Research on conference calls documents that the question and answer (Q&A) portion is informative to markets. However, prior studies focus on the attributes of the participating individuals, primarily managers and analysts. We instead use the conversation as our unit of analysis, and examine whether conversational engagement between managers and analysts in earnings calls is informative to market participants. Using an experiment, we first demonstrate that linguistic style matching (LSM), a form of verbal coordination, is a reasonable empirical proxy for conversational engagement. We next use a quasi-experiment to confirm that investors can detect differences in engagement. Finally, using a hand-collected archival dataset comprised of audio recordings and textual transcripts from over 2400 earnings calls, we show that LSM in manager-analyst conversations during the Q&A is positively associated with absolute stock returns during the conversation, suggesting that conversations with greater engagement are more informative to capital markets and facilitate price formation.

We study a class of permutation tests of the randomness of a collection of Bernoulli sequences and their application to analyses of the human tendency to perceive streaks of consecutive successes as overly representative of positive dependence—the hot hand fallacy. In particular, we study permutation tests of the null hypothesis of randomness (i.e. that trials are i.i.d.) based on test statistics that compare the proportion of successes that directly follow k consecutive successes with either the overall proportion of successes or the proportion of successes that directly follow k consecutive failures. We characterize the asymptotic distributions of these test statistics and their permutation distributions under randomness, under a set of general stationary processes, and under a class of Markov chain alternatives, which allow us to derive their local asymptotic power. The results are applied to evaluate the empirical support for the hot hand fallacy provided by four controlled basketball shooting experiments. We establish that substantially larger data sets are required to derive an informative measurement of the deviation from randomness in basketball shooting. In one experiment, for which we were able to obtain data, multiple testing procedures reveal that one shooter exhibits a shooting pattern significantly inconsistent with randomness—supplying strong evidence that basketball shooting is not random for all shooters all of the time. However, we find that the evidence against randomness in this experiment is limited to this shooter. Our results provide a mathematical and statistical foundation for the design and validation of experiments that directly compare deviations from randomness with human beliefs about deviations from randomness and thereby constitute a direct test of the hot hand fallacy.

Complexity of banks can have important ramifications for the performance and the risks of the banking system. Financial sector reforms that were implemented in the past decade have thus aimed to reduce and to better manage the risk implications of bank complexity. Yet, surprisingly little is known about changes in complexity across countries, its drivers, and its effects. The International Banking Research Network (IBRN) used data and analytical advances to generate rich cross-country insights on the complexity and riskiness of banking organizations. The initiative has four key findings. First, the largest banks in countries tend to be the more complex ones. Yet, even controlling for size, there is substantial diversity across banking organizations in terms of complexity choices. Second, over the past decade, banking organizations have tended to reduce complexity by limiting the number of affiliates in both domestic and foreign locations. Generally, however, complexity patterns are fairly persistent. Third, regulatory changes can alter both banking organization complexity and the associated risk profiles. Fourth, the link between complexity and risks involves trade-offs: diversification benefits and reductions in liquidity risk may weigh against agency problems, monitoring costs, and systemic risk contributions arising from higher complexity.

Antitakeover provisions play a central role in corporate governance research. But there is little agreement over which, if any, provisions actually affect takeover likelihoods. In tests that account for the endogenous use of antitakeover provisions, we find that at most 11 of the 24 G-index provisions are negatively related to takeover likelihood. Various indices used in the literature measure takeover deterrence to the extent they include this subset of provisions. In more stringent tests, only four provisions are consistently and negatively related to takeover likelihood throughout the 1995–2020 period, while one provision (golden parachutes) is positively related to takeover likelihood.

This paper investigates the impact of macro-prudential policy (proxied by the counter-cyclical capital buffer (CCyB)) on bank credit risk during uncertain times, as banking sector stability is crucial in promoting financial intermediation. Using a unique daily data set consisting of 4939 credit default swaps (CDS) of 70 banks from 25 countries over the period 2010–2019, we find that CCyB tightening decreases bank-level CDS spreads, while CCyB loosening increases CDS spreads. This heterogeneous effect of CCyB arises due to its asymmetric effect on the capital ratio (i.e., the equity-to-total assets ratio) of banks. Tightening CCyB significantly increases capital, whereas loosening CCyB does not impact capital. Thus, the risks that emanate from the banking sector during periods of heightened uncertainty and financial distress can be significantly dampened when CCyB regulation is enabled. Consequently, macro-prudential policies for banks to hold higher levels of capital during good times are justified to contain financial market risks during downturns.

This study examines corporate integrity culture—that is, a firm's shared values and behaviors related to compliance, trustworthiness, and ethics. Different from prior research that associates culture measures with general firm‐level outcomes, we evaluate the pervasiveness of the integrity culture within an organization across two disparate business functions: operations and financial reporting. We first develop a measure of corporate integrity culture based on firms' internal control environments and show that, as predicted, weak integrity culture contributes to both operational and financial non‐compliance. We next document the predicted positive contemporaneous association between operational and financial non‐compliance, controlling for the integrity culture reflected in the internal control environment. Given the organizational and physical distances and lack of day‐to‐day interactions between the two business functions, we infer that management's “tone at the top” likely affects non‐compliance in both functions. Finally, for firms with existing operational non‐compliance, we find more negative market reactions to accounting restatements and higher CEO turnover propensities following restatements. These results indicate that top management must consistently reinforce a culture of compliance and integrity, lest it decay throughout the organization. Our results also imply that regulators evaluating compliance in specific functions could benefit from reviewing compliance in other functions within the firm.

Two forms of expertise can influence audit quality: industry and task-specific expertise. Anecdotal evidence suggests that tax knowledge is task-specific, rather than industryspecific and audit offices with increased exposure to complex tax issues develop this taskspecific expertise. Using outcomes related to audits of the income tax accounts, we examine whether tax task-specific knowledge (TSK) affects the audit quality of the income tax accounts and find that tax TSK increases the audit quality of the income tax accounts. We also find evidence of an improved response to misstatements among audit offices with tax TSK, demonstrated by a decreased likelihood of future tax misstatements following the disclosure of a tax restatement. Finally, we observe the effect of tax TSK among audit offices with lower levels of auditor-provided tax services (APTS). This result suggests that audit offices without the benefit of knowledge spillover from APTS rely more on the tax TSK.

Many studies use GAAP effective tax rates (ETRs) as a proxy for tax avoidance and assume that very low (high) ETRs represent the greatest (least) tax avoidance, yet ETRs can be affected by items unrelated to tax avoidance. Despite awareness of the potential limitations of ETRs versus other factors as a measure of tax avoidance, the literature lacks consistent evidence on the extent to which ETRs capture tax avoidance. We take a step toward filling this void using income tax footnote disclosures from 2008 through 2016 to investigate how well ETRs versus other factors capture cross‐sectional differences in tax avoidance. We document that ETRs below 5% and above 40% are significantly influenced by items largely unrelated to tax avoidance, such as valuation allowances and goodwill impairments. Truncating ETRs at zero and one, controlling for standard determinants of tax avoidance, and using industry‐size‐adjusted ETRs or multiyear GAAP ETRs do not eliminate the clustering of factors largely unrelated to tax avoidance in the tails of the ETR distribution. Cash ETRs attenuate but do not eliminate this clustering. Researchers can use ETR rate reconciliation data to construct an adjusted ETR that removes the influence of factors largely unrelated to tax avoidance. Our findings inform researchers about factors largely unrelated to tax avoidance that drive significant deviations in ETRs from the statutory tax rate. This is of increasing importance as the number of studies examining the consequences of very high and very low ETRs grows.

Equal compensation across assets for the same risk exposures is a bedrock of asset pricing theory and empirics. Yet real-world frictions can violate this equality and create apparently high Sharpe ratio opportunities. We develop new methods for asset pricing with cross-sectional heterogeneity in compensation for risk. We extend k-means clustering to group assets by risk prices and introduce a formal test for whether differences in risk premiums across market segments are too large to occur by chance. We find significant evidence of cross-sectional variation in risk prices for almost all combinations of test assets, factor models, and time periods considered.