Short‐sale costs eliminate the abnormal returns on asset pricing anomaly portfolios. While many anomalies persist out‐of‐sample before accounting for short‐sale costs, they cannot be exploited with long‐short strategies due to stock borrow fees. Using a comprehensive sample of 162 anomalies, the average long‐short portfolio return is a significant 0.14% per month before short‐sale costs, and the returns are due to the short leg. However, the average is −0.01% once returns are adjusted for borrow fees. Moreover, anomalies are not profitable even before fees if the high‐fee observations, representing 12% of stock dates, are excluded from the analysis.

We examine whether and how firms structure their merger and acquisition deals to avoid antitrust scrutiny. There are approximately 40% more mergers and acquisitions (M&As) than expected just below deal value thresholds that trigger antitrust review. These “stealth acquisitions” tend to involve financial and governance contract terms that afford greater scope for negotiating and assigning lower deal values. We also show that the equity values, gross margins, and product prices of acquiring firms and their competitors increase following such acquisitions. Our results suggest that acquirers manipulate M&As to avoid antitrust scrutiny, thereby benefiting their own shareholders but potentially harming other corporate stakeholders.

Measures of private equity (PE) performance based on cash flows do not account for a discount‐rate risk premium that is a component of the capital asset pricing model (CAPM) alpha. We create secondary market PE indices and find that PE discount rates vary considerably. Net asset values are too smooth because they fail to reflect variation in discount rates. Although the CAPM alpha for our index is zero, the generalized public market equivalent based on cash flows is large and positive. We obtain similar results for a set of synthetic funds that invest in small cap stocks. Ignoring variation in PE discount rates can lead to a misallocation of capital.

We use retail structured equity product (SEP) issuances to construct a new sentiment measure for large capitalization stocks. The SEP sentiment measure predicts negative abnormal returns on the SEP reference stocks based on a variety of factor models, and also predicts returns in Fama‐MacBeth regressions that include a wide range of covariates. Consistent with our interpretation that SEP issuances reflect investor sentiment, aggregate SEP issuances are highly correlated with the Baker‐Wurgler sentiment index. Tobit regressions reveal that proxies for attention and sentiment predict SEP issuance volumes, providing additional evidence consistent with the hypothesis that SEP issuances reflect sentiment.

Recent research argues that uncertainty about future stock borrowing fees hinders short‐selling, and this risk explains the performance of short strategies. One possible mechanism is that borrowing fee risk carries a risk premium. Since the present value of the uncertain borrowing fee is reflected in options prices, the difference between option‐implied and realized fees estimates this premium. We find that the risk premium is small. Moreover, if the risk premium is substantial, it should be reflected in the returns to short‐selling stock after adjusting for stock borrowing fees. However, borrowing fee risk does not predict fee‐adjusted returns.

This study shows that the guardians behind underaged accounts are successful at picking stocks. Moreover, they tend to channel their best trades through the accounts of children, especially when they trade just before major earnings announcements, large price changes, and takeover announcements. Building on these results, we argue that the proportion of total trading activity through underaged accounts (labeled BABYPIN ) should serve as an effective proxy for the probability of information trading in a stock. Consistent with this claim, we show that investors demand a higher return for holding stocks with a greater likelihood of private information, proxied by BABYPIN .

Less-informed investors face greater costs of processing earnings news into actionable information. Our findings suggest financial analysis on social media reduces less-informed investors’ disclosure processing costs. We document an attenuated spike in earnings announcement (EA) information asymmetry for quarters containing more financial analysis on social media in the weeks prior to the EA. Cross-sectional evidence suggests this finding is stronger when coverage from traditional intermediaries is lower, for financial analyses written by more credible authors, and for financial analyses that are more likely relevant to evaluating the EA. Further evidence suggests retail trades, but not institutional trades, at EAs are significantly more profitable in quarters with greater financial analysis on social media, consistent with financial analysis on social media benefitting traders who are otherwise less-informed. Overall, our evidence suggests that financial analysis on social media plays an important role in aiding less-informed investors by helping them better process EA news.

Regulation is often proposed, developed, and finalized over a lengthy rule-making period prior to its adoption. We examine the period over which banking authorities discussed, adopted, and implemented Basel III to understand how firms respond to proposed regulation. We find evidence to suggest that affected banks not only lobbied rule-makers against it but also made strategic financial reporting changes and altered their business models in ways that reduced their exposure to the proposed rule prior to rule-makers finalizing the regulation. Further, our results indicate a sequential response, with banks responding through lobbying and strategic financial reporting prior to making business model changes. These findings highlight the interplay among firms’ financial reporting, business model, and political choices in response to proposed regulation and indicate that the appropriate date for an event study may be the regulation’s announcement date rather than its adoption or implementation dates.

We investigate the audit fee response to CEO behavioral integrity (BI). BI refers to the perceived congruence between an individual's words and deeds (Simons 2002). Because low word-deed congruence should result in more explanations when communicating, we use variation in explanations beyond firm fundamentals and CEO-specific characteristics in more than 30,000 shareholder letters to serve as a linguistic-based proxy for CEO BI. We find that audit fees increase as BI decreases, but BI is not associated with financial misstatement or litigation. These findings are potentially consistent with auditors undertaking additional work in response to low BI, which, in turn, mitigates the risk of restatements and lawsuits. The likelihood of option backdating increases as BI decreases, consistent with the contention that auditors lacked incentives to prevent backdating. Finally, BI is increasing in future performance, which suggests that CEOs partially underpin the returns to high-integrity corporate cultures. JEL Classifications: J24; L25; M14; M41; M42. Data Availability: Proprietary data from KRW International cannot be shared because of the terms of a confidentiality agreement. All other data are available from the public sources cited in the text.

An extensive literature examines the causes and effects of financial misconduct based on samples drawn from four popular databases that identify restatements, securities class action lawsuits, and Accounting and Auditing Enforcement Releases (AAERs). We show that the results from empirical tests can depend on which database is accessed. To examine the causes of such discrepancies, we compare the information in each database to a detailed sample of 1,243 case histories in which regulators brought enforcement actions for financial misrepresentation. These comparisons allow us to identify, measure, and estimate the economic importance of four features of each database that affect inferences from empirical tests. We show the extent to which each database is subject to these concerns and offer suggestions for researchers using these databases.