This paper re-examines the Ou and Penman (1989) conclusion that fundamental analysis identifies equity values not currently reflected in stock prices, and thus systematically predicts abnormal returns. Their fundamental summary measure Pr, the estimated probability of an earnings increase, also proxies for firm size and CAPM risk. After controlling cross-sectional differences in CAPM beta and firm size, no significant incremental predictive ability is attributable to Pr. The Pr measure is interpreted as a proxy for expected return differences rather than as new evidence of a systematic market underreaction to the future earnings signal inherent in current financial statements.

Abnormal returns (market model prediction errors) are the subject of many event studies in accounting and finance literature. Conditional on the event of interest, researchers have recently used cross-sectional regressions to examine relations between abnormal returns and firm specific variables. This paper demostrates that non-constant variences and covariances in market model residuals across firms introduced bias in the estimated slope coefficients of the independent variables, i.e., the expected signs of the estimated slope coefficients can be predicted a priori. A method is develope to removed the bias in the estimated slope coefficiets and is found to be effective. This method explicitly takes the dependence among abnormal returns across firms into account. Methods that assume abnormal returns across firms to be independent do not control for such bias.

I examine three composite analyst forecast of earnings per share as proxies for expected earnings. The most current forecast weakly dominates the mean and median forecasts in accuracy. This is evidence that forecast dates are more relevant for determining accuracy than individual error. Consistent with previous research, I find analysts more accurate than time-series models. However prior knowledge of forecast errors from a quarterly autoregressive model predicts excess stock returns better than prior knowledge of analysts' errors. This is inconsistent with previous research, and is anomalous given analysts' greater accuracy.

We examine the economic determinants of short-sale supply, and its consequences for future stock returns. Lendable supply increases with expected borrowing costs and decreases with financial statement constructs that indicate overvaluation. Although rising loan fees help ease supply constraints, we find shares are still least available when they are most attractive to short sellers. Using a number of firm characteristics, we derive useful instruments for real-time loan supply and demand conditions in the lending market. Further, we show that (1) when lendable supply is binding (non-binding), short-sale supply (demand) is the main predictor of future stock returns, (2) abnormal returns to the short-side of nine well-known market anomalies are attributable solely to “special” stocks, and (3) loan fees significantly reduce the profitability of the short side and several of these anomalies cease to be profitable. Overall our evidence highlights the central role played by the supply of lendable shares in equity price formation and returns prediction.

This study documents that the market's responsiveness to earnings announcements declines significantly after the issuance of qualified audit reports for a sample of ‘subject to’ qualifications and consistency qualifications. The results are consistent with a hypothesis that audit qualifications reduce the market's responsiveness to earnings announcements by altering the market's perception of earnings noise or the persistence of earnings, or both. Alternatively, a decline in earnings response coefficients may be observed because audit qualifications are more likely in firms that have undergone economic or structural changes and these changes, rather than the qualification per se, lead to decreased persistence or increased noise.

Prior studies of discretionary accounting choices have generally relied on one or more proxy variables to measure closeness to debt covenant restrictions without actually examining the existence or extent of restrictive covenants. This study tests the validity of the most commonly used proxy, the debt–equity ratio, by examining its relation to actual debt covenant restrictions for a random sample of U.S. firms. The results indicate that several versions of the debt–equity ratio capture the existence and tightness of retained earnings restrictionsand the existence of net tangible asset and working capital restrictions, but are unrelated to four other covenant restrictions.

This paper documents the empirical distributions of daily trading volume prediction errors for several commonly used volume measures and expectation models for individual firms and for portfolios. The prediction errors for raw volume measures are significantly positively skewed, with thin left tails and fat right tails. However, natural log transformations of the volume measures are approximately normally distributed. For longer than one-day prediction intervals, recognition of autocorrelation in daily trading volume is advantageous for detecting abnormal trading. Results of analysis for clustering of events and for different size firms are also presented.

This study examines whether an increase in the transparency of investment transactions facilitates portfolio mimicking. While there are reported benefits of transparency in enhancing regulatory monitoring and discipline, an increase in the transparency of investment transactions can also facilitate mimicking of peer firms’ investment strategies. I exploit an exogenous increase in the broad dissemination of transaction-level investment disclosures of U.S.-based insurers and find a significant increase in portfolio similarity at the individual security level. Increases in portfolio similarity are more pronounced in smaller, less sophisticated insurers mimicking their larger, more sophisticated peers. Shared asset positions and common exposures to risk can exacerbate collective risk across firms. Accordingly, I find that the detectable increases in portfolio similarity are positively associated with measures of systemic risk, especially in those smaller insurers mimicking their peers. This study adds to a nascent literature on portfolio mimicking and highlights a potential negative externality of increased transparency.

While market prices can be useful tools for bank regulation, recent theoretical work argues that reliance on prices can be counterproductive when secondary markets are stressed and illiquid. Evidence from the financial crisis unearthed by Bhat et al. (in press) provides empirical validation of these arguments. Though Bhat et al. do not fully acknowledge it, their findings suggest that forcing banks to count liquidity-induced unrealized losses in securities holdings against regulatory capital destroys value and exposes bank creditors, including taxpayers, to more risk. Policy makers contemplating greater regulatory reliance on market prices ignore these findings at their peril.

Cheng and Neamtiu examine whether credit rating agencies exploit market power to sell a substandard product. Their evidence is suggestive, but plausible alternative hypotheses could explain their results. Johnston, Markov and Ramnath provide first evidence on the bond and firm characteristics that determine the quantity of sell-side debt analyst coverage that a corporate bond receives. They also find that debt analysts anticipate credit rating changes and add information to markets incremental to credit ratings, suggesting debt analysts will be important to future research on bond markets. These results also suggest a method for refining tests of rating agency market power.