Downside risks are ubiquitous and can profoundly impact firm operations and valuation. Failure to adequately assess and manage target firms' downside risks hinders acquirers' ability to integrate and manage these businesses. This article introduces a novel measure of firms' downside risk similarity (DRS) based on risk factor descriptions and examines its implications for mergers and acquisitions (M&A) outcomes. We first validate that the measure is distinct from existing similarity measures and that it captures similarity in firms' potential significant downside. Using the new measure, we find that the market reacts more positively to deals in which acquirers and targets share more downside risks. Additional analyses show that this beneficial effect of DRS is driven primarily by risks that are idiosyncratic or firm‐specific, consistent with these risks requiring acquirers' relevant expertise to manage. Last, we document that in deals with more similar downside risks, the acquirers experience fewer risk profile changes and are less likely to suffer from adverse outcomes, such as deal‐specific goodwill impairment, divestitures, and significant profitability declines. Overall, we conclude that DRS plays a significant role in the M&A process.

We examine the association between chief executive officer (CEO) reputation (proxied by the extent of press coverage) and the quality of the firm's earnings (proxied by two accruals-based measures). We test three explanations for an association between these constructs: the efficient contracting hypothesis suggests that reputed CEOs are associated with good earnings quality, while the rent extraction and matching explanations argue that reputed CEOs are associated with poor earnings quality. Using a simultaneous equations system to capture the endogeneity of the constructs, we find (consistent with the rent extraction and matching arguments) that more reputed CEOs are associated with poorer earnings quality than are less reputed CEOs. Further tests find little support for the rent extraction hypothesis. We conclude that the reason more reputed CEOs are associated with poor earnings quality firms is that such firms require more talented managers and, therefore, employ more reputed CEOs. © CAAA.

This study examines whether and when credit ratings are useful for accounting fraud prediction. We find that negative rating actions by Standard & Poor’s (S&P), an issuer-paid credit rating agency (CRA), have predictive ability for fraud incremental to fraud prediction models (e.g., F-score) and other market participants. In contrast, rating actions by Egan-Jones Rating Company (EJR), an investor-paid CRA relying on public information, have less predictive ability, which is subsumed by S&P and other market participants. Our results are robust to including firms not covered by EJR, using only rating downgrades, controlling for firm characteristics, and using alternative benchmarks. We also find that the ability of negative S&P rating actions to predict fraud becomes stronger after the 2008–2009 financial crisis. Last, compared with EJR, S&P is quicker to take negative rating actions against fraud firms. In sum, our results suggest that issuer-paid CRAs’ information advantage helps predict accounting fraud. Data Availability: Data are available from the public sources cited in the text.

We document that textual discussions in a sample of 363,952 analyst reports provide information to investors beyond that in the contemporaneously released earnings forecasts, stock recommendations, and target prices, and also assist investors in interpreting these signals. Cross-sectionally, we find that investors react more strongly to negative than to positive text, suggesting that analysts are especially important in propagating bad news. Additional evidence indicates that analyst report text is more useful when it places more emphasis on nonfinancial topics, is written more assertively and concisely, and when the perceived validity of other information signals in the same report is low. Finally, analyst report text is shown to have predictive value for future earnings growth in the subsequent five years.

We investigate whether judges’ political ideology affects corporate tax behaviors. We find that firms engaging in less aggressive tax planning when Circuit Court judges are more liberal. Cross-sectionally, the deterrent effect of liberal judge ideology is more pronounced for firms that engage in judiciary-sensitive tax strategies, face higher enforcement risk from the Internal Revenue Service (IRS), or have larger reputational costs from tax disputes. Our findings further suggest that liberal judge ideology reduces firms’ R&D investments and market value by constraining tax planning. Overall, our evidence highlights the importance of judge ideology for firm behavior in the context of corporate tax planning.

During 2005 to 2007, the SEC ordered a pilot program in which one‐third of the Russell 3000 index were arbitrarily chosen as pilot stocks and exempted from short‐sale price tests. Pilot firms’ discretionary accruals and likelihood of marginally beating earnings targets decrease during this period, and revert to pre‐experiment levels when the program ends. After the program starts, pilot firms are more likely to be caught for fraud initiated before the program, and their stock returns better incorporate earnings information. These results indicate that short selling, or its prospect, curbs earnings management, helps detect fraud, and improves price efficiency.