We examine the relative importance of observed and unobserved firm- and manager-specific heterogeneities in determining executive compensation incentives and firm policy, risk, and performance. First, we decompose executive incentives into time-variant and time-invariant firm and manager components. Manager fixed effects supply 73% (60%) of explained variation in delta (vega). Second, controlling for manager fixed effects alters parameter estimates and corresponding inference on observed firm and manager characteristics. Third, larger CEO delta (vega) fixed effects predict better firm performance (riskier corporate policies and higher firm risk). These results suggest that the delta (vega) fixed effect captures managerial ability (risk aversion). (JEL G3, G32, G34, J24, J31, J33) Received September 7, 2018; editorial decision February 21, 2020 by Editor Andrew Ellul.

I model the effect of associative memory on asset prices. The model includes mood-congruent memory, which predicts that the subjective goodness (or badness) of the agent’s affective state (e.g., mood) is a cue for positive (negative) information stored in long-term memory. I also include rehearsal, which implies that data recalled in the recent past are more likely to be recalled in the present. I show that mood-congruent memory causes the set of recalled information to be biased, and rehearsal generates autocorrelation in the biases across periods. The theory provides novel explanations for short-run continued overreaction to news, long-run correction of these effects, and excess volatility. I also make the novel predictions that excess volatility is highest during downturns, price biases are increasing in fundamental volatility, knowledge/experience may intensify these biases, and asset prices exhibit excess comovement.

Jurisdictions across the United States have adopted “ban the box” (BTB) policies preventing employers from asking about job applicants’ criminal records until late in the hiring process. Their goal is to improve employment outcomes for those with criminal records, with a secondary goal of reducing racial disparities in employment. However, removing criminal history information could increase statistical discrimination against demographic groups that include more ex-offenders. We use variation in the timing of BTB policies to test BTB’s effects on employment. We find that BTB policies decrease the probability of employment by 3.4 percentage points (5.1%) for young, low-skilled black men.

We study how the potential for discretionary disclosure affects the way a firm designs its reporting system. In our model, the firm's primary but nonexclusive concern is to induce beliefs that exceed a threshold. Such thresholds arise in numerous contexts, including investing decisions, liquidation/continuation choices, covenants, audits, impairments, listing requirements, index inclusion, credit ratings, analyst recommendations, and stress tests. The optimal reporting system is characterized by informative good reports when the threshold is high and, potentially, uninformative reports when the threshold is low. Under an optimal impairment-type reporting system, the likelihood of reported impairments and the information content of non-impairment reports both increase in the probability of the firm observing private information. We provide a novel motivation for the quiet period around an IPO and empirical predictions relating the probability of discretionary disclosure to the properties of financial reports. In extensions, we consider disclosure mandates, report manipulation, endogenous thresholds, and alternative payoff functions.

Prior literature examines the effect of either informed or arbitrage short selling on equity markets. We test the relative importance of informed and uninformed short selling around convertible bond issues and earnings announcements for the same firms over the same time period. Convertible arbitrage short selling is associated with temporary price pressure, consistent with downward sloping demand curves. Earnings announcement short selling is consistent with informed traders who anticipate future returns. Firm-specific characteristics related to the cost of short selling similarly affect both informed and arbitrage short selling. Deal-specific characteristics capturing hedging demand also strongly determine convertible arbitrage short selling.

We investigate whether reviews of transactional filings by the SEC unexpectedly constrain SEC resources, leading to lower quality comment letters for periodic reports. The Sarbanes‐Oxley Act requires the SEC to review periodic reports (e.g., 10‐Ks) at least once every three years. However, the SEC also reviews transactional filings (e.g., initial public offerings and acquisitions), which are unpredictable and often occur in waves. We find comment letters for periodic reports are of lower quality (in terms of outputs, inputs, and firm responses) during periods of abnormally high transactional filings. We also find that comment letters issued during periods of abnormally high versus low transactional filings are associated with increased information asymmetry and lower earnings response coefficients in the quarter after the resolution of the comment letter. Overall, our results suggest that unexpected resource constraints affect the quality of SEC oversight of periodic reports.

Regulators and researchers have expressed concerns that social interaction leads auditors to unjustifiably trust managers, constituting a lack of sufficient professional skepticism. Using both an abstract laboratory experiment and a contextually rich experiment with practicing auditors we predict and find that higher Dark Triad auditors (those with higher levels of the shared core between psychopathy, narcissism, and Machiavellianism) are relatively more resistant to lapses in professional skepticism due to the effects of social interaction. This is likely driven by higher Dark Triad auditors' callousness, lack of empathy, and lack of response to social stimuli. In contrast, while higher social interaction initially increases lower Dark Triad auditors' unjustified trust in managers, this effect reverses in subsequent interactions when lower Dark Triad auditors observe evidence suggesting managers have reported aggressively. These findings add to research on the effect of auditor personality traits, audit‐client social interaction, and the interaction of these two variables, and suggest that practitioners and researchers account for the interplay of Dark Triad traits and social interaction and their effect on professional skepticism.