In this paper, I develop a measure of the difference in the amount of information that investors expect a forthcoming disclosure to contain should it reveal good news versus bad news (the disclosure’s “asymmetry”). To do so, I first show that this asymmetry is linked to the skewness of returns that the disclosure creates. I then show that this skewness can be measured using a weighted change in option-implied return skewness leading up to the disclosure’s release. The measure’s ability to capture investors’ prior beliefs regarding asymmetry is advantageous when studying ex ante decisions including contracting and information acquisition choices. I implement it on a sample of large firms’ quarterly earnings announcements, finding evidence that investors anticipate cross-sectional but not time-series variation in earnings’ asymmetry.

We study the impact of asymmetric (i.e., conservative or aggressive) disclosure on a firm’s price in the classic setting in which its stock is traded by risk-averse investors and noise or liquidity traders. We show that asymmetric accounting policies alter the relative risk faced by investors when they short versus long, which causes market liquidity to differ for positive versus negative demand shocks. As a result, accounting conservatism raises firms’ valuations and lowers their expected returns. We further demonstrate that the relationship between accounting informativeness and expected returns depends upon the skewness of investors’ prior beliefs. Finally, we find that a firm that can commit to an accounting policy can tailor this policy to benefit from noise trade and foster overvaluation.

We examine the effects of a large number of clients in an audit office using the same enterprise-resource planning (ERP) system such as SAP or Oracle resulting in what we term “client accounting system homogeneity” on audit efficiency and effectiveness. Using a unique dataset of ERP system implementations, we find that accounting system homogeneity is positively associated with audit efficiency. Specifically, we find lower (higher) audit fees for clients using an ERP system from a vendor used by a higher (lower) proportion of clients in that office. We further document that accounting system homogeneity is associated with improved audit effectiveness as proxied by two accruals-based measures, incorrect internal control weakness reporting, and restatements. Our findings are reflective of a new form of knowledge spillover from repeated experiences auditing clients using similar accounting systems, resulting in audits that are not only less expensive but also of higher quality. Data Availability: Contact the authors.