Research has long recognized that institutional investors possess significant information processing advantages. Yet even these investors face limited‐attention constraints, implying that periods of distraction may attenuate their advantage. We examine the effects of a plausibly exogenous shock to institutional attention arising from the annual buy‐side‐focused Equity Research and Valuation (ERV) conference for Chartered Financial Analysts on institutions' information processing at earnings announcements. Validation tests using conference call data indicate that fewer buy‐side analysts are present on earnings calls during ERV conferences and that questions are shorter, consistent with the presence of substitute or backup analysts. In our main analyses, we find that buy‐side analyst inattention reduces information asymmetry among investors and improves liquidity at these earnings announcements, consistent with theory, and observe similar results for non–earnings announcement events. In additional tests, we document slower price formation, but also more profitable retail trading, during these periods. Collectively, we provide novel evidence on the market consequences of institutional inattention during key information events.

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.

Despite the intuitive appeal, prior research finds mixed evidence on whether higher audit fees translate to superior audit quality. Under the assumption that product differentiation between auditors is based, in large part, on the level of financial statement assurance, we propose more refined measures of excess audit fees that separate auditor premiums from other fee premiums. Consistent with our conjecture, we identify significant variation in audit pricing across auditors (i.e., auditor premiums) that relates positively to audit quality. Conversely, we find no evidence that higher engagement‐specific fee premiums (i.e., fee model residuals) are positively related to proxies for audit quality. Additional tests indicate that our results do not simply reflect premiums attributable to auditor characteristics evaluated in prior research (e.g., Big 4 membership, office size, and industry expertise). In fact, our findings suggest that the positive association between auditor premiums and audit quality is better captured at the auditor level than it is at the auditor “tier,” office, auditor‐industry, or engagement levels. In sum, our results suggest that auditors charging higher fees, on average, deliver superior levels of financial statement assurance, but engagement‐specific fee premiums do not reflect quality‐enhancing audit effort. These contrasting results provide a possible explanation for the mixed findings in prior research.