[Prior research on auditors' memory for evidence encountered during working paper review suggests that auditors commit memory errors that could inhibit audit efficiency and effectiveness. The current study extends this line of research by examining whether two prominent features of the auditing environment, audit risk and information importance, affect the accuracy of auditors' memory and auditors' willingness to rely on memory. These issues were examined in an experiment in which auditors were required to review two working-paper areas (accounts) and, 24 hours later, recognize if information items had been present in the working papers and express how willing they would be to rely on their memory for each item. The results indicate that: (1) the accuracy of auditors' memories is positively related to the level of audit risk of the area and the degree of importance of an information item within the area; (2) the auditors' willingness to rely on memory is negatively related to the degree of information importance but not related to the level of audit risk of the area; and (3) the auditors' likelihood of referring back to the working papers is negatively related to the accuracy of auditors' memories, and this negative relationship increases with the degree of information importance. Collectively, these results suggest that audit risk and information importance altered auditors' cognitive activities during the review process in a manner that contributes to the effectiveness (e.g., better memory for more consequential evidence) and efficiency (e.g., less verification of more strongly remembered and less consequential evidence) of the audit.]

This paper provides empirical evidence on the economic value of services provided by independent auditors by analyzing whether auditor association leads to reduced interest rates on revolving credit agreements. Using multivariate regressions, we analyze the relation between interest rates on revolving bank loans to small, private firms and the degree of auditor association with the financial statements provided to the lender,

Why are observed contracts so often incomplete in the sense that they leave contracting parties' obligations vague or unspecified? Traditional answers to this question invoke transaction costs or bounded rationality. In contrast, we argue that such incompleteness is often an essential feature of a well-designed contract. Specifically, once some aspects of performance are unverifiable, it is often optimal to leave other verifiable aspects of performance unspecified. We explore the conditions under which this occurs, and investigate the structure of optimal contracts when these conditions are satisfied.

[This paper examines cross-sectional differences in the optimistic behavior of financial analysts. Specifically, we investigate whether the predictive accuracy of past information (e.g., time-series of earnings, past returns, etc.) is associated with the magnitude of the bias in analysts' earnings forecasts. We posit that there is higher demand for non-public information for firms whose earnings are difficult to accurately predict than for firms whose earnings can be accurately forecasted using public information. Assuming that optimism facilitates access to management's non-public information, we hypothesize that analysts will issue more optimistic forecasts for low predictability firms than for high predictability firms. Our results support this hypothesis.]

Previous research finds the volatility implied by S&P 100 index option prices to be a biased and inefficient forecast of future volatility and to contain little or no incremental information beyond that in past realized volatility. In contrast, we find that implied volatility outperforms past volatility in forecasting future volatility and even subsumes the information content of past volatility in some of our specifications. Our results differ from previous studies because we use longer time series and nonoverlapping data. A regime shift around the October 1987 crash explains why implied volatility is more biased in previous work.

This paper estimates the performance of insider trades on the closely held Oslo Stock Exchange (OSE) during a period of lax enforcement of insider trading regulations. Our data permit construction of a portfolio that tracks all movements of insiders in and out of the OSE firms. Using three alternative performance estimators in a time-varying expected return setting, we document zero or negative abnormal performance by insiders. The results are robust to a variety of trade characteristics. Applying the performance measures to mutual funds on the OSE, we also document some evidence that the average mutual fund outperforms the insider portfolio.

This study tests for the presence of prejudicial or “noneconomic” discrimination on the part of mortgage lenders by evaluating the performance of home mortgage loans. The approach differs from that of previous studies of loan performance in that it is based on the proposition that noneconomic discrimination should be more pronounced in less competitive lending environments, while statistical discrimination should not. Using a rich set of FHA-insured loan records and measures of local market concentration to proxy the competitive environment, we test for the prediction of better loan performance by minority borrowers relative to white borrowers in more concentrated markets. We argue that this approach substantially reduces the potential for omitted-variable bias that has cast a shadow on previous studies of lending discrimination. Results fail to reject the null hypothesis of no noneconomic discrimination.

It is argued that changes in workers' budget sets cannot explain the dramatic increases in civilian work in the United States during World War II. Although money wages grew during the period, wartime after‐tax real wages were lower than either before or after the war. Evidence from the 1940s also appears to be inconsistent with other pecuniary explanations such as wealth effects of government policies, intertemporal substitution induced by asset prices, unfulfilled expectations, and changes in the nonmarket price of time. Although untested and relatively undeveloped, nonpecuniary models of behavior are tempting explanations for wartime work.