Prior to the Sarbanes–Oxley Act of 2002, audit partners experienced economic pressure to grow revenue from the sale of nonaudit services to their audit clients. To an auditor who is highly rewarded for revenue generation and growth, nonaudit services may represent a particularly strengthened economic bond with the client. Prior research shows that, in general, nonaudit service fees received in the current period do not impair audit quality. We examine a different setting. We propose that auditor independence can become impaired, and audit quality compromised, when clients that currently purchase relatively low amounts of nonaudit services, increase their purchases of nonaudit services from the auditor in the subsequent period. We test our prediction in the context of earnings management as a proxy for audit quality, measured by (a) performance‐adjusted discretionary accruals and (b) classification shifting of core expenses. Our results indicate that prior to the Sarbanes‐Oxley Act, rewards to the auditor in the form of future additional nonaudit service fees from current‐year high fee‐growth‐opportunity clients adversely affects audit quality. This effect is particularly strong among companies with powerful incentives to manage earnings. Our findings indicate that regulators should consider the multiperiod nature of the client–auditor relationship when contemplating policies that restrict nonaudit services, as well as the overall environment in which audit partners operate. This might include partner compensation arrangements that put pressure on audit partners to focus on increasing revenue at the expense of audit quality.

We model retail-price recommendations (RPRs) as a communication device in vertical supply relations with private manufacturer information on production costs and consumer demand. With static trade, RPRs are irrelevant, and the equilibrium outcome is inefficient. With repeated trade, RPRs can become part of a relational contract, communicating private information from manufacturer to retailer that is indispensable for maximizing joint surplus. We show that this contract is self-enforcing if the retailer's profit is independent of production costs and punishment strategies are chosen appropriately. The predictions of our analysis are consistent with the available empirical evidence.

We show that economic activity plays an important role in explaining momentum-based anomalies. A simple two-factor model containing the market and alternative indicators of economic activity as risk factors—industrial production, capacity utilization rate, retail sales, and a broad economic index—offers considerable explanatory power for the cross-section of price and industry momentum portfolios. Hence past winners enjoy higher average returns than past losers because they have larger macroeconomic risk. The model compares favorably with popular multifactor models used in the literature. Moreover, our model is consistent with Merton’s Intertemporal CAPM framework, since the macro variables forecast stock market volatility and future economic activity.

We review the theoretical, computational, and empirical research on school vouchers, with a focus on the latter. Our assessment is that the evidence to date is not sufficient to warrant recommending that vouchers be adopted on a widespread basis; however, multiple positive findings support continued exploration. Specifically, the empirical research on small-scale programs does not suggest that awarding students a voucher is a systematically reliable way to improve educational outcomes, and some detrimental effects have been found. Nevertheless, in some settings, or for some subgroups or outcomes, vouchers can have a substantial positive effect on those who use them. Studies of large-scale voucher programs find student sorting as a result of their implementation, although of varying magnitude. Evidence on both small-scale and large-scale programs suggests that competition induced by vouchers leads public schools to improve. Moreover, research is making progress on understanding how vouchers may be designed to limit adverse effects from sorting, while preserving positive effects related to competition. Finally, our sense is that work originating in a single case (e.g., a given country) or in a single research approach (e.g., experimental designs) will not provide a full understanding of voucher effects; fairly wide-ranging empirical and theoretical work will be necessary to make progress.

This paper develops a measure of execution costs (market impact) of transactions on the NYSE. The measure is the volume‐weighted average price over the trading day. It yields results that are less biased than measures that use single prices, such as closes. The paper then applies this measure to a data set containing more than 14,000 actual trades. We show that total transaction costs, commission plus market impact costs, average twenty‐three basis points of principal value for our sample. Commission costs, averaging eighteen basis points, are considerably higher than execution costs, which average five basis points. They vary slightly across brokers and significantly across money managers. Though brokers do not incur consistently high or low transaction costs, money managers experience persistently high or lost costs. Finally, the paper explores the possible tradeoff between commission expenditures and market impact costs. Paying higher commissions does not yield commensurately lower execution costs, even after adjusting for trade difficulty. We cannot determine whether other valuable brokerage services are being purchased with higher commission payments or whether some money managers really are inefficient consumers of brokerage trading services.

Institutions often own equity in multiple firms that compete in the same product market. Prior research has shown that these institutional “common owners” induce anticompetitive pricing behavior in the airline industry. This paper reevaluates this evidence and shows that the documented positive correlation between common ownership and airline ticket prices stems from the market share component of the common ownership measure, and not the ownership and control components. We further show that the results are sensitive to measures of investor control and to assumptions about equity holders' ownership and control during bankruptcy.

We study the effectiveness of magnet programs in an urban district that ration excess demand by admission lotteries. Differential attrition arises since students who lose the lottery are more likely to pursue options outside the school district than students who win the lottery. When students leave the district, important outcome variables are often not observed. The treatment effects are not point-identified. We exploit known quantiles of the outcome distribution to construct informative bounds on treatment effects. We find that magnet programs improve behavioral outcomes but have no significant effect on achievement.

We use a new data set on macroprudential foreign exchange (FX) regulations to evaluate their effectiveness and unintended consequences. Our results support the predictions of a model in which banks and markets lend in different currencies, but only banks can screen firm productivity. Regulations significantly reduce bank FX borrowing, and firms respond by increasing FX debt issuance. Moreover, regulations reduce bank sensitivity to exchange rates but are less effective at reducing the sensitivity of the broader economy. Therefore, FX regulations mitigate bank vulnerability to currency fluctuations and the global financial cycle, but appear to partially shift the snowbanks of vulnerability elsewhere.

We study the relationship between societal trust and risk-taking in the banking industry. Prior literature has found that societal trust is positively related to both financial reporting conservatism and financial reporting transparency, which reduce bank managers’ ability to take excessive risk. Additionally, bank managers in high-trust countries are more likely to exhibit higher pro-social behavior and, therefore, less likely to take excessive risk for personal benefit. Consistent with these arguments, we document that banks in countries with higher societal trust exhibit lower risk-taking and that these banks also experienced less financial trouble and fewer failures during the 2007–2009 financial crisis.