We study the mispricing information present in the target prices of US and international analysts. We hypothesize that asymmetry in the value-relevance of the information that managers supply to analysts, combined with asymmetry in the incentives facing analysts to curry favor with managers, leads to analyst-claimed undervaluation being more predictive of future stock returns than analyst-claimed overvaluation. Our empirical tests isolate analyst-claimed mispricing by first removing analysts’ estimates of the cost of equity from the returns implied by target prices and then separating analyst-claimed undervaluation from overvaluation. We find that target prices only predict future returns (at 16 cents to 18 cents on the dollar) when analysts claim undervaluation, not when they claim overvaluation. We also observe that analyst-claimed undervaluation predicts future returns more strongly after firms experience low returns and when macro-driven valuation uncertainty is low.

This study examines whether the implementation of industry-specific accounting standards helps capital market participants in making decisions about providing capital to firms. We predict and find an, on average, increase in firms’ capital growth in years following implementation of the relevant industry standard. The increase in capital growth arises primarily from equity issuances and is attributable to the implementation of the standards rather than industry-specific trends or economic shocks. We explore heterogeneity in industry standards and find more pronounced effects for (i) industry standards that reveal new information, provide explicit guidance, or increase accounting uniformity, and (ii) small firms, firms with greater information asymmetry, and firms with greater capital constraints before implementation of the standards. We also find evidence consistent with two channels explaining the documented increase in capital flows: reduction of information asymmetry and increase in financial statement comparability.

In response to the extended audit report regulations implemented in the United States and internationally, both audit firms and regulators have increased scrutiny over critical audit matters/key audit matters (collectively referred to as CAMs) through internal and external inspections. At the same time, auditors and audit committees (ACs) have altered the content and timing of CAM‐related discussions by communicating specific planned audit procedures earlier in the audit process. This study explores the effect of early communication of CAM‐related audit procedures to the AC and increased scrutiny from inspections on auditors' propensity to adjust planned audit procedures in the presence of newly identified audit risks. Based on self‐justification theory, we predict and find that early communication of planned audit procedures to the AC causes auditors to be less likely to adjust planned audit procedures even when additional risks arise that necessitate change, especially when inspection is likely. This has the potential for diminished audit quality. Interviews with audit partners provide context for how these findings relate to the current auditing environment.

We investigate whether a larger CEO employment network provides access to information that improves firms' earnings forecasts and find a significantly positive relation between CEO employment network size and management earnings forecast accuracy. Our results suggest that firms use information obtained from CEO contacts to increase the accuracy of their earnings forecasts. Our conclusion is further supported by evidence of positive associations between CEO employment network size and the likelihood, frequency, and precision of management earnings forecasts. We also find that CEO employment network size is positively related to analysts' reactions to the forecast news and the accuracy of management earnings forecasts relative to analyst forecasts. Overall, our results are consistent with a larger CEO employment network generating external information that increases the accuracy of firms' earnings forecasts.

Since the passage of the Sarbanes‐Oxley Act of 2002, many notable frauds have been tied to ineffective audit committee (AC) oversight. As a result, AC oversight is of continuing interest, and regulators continue to debate this issue, garnering a growing body of research focused on the role played by the AC. But little theoretical research exists to guide analytical and empirical researchers investigating AC oversight. The purpose of this study is to provide theoretical guidance by examining AC oversight in a strategic setting. We focus on the AC's role in overseeing internal controls (ICs) and the impact of whether the AC relies on management in designing the controls. We characterize how the nature of control risk changes and how IC strength is associated with the amount of managerial fraud, expected probability of fraud detection (which, on average, equates to audit effort), and audit quality (assessed as 1 − audit risk) across two settings defined by the degree of AC oversight. As one example that highlights the need for theoretical guidance, we consider the literature's presumption that IC strength is negatively associated with audit effort. We find that this association may be positive or negative as IC changes, where the association varies with the degree of direct AC oversight and the change in payoff parameters.

This paper examines how environmental and social (ES) performance, proxied by related incidents, affect the managerial and analyst tones in quarterly earnings conference calls and its incremental effect on post-earnings call returns. We document that firms experiencing poor ES performance in the quarter prior to the earnings call exhibit more negative management tone after controlling for quarterly financial performance metrics. Tone difference in conference calls between managers and analysts predicts negative abnormal returns in the three-day window around the call. In the 60-day post-call period, we show that firms with poor ES performance exhibit returns negatively related to the tone difference on the conference call – low tone difference leads to return continuation and high tone difference predicts reversals for firms with positive earnings surprises. These results are consistent with an increase in information asymmetry and lower transparency for firms following poor ES performance.

This article provides a survey of China’s initial public offering (IPO) market, focusing on IPO pricing, bids and allocation, and aftermarket trading. We show that strict regulations result in suppressed IPO offer prices and high initial returns, causing a high cost of going public. Investors treat IPOs as lotteries with extremely high short-term returns, with little attention to the long term. The auction selling method, however, works in the way it is supposed to. Mutual funds bid in a more informative way than other investors, and their advantages are unlikely to be due to underwriters’ preferential treatment. We also discuss the latest registration-system reform.

Are the professional networks of directors valuable? To separate the effect of director networks on firm value from the effect of other value-relevant director attributes, we use the unexpected deaths of directors as a shock to the director networks of interlocked directors. By studying the announcement returns and using a difference-in-differences methodology, we find the negative shock to director networks reduces the value of interlocked firms – a result that is stronger for firms that are more likely to benefit from access to information from board connections. This evidence is consistent with director networks being valuable and improving access to information.

Critics assert that securities class actions are economically burdensome and yield minimal recoveries, whereas proponents claim they deter wrongdoing. We examine key events in the recent Goldman Sachs Supreme Court case to test the net effect of securities litigation risk on shareholder value. We find that investors view securities class actions as value‐increasing. However, the strength of this effect varies based on external monitoring. Investors view securities class actions as more value‐enhancing when institutional ownership is low. We also use this setting to examine the effect of securities litigation risk on mandatory disclosure because the Goldman Sachs case focuses on mandatory disclosure properties. Using a difference‐in‐differences design, we find firm risk factor disclosures become shorter and less similar to industry peers, and they contain more uncertain and weak terms. Overall, our results show nuanced effects of securities litigation risk on shareholder value and firm disclosure.

When determining new equity grants, corporate boards face a tradeoff between the CEO’s incentives generated from the grant’s duration versus those arising from the convexity of the embedded equity risk. We hypothesize and find that boards lengthen the horizon of new compensation grants in the presence of greater pre-existing compensation sensitivity to stock return volatility (vega). In addition, consistent with our hypothesis, we find stronger results in the presence of greater left-tail risk. Further, employing two exogenous shocks to left-tail risk, we provide evidence consistent with our hypothesis that grant horizons are related to risk incentives. Our analysis of the interaction of these two incentive mechanisms provides new insights on compensation contracting.