[The empirical evidence on the cross-sectional relation between idiosyncratic risk and expected stock returns is mixed. We demonstrate that the omission of the previous month's stock returns can lead to a negatively biased estimate of the relation. The magnitude of the omitted variable bias depends on the approach to estimating the conditional idiosyncratic volatility. Although a negative relation exists when the estimate is based on daily returns, it disappears after return reversals are controlled for. Return reversals can explain both the negative relation between value-weighted portfolio returns and idiosyncratic volatility and the insignificant relation between equal-weighted portfolio returns and idiosyncratic volatility. In contrast, there is a significantly positive relation between the conditional idiosyncratic volatility estimated from monthly data and expected returns. This relation remains robust after controlling for return reversals.]

Abstract We examine how Confucian culture operates as an informal institution by fostering relational contracts that substitute for formal legal frameworks in shaping corporate behavior. Using data on historical Confucian academies near firms’ headquarters in China, we find that greater cultural exposure is associated with higher investment in stakeholder relationships—measured by social contribution, stakeholder protection, courtesy expenses, patenting, and trade credit. These effects persist after controlling for human capital and alternative cultural influences, and weaken in regions with stronger formal institutions. Our findings highlight the enduring role of culture in supporting trust-based governance when formal contracting is limited.

ABSTRACT In this paper, we analyze the social value of accounting objectivity in maintaining financial stability. Building on an early influential accounting study by Ijiri and Jaedicke (1966), we operationalize two informational properties, accuracy (free of collective bias) and objectivity (degree of consensus), in a correlated information structure and embed them into a model of runs on financial institutions. We show that when compared with the accuracy property, the objectivity property exhibits an advantage in mitigating inefficient panic-based runs. In fact, it is possible that improving objectivity discourages such runs, whereas improving accuracy encourages them. Our model also sheds light on the design of optimal accounting systems to enhance objectivity. We find that to generate a more objective accounting report, accounting systems should be designed to be less vulnerable to intentional managerial intervention.

The empirical evidence on the cross-sectional relation between idiosyncratic risk and expected stock returns is mixed. We demonstrate that the omission of the previous month's stock returns can lead to a negatively biased estimate of the relation. The magnitude of the omitted variable bias depends on the approach to estimating the conditional idiosyncratic volatility. Although a negative relation exists when the estimate is based on daily returns, it disappears after return reversals are controlled for. Return reversals can explain both the negative relation between value-weighted portfolio returns and idiosyncratic volatility and the insignificant relation between equal-weighted portfolio returns and idiosyncratic volatility. In contrast, there is a significantly positive relation between the conditional idiosyncratic volatility estimated from monthly data and expected returns. This relation remains robust after controlling for return reversals.