Knowledge that Transforms

OLS estimates of linear regression models become imprecise when distributional assumptions about the regression errors are not strictly met. Such situations frequently arise in applied research due to the heavy-tailed distributions of dependent variables. Using simulated data and replication settings, we show how robust regression estimation can produce more policy-relevant inferences by increasing the precision of estimates, improving test power, and tightening confidence intervals. We provide guidance to researchers on when and how to apply robust estimation as alternative to OLS and how to combine robust regression estimators with fixed effects and clustered standard errors. Given the non-random nature of observations typically downweighted by robust regression estimators, we also illustrate the importance of inspecting the robust regression weights and discuss how these weights can provide useful insights about heterogeneity in treatment effects or relations of interest.

We study the informational value of trading networks in over-the-counter (OTC) markets. Using detailed transaction-level data from the corporate bond market, we show that investors with larger dealer networks make superior trading decisions before changes in credit fundamentals, resulting in better risk-adjusted performance. We trace these investors’ superior trading decisions to trading connections where dealers are most likely to have access to novel credit-relevant information, supporting the interpretation that these investors obtain private information through their trading networks. Collectively, our evidence highlights the importance of trading relationships for investors’ private information acquisition.

Building on economic theories of cultural transmission, we examine how audit partners’ cultural trust influences audit outcomes. Based on the “presumptive doubt” perspective of professional skepticism, we propose that audit partners from trusting cultures are more likely to rely on management’s assertions, while still exercising a high degree of caution and not naively trusting management. Consistent with our prediction, we find that audit partners from trusting cultures commit fewer Type I errors when issuing going concern opinions, without significantly increasing Type II errors. The reduction in Type I errors is primarily found when audit partners normally tend to be more conservative, and it is attenuated when management is less trustworthy. At the same time, audit partners from trusting cultures are also associated with more within-GAAP earnings management, suggesting that increased trust entails a cost. Collectively, our findings offer new insights into how cultural trust affects the assurance of accounting information.