We explore whether accounting fraud can be detected using the information of firms economically linked to a focal firm. Specifically, we examine whether customer information disclosed by a supplier firm, combined with customers’ accounting information, helps to detect the supplier’s revenue fraud. We first confirm the economic link between the supplier and customers by showing a strong positive correlation between the supplier’s sales growth and the growth rate of total customer purchases. We then introduce two variables based on customer accounting information—the discrepancy between supplier sales growth and customer purchase growth and customer excess purchases—and show that they are predictive of supplier revenue fraud. We conduct a battery of cross-sectional tests and generally find results to vary cross-sectionally in a predictable way. Finally, the out-of-sample tests indicate that adding the two variables to Dechow, Ge, Larson, and Sloan (2011) model increases fraud prediction accuracy.

We examine the evolution of accounting regulation by linking disclosure policies and investments in a dynamic voting model. The disclosure policies are the outcome of voting by entrepreneurs, whose preferences are influenced by their investments. The investments are in turn endogenously determined by current and future disclosure policies. Absent external influences, accounting regimes are stable. A disclosure regime of high (low) quality and a strong (weak) economy coexist and reinforce each other. However, regulatory interventions can result in regime changes by changing the entrepreneurs’ expectations, even without direct enforcement. Unexpected shocks could also result in regime changes by impacting economic conditions and hence voter composition. Our analysis provides a framework to study the interaction between accounting regulation and firms’ economic decisions.

This study exploits an exogenous change to audit committee policy in Canada and presents new evidence on how high-quality corporate governance mitigates managerial resource diversion and improves firm values. We first examine why some firms listed on the Toronto Venture Exchange (TSX Venture) voluntarily adopted the more stringent governance policy in 2004 that requires all audit committee members to be independent and financially literate. We develop a parsimonious analytical model that shows that both compliance costs and financing needs have an impact on firms' adoption decisions. Confirming the model's predictions, we find that TSX Venture firms with low compliance costs and greater future financing needs are more likely to adopt the new policy voluntarily. The analytical model also shows that high-quality audit committees enhance firm values by reducing the likelihood of managerial resource diversion. Consistent with the predictions of our analytical model, we find that the adoption decision has a positive impact on firm value and a negative impact on firms' cost of equity capital for both Toronto Stock Exchange (TSX) and TSX Venture firms. As corroborating evidence of the economic impact of the more stringent governance policy, we also show that both TSX and TSX Venture firms have improved investment efficiency following the adoption decisions. Data Availability: Data are available from public sources identified in the paper.

This study finds that, for a sample of 335 open-market repurchase announcements during 1978 to 1992, the market reaction to the announcement is significantly associated with the firm's sales growth and accounting profitability in prior periods. This result holds after controlling for two known correlates of the market response, the announced fraction to be repurchased and prior returns. This result is consistent with the market reinterpreting previously released accounting information when interpreting a subsequent repurchase announcement by the firm. Further, the association between the market response and prior accounting information is more pronounced for firms that are smaller in size or have fewer analysts following them. This suggests that the degree of reinterpretation of prior accounting information at the time of the repurchase announcement increases in the information asymmetry between managers and investors.

[This study finds that, for a sample of 335 open-market repurchase announcements during 1978 to 1992, the market reaction to the announcement is significantly associated with the firm's sales growth and accounting profitability in prior periods. This result holds after controlling for two known correlates of the market response, the announced fraction to be repurchased and prior returns. This result is consistent with the market reinterpreting previously released accounting information when interpreting a subsequent repurchase announcement by the firm. Further, the association between the market response and prior accounting information is more pronounced for firms that are smaller in size or have fewer analysts following them. This suggests that the degree of reinterpretation of prior accounting information at the time of the repurchase announcement increases in the information asymmetry between managers and investors.]

We examine how hometown, school, and workplace ties between financial analysts and mutual fund managers affect their business decisions. We show that a fund manager is more likely to hold stocks covered by analysts with whom she is socially connected, and that she also makes higher profits from these holdings. Such social tie-related holding returns are higher among more opaque firms. In return, a fund manager tends to cast her star analyst votes in favor of her connected analysts, and her fund company is more likely to allocate trading commissions to her connected analysts' brokerages. Additional tests indicate that analysts more actively acquire information (through conducting corporate site visits) and issue more optimistically biased recommendations for stocks held by fund managers with whom they are connected. Overall, our results illustrate the pronounced influence of social networks on the behaviors of analysts and fund managers. JEL Classifications: G10; G23; M40. Data Availability: Data are available from the public sources cited in the text.

We argue that contracting with the federal government involves significant proprietary information cost due to regulations requiring contractors to provide proprietary information, which may become available to outsiders via Freedom of Information Act (FOIA) requests. We provide evidence by showing that firms become more willing to bid for government contracts after a recent Supreme Court ruling on FOIA (Food Marketing Institute v. Argus Leader Media) that improved information protection for contractors and that this effect strengthens when the contracts entail higher proprietary information cost for contractors. Data Availability: Data are available from the public sources cited in the text.

We test whether mandatory IFRS adoption affects firm-level “crash risk,” defined as the frequency of extreme negative stock returns. We separately analyze nonfinancial firms and financial firms because IFRS is likely to affect their crash risk differently. We find that IFRS adoption decreases crash risk among nonfinancial firms, especially among firms in poor information environments and in countries where IFRS adoption results in larger and more credible changes to local GAAP. In contrast, IFRS adoption has no effect on crash risk for financial firms, on average, but decreases crash risk among firms less affected by IFRS's fair value provisions, and increases crash risk among banks in countries with weak banking regulations. Overall, our results are consistent with the increased transparency from IFRS adoption broadly reducing crash risk among nonfinancial firms, but more selectively among financial firms, and with financial regulations playing a complementary role in implementing IFRS among financial firms.

This paper evaluates the real effects of the new lease standard, ASC 842, on firms’ investment and operational outcomes. Using a sample of airline companies, we find that, subsequent to the promulgation of ASC 842 (2016–2018), public airlines reduce operating lease usage by about seven to ten percentage points relative to private airlines. The reduced lease usage is replaced by increased ownership, suggesting an equilibrium shift in firms’ investment due to changes in the cost-benefit tradeoffs associated with the operating lease classification. We also find evidence that the decline in lease usage hinders public airlines’ operational flexibility, as we observe more idle capacity in flights post-ASC 842. Facing excess capacity, public airlines seem to deploy their aircraft to shorter flying routes, raising the possibility of more wear and tear on the fleet. Overall, our evidence suggests that the new lease standard has intended and unintended real effects. Data Availability: Data are available from the public sources cited in the text.

Short sellers assist in impounding negative news more quickly into stock prices and improve price informativeness. However, there is a lack of consistent evidence about whether short sellers trade predominantly in anticipation of, or in response to, a public information release. To shed light on this question, we exploit Reg SHO, which reduced the constraints faced by short sellers for a subsample of U.S. firms, to examine price informativeness before, during, and after earnings announcements. We show that relative to control firms, pilot firms have greater (less) price informativeness before (during) earnings announcements, suggesting that short sellers trade in anticipation of public earnings news, rather than in response to the public news. Data Availability: Data are available from the public sources cited in the text.