Pre-IPO firms may “test the waters” by meeting privately with investors in order to allow access to management and more time to make an investment decision. However, these meetings have the potential to undermine the SEC’s objectives of protecting investors and supporting market efficiency by allowing institutional investors, but not retail investors, private access to management. We find lower retail trading after IPOs of firms that held testing-the-waters meetings, consistent with the meetings reducing retail investor participation. Moreover, retail investors that still participate in the market in the presence of testing-the-waters meetings have inferior investment outcomes. Nonetheless, we find no evidence of lower overall market liquidity or slower price discovery following testing-the-waters meetings. In fact, we observe a reduction in stock return volatility. Overall our evidence suggests that, while testing-the-waters meetings may harm retail investors, there does not appear to be a negative impact on overall market function.

We examine the effects of local newspapers on firms’ information environments. With newspaper employment dropping precipitously in the last few decades, we posit that these changes will harm local firms’ information environments. Consistent with local news improving information environments, we find that volatility, spreads, and illiquidity increase as local newspaper intensity declines and that this is associated with firms’ importance in their local economy. We further find that for firms that are more important in their community, or have busy analysts, less local newspaper intensity is associated with significantly lower analyst accuracy and higher forecast dispersion. This is consistent with local newspapers improving information environments, even for sophisticated and likely remote information intermediaries. We also investigate how stakeholders respond to declines in local news and find that managers increase the amount of forward-looking disclosures while analysts increase coverage. These results provide insights into the methods by which stakeholders attempt to improve firms’ information environments when local news coverage fades.

Research concludes that managers’ political orientation influences their decision-making and offers the political connections and risk tolerance hypotheses as explanations. We investigate partisan bias as an additional way political orientation may influence managers’ decisions. Partisan bias results in individuals whose partisan orientation aligns with that of the US president expressing more optimistic economic expectations. We examine whether partisan bias is present in managers’ annual earnings forecasts. We find that firms with CEOs whose partisanship aligns with that of the US president issue more optimistically biased annual earnings forecasts than firms with other CEOs. Higher-ability CEOs, however, are less susceptible to partisan bias. Additionally, we find that overestimating customer demand contributes to the forecast over-optimism of partisan-aligned CEOs and results in greater firm overinvestment. Furthermore, investors fail to discount the news in forecasts of partisan-aligned CEOs, and their firms’ post-forecast abnormal returns are lower.

We examine whether mutual fund managers overestimate carbon risk when they are exposed to local air pollution. We find that air pollution near fund managers induces them to underweight stocks of high-emission firms. The effects strengthen among environmentally conscious fund managers and among those likely to be surprised by air pollution—consistent with the idea that managers revise their beliefs about carbon risk following exposure to air pollution. A firm’s carbon-emissions disclosures and fund managers’ sophistication moderate these effects. Carbon-intensive stocks sold by fund managers who are exposed to local air pollution subsequently outperform stocks they buy, suggesting that such underweighting is costly to fund investors.

This study examines whether auditor KAM disclosures about M&A transactions predict future performance outcomes. We find that auditors make more M&A KAM disclosures when M&A transactions are larger, involve targets with greater information asymmetry, and are subject to greater overpayment risk. When auditors disclose M&A KAMs in the acquisition year, we find an increased risk of larger goodwill impairments and that the association between acquired goodwill and changes in companies’ subsequent operating performance are significantly lower compared to when auditors do not issue an M&A KAM. We also find that the likelihood of forced CEO turnover is incrementally higher when subsequent operating performance is poor and auditors issue an M&A KAM compared to when they do not. Collectively, our findings suggest that these auditor disclosures reflect uncertainty that predicts weak post-acquisition performance and forced CEO turnover, incremental to other indicators of failed acquisition strategies.

We study the extent to which creditors shape the executive bonus plans of their financially distressed borrowers. Financial distress can exacerbate agency conflicts between creditors and borrowers as concerns with underinvestment become more acute due to managerial myopia and debt overhang. Consequently, we expect creditors to exert their influence to ensure that these managers’ incentive-compensation plans encourage longer-term investments and directly reward outcomes that benefit creditors without exposing managers to unnecessary risk. We argue that bonus plans are an especially important way to provide these incentives because their flexibility allows creditors to more precisely target specific investment objectives. We find that borrowers’ bonus plans tend to have longer horizons and more convex payouts following covenant violations, especially when bonus plans can be a particularly effective way to address distress-related agency conflicts. Our evidence suggests that creditors protect their interests by exercising their control rights to shape their borrowers’ incentive-compensation plans.