Knowledge that Transforms

We examine the effects of stock market access, and in particular trading hours, on retail investment performance. Using discontinuities around time zone borders, we find that plausibly exogenous decreases in waking trading hours are associated with meaningful increases in retail investors’ capital gains, as reported on tax returns for the U.S. population. Our results indicate that limiting trading hours curbs active retail trading, leading to improvements in portfolio performance. Our findings identify one negative effect of decreasing barriers to entry for retail investors in trading markets.

Tax aggressiveness presents nontax risks to firms’ cash flow. Evaluating these risks requires information beyond the accounting function’s expertise, resulting in high processing costs to acquire and integrate risk information relevant to tax strategies. Managers can rationally adapt by making assumptions about risk information, potentially resulting in decision biases when evaluating the risk-reward tradeoff of tax aggressiveness. Using a novel regulatory setting in the U.S. insurance industry, I examine whether the adoption of mandated enterprise risk assessments updates managers’ prior beliefs about the nontax risks of tax aggressiveness. I find that as regulation requires managers to accept processing costs to acquire and integrate risk information, managers learn about previously underestimated nontax risks and significantly reduce tax aggressiveness. Results suggest that absent firm-wide internal risk information, managers can use aggressive tax positions without fully considering nontax risks. Data Availability: Data used in this study are available from public sources identified in the paper.

This study documents that M&A delistings are associated with a deterioration in the quality of analysts’ information environment for industry peer firms, measured by an increase in analysts’ absolute forecast errors and dispersion. This effect persists for six quarters and is larger when the delisting target firm contributes relatively more to the industry information environment. Further, we find that, among analysts forecasting earnings for an industry peer firm, those who also followed the delisted target firm in the pre-M&A period experience a larger increase in their absolute forecast errors. A comparison based on public versus private target firms also suggests that the loss of target firms’ public disclosures plays a role in the deterioration in the quality of analysts’ information environment. In additional analyses, we find evidence consistent with this effect resulting from a deterioration in analysts’ ability to exploit across-firm information complementarities.

Although activist short sellers can play a crucial role in fraud detection, they have come under scrutiny following accusations of systematically disseminating false negative information. We develop a framework delineating the roles of campaign-specific private information quality and short-selling dynamics in shaping disclosure incentives. We predict that the act of disclosure combined with pre-disclosure stock lending dynamics is informative about the quality of an activist’s private information. We find that increased pre-disclosure shorting intensity is associated with more negative post-disclosure returns, adverse media coverage, and consequential campaign outcomes, including auditor turnover, accounting restatements, class-action lawsuits, and performance-related delistings. Furthermore, elevated short-selling costs and risks magnify the association between pre-disclosure shorting intensity and post-disclosure underperformance. Finally, we examine V-shaped reversals and short covering following activists’ disclosures and find no evidence of systematic manipulation. We conclude that activists disclosing fraud allegations under their own names are discouraged from engaging in “short-and-distort” schemes. Data Availability: Data are available from the sources cited in the text.

Auditors collect evidence from clients that vary in social status. I investigate how these status differences interact with the costliness of auditor requests, thereby influencing client cooperation during evidence collection. I develop theory predicting that higher-status clients’ cooperation decisions will be more sensitive to differences in the costliness of requests than lower-status clients’ decisions. I test this theory across two experiments using multiple methods, leveraging the complementary strengths of each method. Experiment 1 is a more abstract experiment in the tradition of experimental economics, and Experiment 2 is a more contextualized experiment using participants with prior experience interacting with auditors. Results from both experiments support the theorized interaction between the costliness of audit requests and client social status. This conclusion carries implications for practitioners in assessing strategic tactics that will efficiently and effectively increase client cooperation. Data Availability: Contact the author.

Toward the goal of reconciling conflicting arguments on whether performance-based incentives facilitate or impede divergent thinking, we identify a feature common to prior demonstrations of negative incentive effects: they generally involve tasks with only one correct solution. Our first experiment replicates a negative incentive effect when insight problems require “bottom-up” divergent thinking from an unexpected resource to the problem it is uniquely equipped to solve, whereas our second experiment finds a positive incentive effect in the more general case of problems that enable “top-down” divergent thinking from a problem to multiple potential solutions. We also observe a positive incentive effect in a third experiment that measures the time needed to generate a solution to problems that have multiple potential solutions and in a fourth experiment in which participants design insight problems. Overall, our findings suggest that any harmful effects of performance-based incentives are likely restricted to highly constrained settings. Data Availability: Data are available from the authors upon request.

Boards of directors encourage risk-averse managers to take risky actions by providing stock options and severance pay. We demonstrate that the ability of these incentives to encourage risk-taking hinges on the level of uncertainty facing the manager. We confirm prior findings that stock option convexity encourages risk-taking but find that this relation only holds when market-wide uncertainty is low. We also confirm prior findings that severance pay encourages risk-taking but find that this relation only holds during high market-wide uncertainty and negative market-wide performance. Finally, we find that compensation committees respond to variation in uncertainty by adjusting the level of option grants. Our results suggest that the effectiveness of incentives to take risk varies with the market-wide uncertainty, and that boards consider this in annual compensation design. Data Availability: Data are available from the public sources cited in the text.

This paper examines the prevalence and benefits of upward social mobility in the early accountancy profession by analyzing the lifespan of chartered accountants admitted to membership in Scotland between 1853 and 1940. We find that 76 percent of the chartered accountants in our sample experienced upward social mobility, a greater percentage than found in previous studies. The chartered accountants in our sample experienced an average life expectancy premium of approximately three years over the general population, irrespective of social origins, and were less likely to die from most preventable causes than the general population. Upwardly mobile chartered accountants achieved lifespans consistent with their achieved professional status rather than their previous social class. While the findings confirm the existence of a social mortality gradient, the increase in longevity is likely attributable to the superior resources of higher social class and other factors affecting self-selection into the accountancy profession. Data Availability: Data are available from the public sources cited in the text.

I investigate whether algorithmic trading (AT) affects the provision of management guidance. Existing research finds that AT decreases fundamental information acquisition before earnings announcements and consequently reduces the informativeness of prices. To compensate for reduced information acquisition, I predict and find that managers at firms with more AT activity increase the quantity and quality of guidance issued at earnings announcements. Evidence is consistent with managers responding to reduced information acquisition, as opposed to changes in liquidity, and results suggest guidance in response to AT is effective at reducing information asymmetry. These findings identify a new channel through which AT affects stock price informativeness by documenting a link to managers’ disclosure decisions. Data Availability: Data are available from the public sources cited in the text.

This study examines whether politicians exhibit hometown favoritism in assigning preferential corporate income tax rates. We find that firms with hometown connections to incumbent provincial leaders experience favorable tax treatment. This effect is more pronounced when those leaders have strong hometown preferences and weaker when they have a strong incentive to seek promotion, suggesting that social incentives are the primary drivers of the effects on corporate tax benefits of hometown favoritism by politicians. Moreover, this effect is intensified when members of senior management have personal connections with the provincial leader. The mechanism test reveals that the provincial governments tend to qualify connected firms for preferential tax policies under their jurisdictions. Overall, our results suggest that hometown favoritism by politicians promotes tax benefits for business entities. Data Availability: Data are available from the public sources cited in the text.