Using detailed data of individual investors, this study shows that, on average, individuals invest more in firms with clear and concise financial disclosures. The results indicate this relation is ...less pronounced for high frequency trading and financially-literate individuals. The study also shows that individuals' returns are increasing with clearer and more concise disclosures, implying such disclosures reduce individuals' relative information disadvantage. Together, the findings suggest improved corporate disclosure practices benefit individual investors, in particular buy-and-hold investors.
•The study shows that, on average, individuals invest more in firms with clear and concise financial disclosures.•Relation is less pronounced for high frequency trading and financially-literate investors.•Individuals' returns are increasing with clearer and more concise disclosures.•Improved corporate disclosure practices benefit individual investors, in particular buy-and-hold investors.
This study examines whether differences in proxies for audit quality between Big 4 and non-Big 4 audit firms could be a reflection of their respective clients' characteristics. In our analyses, we ...use three audit-quality proxies—discretionary accruals, the ex ante cost-of-equity capital, and analyst forecast accuracy—and employ propensity-score and attribute-based matching models in attempt to control for differences in client characteristics between the two auditor groups while estimating the audit-quality effects. Using these matching models, we find that the effects of Big 4 auditors are insignificantly different from those of non-Big 4 auditors with respect to the three audit-quality proxies. Our results suggest that differences in these proxies between Big 4 and non-Big 4 auditors largely reflect client characteristics and, more specifically, client size. We caution the reader that this study has not resolved the question, although we hope that it encourages other researchers to explore alternative methodologies that separate client characteristics from audit-quality effects.
It is well documented that losses are less persistent than profits and that stock prices anticipate the lower persistence of losses. Yet the underlying explanation for these results is unclear. One ...explanation lies in the abandonment option, whereby firms with losses are more likely to curtail operations (e.g., Hayn Hayn C (1995) The information content of losses.
J. Accounting Econom.
20(2):125–153). Another explanation involves timely loss recognition stemming from conservative accounting (e.g., Basu Basu S (1997) The conservatism principle and the asymmetric timeliness of earnings.
J. Accounting Econom.
24(1):3–37). We provide direct evidence that curtailments are an important factor contributing to the lower persistence of losses. An implication of our results is that popular measures of conservatism, such as the measure proposed by Basu, also reflect curtailments.
This paper was accepted by Suraj Srinivasan, accounting.
U.S. Audit Partner Rotations Laurion, Henry; Lawrence, Alastair; Ryans, James P.
The Accounting review,
05/2017, Volume:
92, Issue:
3
Journal Article
Peer reviewed
We investigate the effects of audit partner rotation among U.S. publicly listed firms, utilizing the fact that audit partners are periodically copied by name in public correspondence between issuers ...and the Securities and Exchange Commission. Relative to non-rotation firms, we find no evidence of a change in the frequency of misstatements following the partner rotation; however, there is an increase in the frequency of restatement discoveries and announcements. We also find an increase in deferred tax valuation allowances. Overall, the results provide some evidence suggesting that U.S. partner rotations support a fresh look at the audit engagement.
We examine five summer Olympics and identify stocks that media outlets hype as benefiting from the Olympics (Olympic stocks). There is a seven-year period from the time that a country first learns it ...has won the Olympic bid to the start of the games (Olympic time period). We predict that the excitement of the Olympics along with the greater media attention impacts the valuation and risk of Olympic stocks. Consistent with this prediction, we show that Olympic stocks earn higher returns than their matched counterparts and comove more strongly with each other over the Olympic time period. Olympic stocks also exhibit increases in trading volume and stock volatility on days when media outlets have stories linking the firm to the Olympic Games. However, we find no evidence that the Olympic Games translate into stronger fundamentals for Olympic firms or stronger fundamental comovements. These findings suggest that investors are not purchasing the stocks based on an analysis of fundamentals, but are purchasing them based on their Olympic attribute. To confirm that event-based groupings occur in other settings, we show that comovement increases for stocks classified by the media as “stay-at-home” stocks at the start of the COVID-19 pandemic.
This paper was accepted by Eric So, accounting.
Supplemental Material:
The online appendix is available at
https://doi.org/10.1287/mnsc.2021.02218
.
SUMMARY This study provides evidence concerning the significance of assessing operational control risk as part of an integrative evaluation of internal controls. We examine whether operational ...control risk indicators can be used as cues to potential unreported financial reporting control weaknesses and financial reporting deficiencies. We use data breaches and an operational control risk index, created through textual analysis of Form 10-Ks, as our two primary indicators of operational control risk. We find positive relations between our operational control risk indicators and future financial reporting control weaknesses, restatements, SEC comment letters, and audit fees, even after controlling for contemporaneous financial reporting control weaknesses. These findings suggest that operational control risk is informative of potential financial reporting deficiencies. Data Availability: Breach data are available subject to the approval of the Identity Theft Resource Center. All other data are publicly available from the sources identified in the article.
This study presents a field experiment in which media articles for a random sample of firms with earnings announcements are promoted to a one percent subset of Yahoo Finance users. Promoted firms ...have higher abnormal returns and some evidence of lower bid-ask spreads on the day of the earnings announcement. These results are more pronounced for less visible firms, negative earnings news, and on days with fewer promoted firms. These findings suggest that investor attention affects the pricing of earnings and that retail investors buy stocks that catch their attention, in a setting where attention is randomly assigned.
SEC Comment Letters and Insider Sales Dechow, Patricia M.; Lawrence, Alastair; Ryans, James P.
The Accounting review,
03/2016, Volume:
91, Issue:
2
Journal Article
Peer reviewed
We document that insider trading is significantly higher than normal levels prior to the public disclosure of SEC comment letters relating to revenue recognition. Furthermore, insider trading is ...triple its normal level for firms with high short positions. We find a small negative return at the comment letter release date and a negative drift in returns of 1 to 5 percent over the next 50 days following the release. We also find that greater pre-disclosure sales are associated with a stronger negative drift. This evidence suggests that insiders appear to benefit from trading prior to revenue recognition comment letters. We investigate whether the delayed price reaction to comment letter releases is due to investor inattention. Consistent with this explanation, we document that comment letters are downloaded infrequently from EDGAR in the days following their public disclosure.
A large body of accounting research finds that various contracting incentives lead managers to engage in conservative accounting practices. We extend existing research by modeling the impact of ...extant accounting rules on conservative accounting. Accounting rules typically require assets to be written down when their fair values drop sufficiently below their book values. We document evidence of the resulting non-discretionary conservatism and show that it appears to explain some of the results from previous research on contracting incentives.
•A large body of accounting research finds that various contracting incentives lead managers to engage in conservative accounting practices.•We extend existing research by modeling the impact of extant accounting rules on conservative accounting.•We document evidence of the resulting non-discretionary conservatism and show that it appears to explain some of the results from previous research on contracting incentives.
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