part of the managerial processes of planning, decision-making, and control. A large aspect of the course covers the fundamentals of financial accounting. The objective is to provide a basic overview of financial accounting, including basic accounting concepts and principles, as well as the structure of the income statement, balance sheet, and statement of cash flows. The course also introduces elements of managerial accounting and emphasizes the development and use of accounting information for internal decisions. Topics include cost behavior and analysis, product and service costing, and relevant costs for internal decision-making. This course is recommended for students who will be using accounting information for managing manufacturing and service operations, controlling costs, and making strategic decisions, as well as those going into general consulting or thinking of starting their own businesses.

• ACCT7420 - Fin Report & Bus Analys

  This intensive one-semester course focuses on how to extract and interpret information in financial statements. The course adopts a user perspective of accounting by illustrating several specific accounting issues in a decision context.

• ACCT9410 - Research in Acct II

  This is Part II of a theoretical and empirical literature survey sequence covering topics that include corporate disclosure, cost of capital, incentives, compensation, governance, financial intermediation, financial reporting, tax, agency theory, cost accounting, capital structure, international financial reporting, analysts, and market efficiency. Please contact the accounting doctoral coordinator for information on the specific upcoming modules/topics that will be taught.

• WEMBA Core Teaching Award, 2014
• WEMBA Core Teaching Award, 2013
• WEMBA Core Teaching Award, 2011
• WEMBA Core Teaching Award, 2009
• WEMBA Core Teaching Award, 2007
• Visiting Faculty - Accounting Doctoral Consortium, 2005
• Visiting Faculty - Accounting Doctoral Consortium, 2004
• Joseph L. McDonald Professor of Accounting, 1995
• Visiting Faculty - Accounting Doctoral Consortium, 1995
• Visiting Faculty - Pac 10 Doctoral Consortium, 1994
• Business School Trust Faculty Fellow, 1991
• Helen Kardon Moss Anvil Award for Teaching Excellence, 1989
• Peat, Marwick, Main & Co, Term Associate Professor, 1988
• Visiting Faculty - Accounting Doctoral Consortium, 1987
• Resident Faculty - Accounting Doctoral Consortium, 1986
• Charter Banks Term Associate Professor, 1985
• Resident Faculty - Accounting New Faculty Consortium, 1985
• Hay Group Faculty Research Fellow, 1984

• Why Is Silicon Valley So Clueless About Stock Options?, Forbes - 03/22/2012

Knowledge @ Wharton

• How Dynamic Electricity Pricing Can Improve Market Efficiency, Knowledge @ Wharton - 11/12/2024
• Is Algorithmic Management Too Controlling?, Knowledge @ Wharton - 11/12/2024
• The Hidden Cost of AI Energy Consumption, Knowledge @ Wharton - 11/12/2024
• Charitable and Political Giving | Pinar Yildirim, Knowledge @ Wharton - 11/12/2024
• The Future of Banking, Knowledge @ Wharton - 11/11/2024
• Election Statistics, Knowledge @ Wharton - 11/06/2024
• Robots Are Taking Over Low-skilled Jobs — and Changing Votes, Knowledge @ Wharton - 11/05/2024
• Crypto Politics: Liberals’ and Conservatives’ Confidence in Cryptocurrencies, Knowledge @ Wharton - 11/05/2024
• Leadership and Elections | Mike Useem, Knowledge @ Wharton - 11/05/2024
• Automation Is Harming Low-skilled Workers and Possibly Their Voting Preferences, Knowledge @ Wharton - 11/01/2024