Abstract We examine the 49 Standard & Poor's (S&P) 500 firms that voluntarily disclosed in their 1993 proxy statements, the composition of the comparison group used by each board's compensation committee to set executive compensation policies. We hypothesize that the net benefits of this disclosure are largest when (1) there is a high degree of stakeholder concern about compensation, (2) compensation policies are defensible, and (3) corporate governance is strong. Consistent with our stakeholder concern prediction, disclosing firms have higher compensation levels and are more apt to have received prior shareholder proposals about executive compensation. Contrary to this prediction, we find a negative association between financial press coverage of compensation policies and the probability of disclosure. Additionally, the disclosure decision is unrelated to the defensibility of compensation policies and the firm's corporate governance profile. Industry‐adjusted firm performance, managerial entrenchment, CEO tenure, institutional holdings, and compensation committee independence variables are insignificant. We also compare the financial performance and compensation practices of compensation peers to two yardsticks — performance and pay practices at the sample firms and the corresponding S&P industry index firms. The compensation levels of compensation peers exceed those of the firms in the corresponding S&P industry indexes. Because (1) compensation levels and performance sensitivities at sample firms are more similar to those at compensation peers than to those at S&P industry index firms, and (2) the superior financial performance and higher performance sensitivities of disclosing firms justify high pay, this evidence suggests that the compensation peers of disclosing firms are an appropriate comparison group.

Abstract Rank transformation of observations has been shown to be useful in linear modeling because the models so constructed are less sensitive to outliers and/or non‐normal distributions than are models constructed using standard methods. In the present study, we apply rank transformations to financial ratios to improve the predictive usefulness of standard failure prediction models. Kane, Richardson, and Graybeal (1996) have shown that failure prediction can be improved by conditioning accounting‐based statistical models on the occurrence of recession. Our results suggest that rank‐ transformed data models show additional improvement in prediction without the added cost of having to predict recession for the companies undergoing testing for potential failure.

Abstract. Analysts have been found to underweight the innovation in the most recent quarterly earnings when forecasting next‐quarter earnings, and these expectations have been posited as an explanation for post‐earnings‐announcement drift. This study uses an experimental asset market to examine whether similar errors in forecasting quarterly earnings are made by student‐subjects. We examine two aspects of their behavior: (1) do subjects underestimate the autocorrelation in quarterly earnings when forming earnings expectations? and (2) are asset prices consistent with a subject's underestimation of the autocorrelation in quarterly earnings? We observe subject errors in forecasts that underweight extreme innovations in the most recent quarterly earnings by approximately 40 percent. The prices in the experimental markets also fail to reflect fully the most recent innovation in quarterly earnings. We are able to predict the sign of the incorrect pricing, from the mean initial earnings predictions of the subjects, in 74 percent of the 135 markets. These forecast errors observed in this study are consistent with forecast errors observed for analysts, and this consistency suggests that errors in analysts' forecasts may be at least partially attributable to the use of judgmental heuristics.

Abstract. The Securities and Exchange Commission requires disclosure of auditor‐client disagreements that precede a change in auditor. Although prior research has documented that disclosure of disagreements is associated with a decline in equity value, no empirical work has examined factors that result in auditor‐client disagreements. We hypothesize that managers are motivated by debt and compensation arrangements to propose methods that are objected to by their auditors (resulting in a disagreement). Because of their greater independence, we also hypothesize that reported disagreements will be more likely for Big Eight (now Big Six) auditors, A comparison of 40 firms that changed auditors and reported a disagreement with a control group of 40 firms that simply changed auditors revealed that disagreement firms are more likely to have debt covenant violations. Disagreement firms are also more likely to have higher leverage, a decline in earnings, and Big Eight auditors. For firms that disclosed the magnitude of the disagreement's effect on earnings, the use of the questionable procedure tended to enhance “flat” earnings growth. Résumé. La Securities and Exchange Commission exige que soit publiée l'information relative aux désaccords vérificateur‐client qui précèdent un changement de vérificateurs. Bien que les recherches antérieures aient démontré que la publication de cette information est accompagnée d'un déclin de la valeur des titres, aucun travail empirique n'a examiné les facteurs qui sont à l'origine des désaccords vérificateur‐client. Les auteurs posent l'hypothèse selon laquelle ce sont le passif et les régimes de rémunération qui motivent les gestionnaires à proposer des méthodes auxquelles s'opposent les vérificateurs (et qui donnent lieu à un désaccord). Les auteurs posent également l'hypothèse selon laquelle il est plus probable que les désaccords déclarés mettent en cause les huit grands cabinets d'experts‐comptables (maintenant les six grands), étant donné leur indépendance plus grande. La comparaison de 40 entreprises ayant changé de vérificateurs et fait état d'un désaccord à un groupe de contrôle de 40 entreprises ayant simplement changé de vérificateurs a révélé que les entreprises en désaccord sont davantage susceptibles d'avoir dérogé à des clauses restrictives. Les entreprises qui déclarent être en désaccord avec leurs vérificateurs sont aussi davantage susceptibles d'être caractérisées par un levier financier élevé, un déclin dans les bénéfices et le recours aux services d'un cabinet d'experts‐comptables appartenant aux huit grands. Dans le cas des entreprises qui ont fait état de l'ampleur des conséquences du désaccord sur les bénéfices, l'utilisation du procédé discutable a eu tendance à favoriser une croissance « horizontale » des bénéfices.

Abstract This study provides evidence on how local office growth affects audit quality. We predict that significant recent growth will temporarily stress office resources, leading to a negative relation between office‐level growth and audit quality. To test this prediction, we examine a sample of 17,062 firm‐year observations from 2005 to 2010. Results indicate a consistent negative relation between changes in volume of audit work and audit quality. Specifically, clients of offices that experience increases in workload over the prior year have greater absolute discretionary accruals as well as an increased likelihood of restatement. Our tests also indicate that the effect of office growth is transient and vanishes after one year. We find limited evidence that the size of the auditor's national network of offices partially mitigates the negative effects of office growth on audit quality. We further show that proxies for audit quality are negatively related to office‐level growth from new and existing clients. These findings are robust to controls for client and auditor characteristics as well as alternative specifications of growth. Taken together, evidence indicates that while larger offices provide higher audit quality, the benefits of office size are not realized immediately and rapid growth temporarily impairs audit quality. These results are informative to regulators concerned with audit quality and to practitioners charged with adjusting to office growth.

ABSTRACT Stock exchanges are important intermediaries in how firm information enters price. Trading halts are a key tool, often exercised at the exchanges' discretion, to prevent extraordinary price volatility when new information arrives. We investigate how exchanges use discretion and whether the discretion alters the effectiveness of the halts. We provide evidence consistent with halts reflecting the preferences of listed firms rather than the stated exchange objectives (i.e., minimizing excess volatility and off‐equilibrium trades). Furthermore, when exchanges exercise more discretion (unexplained by firm and information characteristics), the halts are less effective. Specifically, halts with more discretion are less likely to resume trading with efficient prices and are more likely to have been called unnecessarily (i.e., little to no price movement during the halt). These findings are consistent with exchanges using halts to cater to listed firms rather than to meet exchange objectives such as minimizing excess volatility or avoiding trades at off‐equilibrium prices.

Abstract This study conducts a local analysis of the relation between market structure and audit fees. The research question of interest to us is how audit fees are determined by each practicing local office, after taking into account the auditor's own position in a local market and the influence exerted by his or her clients. Appealing to the economic theories of monopoly and monopsony power, we hypothesize a positive audit fee‐concentration relation, and a negative audit fee‐client influence relation. Results indicate that auditor market concentration is positively associated with the non‐Big 6 audit fees but is unrelated to the Big 6 audit fees. Evidence is mixed concerning the client influence hypothesis. When this construct is proxied by the number of rival auditors operating within a geographic area centered on the municipality, the prediction of negative audit fee‐client influence relation is strongly supported for both groups of auditors. Results are much weaker using measures developed based on the relative importance of a municipal client to its auditor's audit portfolio. The issues addressed in this study are important at a time when the Canadian municipal sector is undergoing major changes because of municipal amalgamation, altering the underlying market structure for audit services and the bargaining position of a municipality vis‐Ã‐vis its auditor. More broadly speaking, our analysis implies that when assessing an auditor's report for signs of client pressure, the professional oversight bodies and regulatory authorities need to consider the relative, rather than the absolute, bargaining position of the client in question.

The 1991 amendment to the auditor appointment requirement of section 86 of the Ontario Municipal Act removes certain barriers to entry into the Ontario municipal audit market. The purpose of this study is to provide evidence that the amendment has enhanced competition in this market. The results indicate that there is a general reduction in the real municipal audit fees compared with the pre-amendment levels, and that the market has become more contestable following the amendment. Notwithstanding the heightened competition, the Big 6 audit firms continue to command audit fee premiums over the non-Big 6 audit firms. This suggests that Big 6 audit fee premiums possibly reflect brand name reputation rather than monopoly/oligopoly rents.

Abstract The 1991 amendment to the auditor appointment requirement of section 86 of the Ontario Municipal Act removes certain barriers to entry into the Ontario municipal audit market. The purpose of this study is to provide evidence that the amendment has enhanced competition in this market. The results indicate that there is a general reduction in the real municipal audit fees compared with the pre‐amendment levels, and that the market has become more contestable following the amendment. Notwithstanding the heightened competition, the Big 6 audit firms continue to command audit fee premiums over the non‐Big 6 audit firms. This suggests that Big 6 audit fee premiums possibly reflect brand name reputation rather than monopoly/oligopoly rents.

Abstract. This article reconciles a disparity between one of Hughes and Kao's (1991) predictions on the effects of firm disclosures regarding future benefits of R&D spending and evidence of reductions in R&D spending pursuant to SFAS No. 2 reported by Horowitz and Kolodny (1980) and others. By assuming Bertrand price competition in place of Cournot quantity competition, it is shown that equilibrium R&D expenditures by risk‐averse duopolists will be lower when firm disclosures are uninformative about R&D outcomes than when they are informative. This result is especially useful in that price competition appears to be descriptive of competition in high technology industries. Résumé. Les auteurs réussissent à concilier l'une des prédictions de Hughes et Kao (1991) portant sur l'incidence de l'information présentée par l'entreprise au sujet des avantages futurs des dépenses de R‐D, et l'évidence de la réduction des dépenses de R‐D depuis l'entrée en vigueur du SFAS n***o 2, dont font état Horowitz et Kolodny (1980) ainsi que d'autres chercheurs. En substituant l'hypothèse de Bertrand relative à la concurrence axée sur le prix à celle de Cournot relative à la concurrence axée sur la quantité, les auteurs démontrent que les dépenses de R‐D au point d'équilibre engagées par des entreprises en situation de duopole qui présentent une aversion pour le risque sont plus faibles lorsque l'information présentée ne renseigne pas sur les résultats découlant des dépenses de R‐D que lorsque l'information présentée renseigne sur ces résultats. Cette conclusion est particulièrement utile du fait que le prix semble bien être l'objet de la concurrence que se livrent les entreprises des secteurs de haute technologie.