This study examines the effect of independence threats and litigation risk on auditors' evaluation of information and subsequent reporting choices. Using a Web‐based experiment, I tracked auditors' information gathering and evaluation leading to a going‐concern reporting decision. Specifically, 48 audit managers assessed client survival likelihood, gathered additional information, and suggested audit report choices. I found that auditors facing high independence threats (fear of losing the client) evaluated information as more indicative of a surviving client and were more likely to suggest an unmodified audit report, consistent with client preferences. In contrast, auditors facing high litigation risk evaluated information as more indicative of a failing client and were more likely to suggest a modified audit report. In addition, the association between risk and report choice was fully mediated by final information evaluation. This suggests that it is unlikely that different reporting choices resulted from a conscious choice bias, but rather that motivated reasoning during evidence evaluation plays a key role in the effect of risk in auditor decision making.

Relicensing requirements for professionals who move across borders are widespread. In this article, we measure the effects of occupational licensing by exploiting an immigrant physician retraining assignment rule. Instrumental variables and quantile treatment effects estimates indicate large returns to acquiring an occupational license and negative selection into licensing status. We also develop a model of optimal license acquisition that, together with the empirical results, suggests that stricter relicensing requirements may lead not only to practitioner rents but also to lower average quality of service in the market for physicians.

Birth weight has emerged as the leading indicator of infant health and welfare and the central focus of infant health policy. This is because low birth weight (LBW) infants experience severe health and developmental difficulties that can impose enormous costs on society. But would the prevention of LBW generate equally sizable cost savings and health improvements? Estimates of the return to LBW-prevention from cross-sectional associations may be biased by omitted variables that cannot be influenced by policy, such as genetic factors. To address this, we compare the hospital costs, health at birth, and infant mortality rates between heavier and lighter infants from all twin pairs born in the United States. We also examine the effect of maternal smoking during pregnancy n the leading risk factor for LBW in the United States n on health among singleton births after controlling for detailed background characteristics. Both analyses imply substantially smaller effects of LBW than previously thought, suggesting two possibilities: 1) existing estimates overstate the true costs and consequences of LBW by at least a factor of four and by as much as a factor of 20;

Much research over the last 30 years has provided evidence that individuals display accounting fixation; that is, their cognitive process does not appropriately adapt to cross‐sectional or temporal differences in an accounting method. This paper presents the results of a quasi‐experimental test of the hypothesis that cognitive adaptation to a change in accounting method is an ordinal interactive function of three person characteristics: relevant accounting knowledge, general problem‐solving ability, and intrinsic motivation to appropriately engage in the decision task. Based on a product‐pricing decision task in which participants are provided with product costs reported by two generally employed product‐costing methods (activity‐based costing [ABC] and volume‐based costing), the results show that the majority of participants did not change their cognitive behavior when there was a change in the costing method. Further, those participants who did adapt to the change in accounting method, and thus avoided accounting fixation, did so by debiasing costs reported by volume‐based costing but not by ABC. Finally, these adapters generally exhibited high values for all three of the person characteristics compared with those who did not adapt.

This paper documents strong evidence for behavioral biases among Chicago Board of Trade proprietary traders and investigates the effect these biases have on prices. Our traders appear highly loss‐averse, regularly assuming above‐average afternoon risk to recover from morning losses. This behavior has important short‐term consequences for afternoon prices, as losing traders actively purchase contracts at higher prices and sell contracts at lower prices than those that prevailed previously. However, the market appears to distinguish these risk‐seeking trades from informed trading. Prices set by loss‐averse traders are reversed significantly more quickly than those set by unbiased traders.

Applying a Burgstahler and Dichev (1997)/Degeorge et al. (1999) type methodology to quarterly data for the 1985–2002 time period, we show that, since the mid-1990s, but not before then, managers seek to avoid negative quarterly earnings surprises more than to avoid either quarterly losses or quarterly earnings decreases. Our findings suggest that the quarterly earnings threshold hierarchy proposed by Degeorge et al. (1999) does not apply to recent years, and that managers' claim that avoiding quarterly earnings decreases is the threshold they most seek to achieve (Graham et al. 2004) is inconsistent with their actions. We provide an intuitively appealing economic rationale for why the shift in threshold hierarchy occurred; since the mid-1990s, but not before then, investors unambiguously rewarded (penalized) firms for reporting quarterly earnings meeting (missing) analysts' estimates more than they did for meeting (missing) the other two thresholds. We provide several explanations for why investors unambiguously reward firms for reporting quarterly earnings that meet or beat analysts' estimates more than for meeting the other two thresholds late (but not early) in our sample period: increased media coverage given to analyst forecasts, more analyst following, more firms covered by analysts, and temporal increases in both the accuracy and precision of analyst forecasts.

The federal government spends billions of dollars each year on programs designed to increase the resources available to hospitals that serve the poor. This paper explores the intended and unintended effects of such targeted funds. First, how do these funds distort the behavior of state and local governments who wish to appropriate the funds for other uses? Second, to the extent that these funds do increase resources in the targeted hospitals, do patients benefit? We use the rapid and uneven growth in Medicaid Disproportionate Share Hospital (DSH) payments across states and hospitals to answer these questions. We identify states that were most able to appropriate DSH funds and show that, while DSH payments to public hospitals in these states were systematically diverted, DSH payments to other hospitals and in other states were not diverted. Additional resources that were made available to hospitals (rather than appropriated by the state) were associated with significant declines in infant and post-heart attack mortality. A range of evidence suggests that these improvements were due to better hospital care. Overall, our analysis implies that public subsidies can be an effective mechanism for improving medical care and outcomes for the poor, but that the impact is limited by the ability of state and local government to divert the targeted funds.

This paper proposes a new framework for understanding financial intermediation. In contrast to previous research, we consider a setting in which intermediaries possess no inherent information processing or monitoring advantages. Instead, in an economy with overly optimistic entrepreneurs who require funding from pessimistic investors, we show that intermediaries can arise endogenously. In such a setting, only a rational intermediary will be sufficiently optimistic to find it worthwhile to invest in a technology for screening entrepreneurs' projects, and yet be pessimistic enough to use this technology. Our framework produces implications consistent with heretofore unexplained stylized facts, and conjectures which are thus far untested.

This paper formalizes a widely discussed peer effect titled “acting White.” “Acting White” is modeled as a two-audience signaling quandary: signals that induce high wages can be signals that induce peer group rejection. Without peer effects, equilibria involve all ability types choosing different levels of education. “Acting White” alters the equilibrium dramatically: the (possibly empty) set of lowest ability individuals and the set of highest ability individuals continue to reveal their type through investments in education; ability types in the middle interval pool on a common education level. Only those in the lower intervals are accepted by the group. The model's predictions fit many stylized facts in the anthropology and sociology literatures regarding social interactions among minority group members.

We analyze a general equilibrium model in which there is both adverse selection of, and moral hazard by, banks. The regulator can screen banks prior to giving them a licence, audit them ex post to learn the success probability of their projects, and impose capital adequacy requirements. Capital requirements combat moral hazard when the regulator has a strong screening reputation, and they otherwise substitute for screening ability. Crises of confidence can occur only in the latter case, and contrary to conventional wisdom, the appropriate policy response may be to tighten capital requirements to improve the quality of surviving banks.