Regulators are concerned about the quality of group audits because of poor inspection results, recent enforcement actions against component auditors, and the significance of these audits to the global economy. Yet research in this area is nascent. In response, we survey and interview US‐based global group audit leads to better understand the group audit process and their perceptions of challenges that arise on such engagements. Our findings indicate that group auditors organize their audits consistent with the client's structure, which drives component auditor selection, scoping, and fees. Group auditors routinely find fault with component auditors, perceiving that work performed and/or documentation provided is not sufficient, not appropriate and/or not communicated timely, to comply with US standards and reporting deadlines. In some cases, they perceive that the component auditor is unable and/or unwilling to comply and in others, that the component auditor misunderstands group instructions due to language proficiency or differing interpretation of the standards. Notably this perspective is ethnocentric, as group auditors almost exclusively attribute issues to component auditors. While ethnocentric tendencies appear myopic, they provide insight into unrecognized or overlooked aspects of the global firm model of cooperative arrangements. This study highlights the significance of the global firm's network structure to global group audits. Thus, we encourage intercommunity research, among (quantitative and qualitative) scholars and standard setters, to consider group audits in the broader context of firm networks.

As firms increasingly use social media to provide disclosures to investors, it is important to understand whether the characteristics that are associated with these disclosures lead to different reactions from investors than disclosures provided via more traditional channels. In this paper, we use an experiment to examine whether linguistic formality in positive news disclosures, and engagement of social media users surrounding the disclosures (e.g., “likes” and “retweets”), affect investors' judgments about a firm and its management. Results suggest that, as predicted, investors are more sensitive to signals of audience engagement when disclosures use informal rather than formal language. Specifically, when associated with signals of high audience engagement, the use of informal language leads to greater willingness to invest than the use of formal language in a disclosure. However, also as predicted, the use of informal language hurts willingness to invest when associated with signals of low audience engagement. In two follow‐up experiments, we investigate how news valence and linguistic formality are expected to affect the level of audience engagement in the first place, and we investigate whether managers strategically vary their use of linguistic formality based on characteristics of the setting. Overall, our results provide evidence on how firms might use social media disclosures to better connect with investors. This study contributes to the growing literature on linguistic attributes of disclosures, and the emerging literature investigating the consequences of issuing financial disclosures through social media.

We examine whether climate change news risk is priced in corporate bonds. We estimate bond covariance with a climate change news index and find that bonds with a higher climate change news beta earn lower future returns, consistent with the asset pricing implications of demand for bonds with high potential to hedge against climate risk. Moreover, when investors are concerned about climate risk, they are willing to pay higher prices for bonds issued by firms with better environmental performance. Our findings suggest that corporate policies aimed at improving environmental performance pay off when the market is concerned about climate change risk.

We study an equilibrium risk and return model to explore the effects of the coronavirus crisis and associated skewness on the market price of risk. We derive the moment and equilibrium equations, specifying skewness price of risk as an additive component of the effect of variance on mean expected return. We estimate our model using the flexible skewed generalized error distribution, for which we derive the distribution of returns and the likelihood function. Using S&P 500 Index returns from January 1980 to mid-October 2020, our results show that the coronavirus crisis generated a deeply negative reaction in the skewness and total market price of risk, more negative even than the subprime and the October 1987 crises.

The Probability of Informed Trading (PIN) is a widely used indicator of information asymmetry risk in the trading of securities. Its estimation using maximum likelihood algorithms has been shown to be problematic, resulting in biased or unavailable estimates, especially in the case of liquid and frequently traded assets. We provide an alternative approach to estimating PIN by means of a Bayesian method that addresses some of the shortcomings in the existing estimation strategies. The method leads to a natural quantification of the uncertainty of PIN estimates, which may prove helpful in their use and interpretation. We also provide an easy to use toolbox for estimating PIN.

Prior evidence indicates that proximity increases investments resulting in stronger economic growth. The introduction of a non-stop direct flight between two locations in different countries allows for faster travel and a lower cost of acquiring information, potentially facilitating acquisitions abroad. We examine this channel by considering cross-border mergers and acquisitions (M&A) activity between China and the U.S. Our results suggest that direct flights matter most in target selection. Direct flights are more important for M&A activity where information asymmetry is greater and for first time acquirers in the market. We demonstrate that endogeneity is unlikely to drive the results.

This paper examines whether ETFs are a unique source of corporate bond fragility. Relative to mutual funds, ETFs cater to high-liquidity-demand investors, facilitate positive feedback strategies, and transmit outflows to corporate bonds via near-proportional trading. Comparing yield spread changes of bonds from the same issuer, we show that ETFs create flow-induced pressure during the Taper Tantrum, a period of market turmoil. Redemptions used to maintain the relative price efficiency of the largest and most liquid ETFs lead to significantly higher yield spreads for 4 months before reverting. The pattern indicates ETFs amplify the effects of negative fundamental shocks.

We examine the effect of humanizing (naming) robo‐advisors on investor judgments, which has taken on increased importance as robo‐advisors have become increasingly common and there is currently little SEC regulation governing key aspects of their use. In our first experiment, we predict and find that investors are more likely to rely on the investment recommendation of an unnamed robo‐advisor, whereas they are more likely to rely on the investment recommendation of a named human advisor. Theory suggests one reason that naming a robo‐advisor may have drawbacks pertains to the complexity of the task the robo‐advisor performs. We explore the importance of task complexity in our second experiment. We predict and find that investors are less likely to rely on a named robo‐advisor when the advisor is perceived to be performing a relatively complex task, consistent with our first experiment, and more likely to rely on a named robo‐advisor when the advisor is perceived to be performing a relatively simple task, consistent with prior research on human‐computer interactions. Our findings contribute to the literature examining how technology influences the acquisition and use of financial information and the general literature on human‐computer interactions. Our study also addresses a call by the SEC to learn more about robo‐advisors. Lastly, our study has practical implications for wealth management firms by demonstrating the potentially negative effects of making robo‐advisors more humanlike in an attempt to engage and attract users.

We study the association between environmental, social, and governance (ESG) government risk management and firm-level IPO underpricing between 2008 and 2018. Examining 7446 IPOs issued in 36 countries, we find that IPO underpricing tends to be lower in countries with higher ESG Government Ratings. When we uniquely examine the environmental, social, and governance pillars, we find that underpricing tends to be lower in countries with stronger risk management practices in each of these areas. Additional analysis indicates that the negative impact of ESG ratings on IPO underpricing is more pronounced in countries with more transparent financial disclosures, higher liability standards, and stronger shareholder protections.

We document four secular trends about U.S. mortgage origination by traditional and FinTech lenders after the 2008-2009 financial crisis. First, since 2011, the overall number, size, and approval rate of small and medium-sized loans have been decreasing over time, relative to large loans. Second, the largest lenders redistribute their lending the most. Third, this loan-size redistribution of credit increases in the size of the lender. Fourth, the effects are stronger for mortgages further away from the conforming loan limit(s) in both directions. We argue that the supply of credit drives these secular trends, and we assess several potential economic mechanisms.