We estimate and compare a variety of continuous-time models of the short-term riskless rate using the Generalized Method of Moments. We find that the most successful models in capturing the dynamics of the short-term interest rate are those that allow the volatility of interest rate changes to be highly sensitive to the level of the riskless rate. A number of well-known models perform poorly in the comparisons because of their implicit restrictions on term structure volatility. We show that these results have important implications for the use of different term structure models in valuing interest rate contingent claims and in hedging interest rate risk.

Macroeconomic forces are challenging the ability of audit firms to sustain engagement profitability. Although one available strategy for multinational clients is to employ non-U.S. firms as component auditors (CAs), the impacts of this choice are unclear. We investigate the influence of CAs on engagement economics in Big 6 audits from 2012 to 2022, a period of increasing non-U.S. labor use. Results show that global hours increase with CA participation, suggesting that additional CA labor is needed to substitute for each U.S. hour. Global billing rates decline, implying that principal auditors share savings from lower cost labor with clients. However, U.S. lead team realizations rise with increasing substitution of non-U.S. labor, incentivizing more extensive CA use. Further analysis shows that these impacts are concentrated in engagements with high CA participation in countries with low wages and low English proficiency. Audit quality is not reduced by greater substitution of non-U.S. labor.

Local-thinking bias, wherein agents overweight information that comes readily to mind, is a prominent finding in cognitive psychology. In this study, we investigate local-thinking bias in the context of sell-side analysts and measure each analyst’s “local” information as news stemming from their individual coverage portfolio. Tests examining multiple analysts forecasting on the same focal firm at the same time find that individual analysts overweight idiosyncratic local news and underweight news from economically linked firms that are not in their coverage portfolios. Market prices track the analyst bias from local news, leading to predictable and economically significant return reversal patterns in the future. A trading strategy that adjusts for analysts’ biases earns meaningful abnormal returns. We discuss the implications of these findings for three literatures: (1) cognitive psychology, (2) analyst behavior, and (3) behavioral asset pricing.

Guided by the performance feedback literature, we study PCAOB inspections as a nonstandard feedback event. We use an experiential questionnaire to collect and analyze perceptions, reactions, and responses to inspection feedback from 120 partners and managers subject to a recent PCAOB inspection. Despite varying perceptions, we find on average auditors perceive strong firm support but also that firms acquiesce to inspectors. Generally, the feedback source, inspectors, are perceived as professional, organized, and knowledgeable and auditors agree with the feedback message, perceiving it as consistent and well reasoned. We observe a range of auditor reactions (satisfaction with and motivated to use inspection feedback), responses at the engagement level (improvements to audit quality and inspection risk or impression management), and individual responses. Multivariate analyses show more positive feedback perceptions improve reactions, which enhance desirability of responses and are robust to considering the inspection outcome, offering insights for refining inspection interactions and processes.

We examine how disclosure and manager reputation influence capital raised when there is no commercial substance underlying the investment. Special Purpose Acquisition Companies (SPACs or “blank check” companies) do not have operations or substantive assets at the IPO but promise to use the funds raised to acquire a private firm, generally within two years. Given the lack of commercial substance and historically poor ex post performance, it is unclear what SPACs disclose at the IPO and why investors invest. Although disclosure is important in traditional IPOs, the underlying information available differs for SPACs. Nonetheless, our evidence suggests disclosures are useful to SPAC investors, although differently than for traditional IPO investors. We also examine manager reputation and find prior SPAC or CEO experience and celebrity status are associated with funds raised. Even when an investment lacks commercial substance, disclosure and reputation are important for investing decisions. Data Availability: Data are available from the public sources cited in the text.

In this study, we consider how the accumulating nature and income direction of audit differences influence negotiated audit adjustments. We test our expectations by constructing dyads consisting of experienced auditors and financial officers, allowing them to interact via a web-based instrument. As predicted, based on expectancy violation theory and consideration of negotiation leverage, these audit difference characteristics alter the behaviors and negotiated outcomes of our participants. Specifically, dyads determine smaller adjustments when audit differences accumulate over time. Analysis of auditor-client expectations and dialog suggests the leverage of the negotiators impacts the arguments used and the persuasiveness of those arguments. Dyads also produce smaller adjustments when an accumulating audit difference increases, rather than decreases, income, due in part to clients successfully using conservatism as a persuasive argument to convince auditors to concede. Our method provides insight into how these effects occur and how the social process can alter auditors' pre-negotiation expectations.