Prior studies have documented that pension plan sponsors often monitor a fund's performance relative to a benchmark. We use a first-difference approach to show that in an effort to beat benchmarks, fund managers controlling large pension assets tend to increase their exposure to high-beta stocks, while aiming to maintain tracking errors around the benchmark. The findings support theoretical conjectures that benchmarking can lead managers to tilt their portfolio toward high-beta stocks and away from low-beta stocks, which can reinforce observed pricing anomalies.

Mortgages are long-term loans with nominal payments. Consequently, in incomplete asset markets, monetary policy can affect housing investment and the economy through the cost of new mortgage borrowing and real payments on outstanding debt. These channels, distinct from the traditional real rate channel, are embedded in a general equilibrium model. The transmission mechanism is stronger under adjustable-rate mortgages compared with fixed-rate mortgages. Further, persistent monetary policy shocks affecting the level of the nominal yield curve have larger real effects compared with transitory shocks. Persistently higher inflation gradually benefits homeowners under FRMs, but hurts them immediately under ARMs.

Our analysis of how banks’ responses to asset price changes can result in procyclical leverage reveals that, for banks with a binding regulatory leverage constraint, absent differences in regulatory risk weights across assets, procyclical leverage does not occur. For banks without a binding constraint, fair value and bank regulation both can contribute to procyclical leverage. Empirical findings based on a large sample of U.S. commercial banks reveal that bank regulation explains procyclical leverage for banks relatively close to the regulatory leverage constraint and contributes to procyclical leverage for those that are not. We also show that fair value accounting does not contribute to procyclical leverage.

In this paper, we propose and empirically test a cross‐sectional profitability forecasting model which incorporates two major improvements relative to extant models. First, in terms of model construction, we incorporate mean reversion through the use of a two‐stage partial adjustment model and inclusion of a number of additional relevant determinants of profitability. Second, in terms of model estimation, we employ least absolute deviation (LAD) analysis instead of ordinary least squares because the former approach is able to better accommodate outliers. Results reveal that forecasts from our model are more accurate than three extant models at every forecast horizon considered and more accurate than consensus analyst forecasts at forecast horizons of two through five years. Further analysis reveals that LAD estimation provides the greatest incremental accuracy improvement followed by the inclusion of income subcomponents as predictor variables, and implementation of the two‐stage partial adjustment model. In terms of economic relevance, we find that forecasts from our model are informative about future returns, incremental to forecasts from other models, analysts’ forecasts, and standard risk factors. Overall, our results are important because they document the increased accuracy and economic relevance of a cross‐sectional profitability forecasting model which incorporates improvements to extant models in terms of model construction and estimation.

We study data from an organization in which fund managers privately share and discuss detailed investment recommendations. Buy recommendations generate positive abnormal returns, and sell recommendations result in negative abnormal returns. In the context of these results, we explore an important economic question: Why do skilled investors share profitable ideas with others? Evidence suggests that the managers in our sample share to receive feedback on their ideas and to attract additional arbitrageur capital to the securities they recommend in order to correct mispricings.

Prior studies find that audit fees are higher for cross‐listed firms, and these studies primarily attribute the incremental fees to added litigation costs. In this study, we investigate whether the higher audit fees that foreign firms cross‐listed in the United States pay are also attributable to incremental audit effort associated with U.S. disclosure requirements and a more stringent U.S. auditing environment. By comparing audit fees of foreign cross‐listed firms to U.S. domiciled firms and to non‐cross‐listed foreign firms, we are able to decompose incremental audit fees into portions attributable to added audit effort and to added litigation costs. We find that, on average, foreign firms cross‐listed in the United States pay significantly higher fees than domestic U.S. firms and foreign firms that do not cross‐list. Furthermore, we find that audit effort is almost as important as litigation costs in explaining the higher fees associated with foreign cross‐listed firms; our estimates suggest that between 29 percent and 48 percent of the incremental fees are attributable to incremental audit effort. In addition, the total cross‐listing premium is increasing in the difference between the U.S. auditing regulatory environment and that of the home country of the cross‐listed firm. Our study improves our understanding of the role of audit effort in explaining the added fees charged by auditors when foreign firms cross‐list in the United States.

Firms are under increasing pressure to implement effective internal whistleblowing systems. While firms can provide incentives to encourage internal whistleblowing, it remains controversial how such incentives should be structured. We examine whether the effectiveness of incentives encouraging internal whistleblowing is a joint function of the framing of such incentives (reward or penalty) and the strength of descriptive norms supporting internal whistleblowing. We predict and find in a lab experiment that penalties lead to a greater increase in internal whistleblowing (compared to rewards) when descriptive norms supporting whistleblowing are stronger. Our study contributes to the previous accounting literature on dishonesty and the role of management control systems design in promoting honesty and ethical norms in organizations. We also contribute to an emerging accounting literature on the links between controls, norms, and individual behavior by distinguishing between descriptive norms and injunctive norms and by highlighting the interplay between these two types of norms. Our results have important implications for organizations considering adopting incentives to encourage internal whistleblowing.