ABSTRACT We investigate whether shared auditors promote the dissemination of innovative knowledge among their clients, thereby fostering follow‐on innovation. We find that a company cites more patents from another company when they are audited by the same audit office. To address concerns about potential confounding factors stemming from commonalities in the fundamentals of the two companies, we leverage a quasi‐exogenous shock to auditor sharing: the demise of Arthur Andersen and the subsequent increase in auditor switching in 2002. Further analysis reveals that the effect of a shared auditor on cross‐client patent citations is stronger when both clients engage in intensive innovation activities. Additional evidence suggests that shared auditors exert more influence on the citations of recent patents and patents that are easier for outsiders to utilize. Overall, our findings suggest that auditors affect corporate innovation by facilitating the transfer of innovative knowledge among their clients.

China launched a pilot scheme in March 2010 to lift the ban on short-selling and margin-trading for stocks on a designated list. We find that stocks experience negative returns when added to the list. After the ban is lifted, price efficiency increases while stock return volatility decreases. Panel data regressions reveal that intensified short-selling activities are associated with improved price efficiency. Short-sellers trade to eliminate overpricing by selling stocks with higher contemporaneous returns following a downward trend, and their trades predict future returns. In contrast, we find intensified margin-trading activities for stocks with lower contemporaneous returns, and these trades have no return predictive power.

When a firm cross-lists its shares in segmented markets, the price of the first issued share, as a reference, plays both an informational and anchoring role in pricing the second issued share. We develop a model illustrating the dual-role. Empirically, we examine a group of Chinese firms that first issue foreign shares and then domestic A-shares, for which the anchoring effect adds to the A-share underpricing. Consistent with the model predictions, we find that the A-share underpricing is positively related to the difference in costs of capital in the two segmented markets, and that this positive association is weaker when participants are less likely to resort to the anchoring heuristic and when the A-share valuation involves less uncertainty.

We measure an individual stock’s misvaluation based on the deviation of its price from predicted intrinsic value. Both under- and overvalued stocks identified by this misvaluation measure exhibit greater valuation uncertainty and arbitrage difficulty, and the misvaluation measure strongly predicts stock returns incremental to size, book-to-market ratio, past returns, and various return anomalies. Based on the misvaluation measure, we form a misvaluation factor and find that stock return covariances with this factor possess significant and robust return predictive power. We further show that the misvaluation factor predicts future economic conditions, providing additional insight into the real effect of systematic misvaluation in the stock market.