Ex ante estimates of the volatility premium embedded in VIX futures, known as the VIX premium, fall or stay flat when ex ante measures of risk rise. This is not an artifact of mismeasurement: (i) ex ante premiums reliably predict ex post returns to VIX futures with a coefficient near one, and (ii) falling ex ante premiums predict increasing ex post market and investment risk, creating profitable trading opportunities. Falling hedging demand helps explain this behavior, as premiums and trader exposures tend to fall together when risk rises. These facts provide a puzzle for theories of why investors hedge volatility. Received January 13, 2017; editorial decision April 26, 2018 by Editor Stijn Van Nieuwerburgh. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Abstract The global ETF industry provides more complicated investment vehicles than low-cost index trackers. Instead, we find that the real investments of ETFs may deviate from their benchmarks to leverage informational advantages (which leads to a surprising stock-selection ability) and to help affiliated OEFs through cross-trading. These effects are more prevalent in ETFs domiciled in Europe. Moreover, ETF flows seem to respond to additional risk. These results have important normative implications for consumer protection and financial stability. Received March 18, 2017; Editorial decision October 14, 2018 by Editor Raman Uppal. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

ABSTRACT We find that firms are less likely to report an internal control material weakness (as mandated by the Sarbanes‐Oxley Act) in a given year if one of their audit committee members is concurrently on the board of a firm that disclosed a material weakness within the prior three years. We find a similar spillover effect for financial restatement disclosures. The spillover from material weakness disclosures is evident only if a shared director has more experience with the disclosing firm or can channel more information about the disclosed material weakness. Our findings suggest that prior director experiences outside the firm influence the work of audit committees inside the firm. One rationale is that a director's prior experience with an adverse disclosure helps diffuse important insights and serves as a catalyst for improvements in a firm's internal control and financial reporting practices. An alternative explanation, which we cannot dismiss, holds that a director's prior experience helps a firm to underreport material weaknesses and financial restatements without any attendant improvements in the underlying practices.

This study examines the association between informed short selling and a firm's position in the board interlock network formed by shared directors. We find that better-connected firms experience higher levels of informed short selling and that this association is driven by both eigenvector centrality (a measure that accounts for both the quantity and quality of firms’ ties) and betweenness centrality (a measure of the extent to which firms serve as information intermediaries), not by degree centrality (a measure that only counts the quantity of their ties) in interlock networks. In addition, the positive association between interlock centrality and informed trading is more pronounced for firms whose directors have more opportunities to interact with directors of external firms in the network, consistent with director information leakage serving as a plausible underlying channel. Our further tests do not support an alternative interpretation based on short sellers’ superior processing of public information. Our findings have policy implications for regulators and professional director associations.

ABSTRACT The SEC's Disclosure Effectiveness Initiative (December 2013) highlights a difference between accounting regulators and academics in their perceptions of Item 1A risk factor disclosure effectiveness. Because most academic evidence relies on pre‐financial crisis data, we compare changes in risk factor disclosure informativeness before and after the crisis as a possible explanation for this disconnect. We further explore this discrepancy by considering (i) three classes of market participants, (ii) new, discontinued, and repeated disclosures, and (iii) nonmarket outcomes. Our results confirm previous findings but indicate that those results no longer hold in the subsequent period. Specifically, we find that although equity, option, and bond markets react to unexpected risk factor disclosures in the period leading up to the financial crisis (2006–2008), the market reactions decline significantly in the post‐crisis period (2009–2014). Perhaps surprisingly, the documented changes in informativeness are not driven by disclosures repeated from one year to the next but instead result from new disclosures initiated in the current year and, in the option and debt markets, also from disclosures discontinued from the previous year. Finally, using the Altman Z ‐score as an objective bankruptcy risk measure, we find that the association between risk factor disclosures and companies’ future bankruptcy risk declines significantly in the post financial crisis period. Taken together, these findings contribute to the current disclosure effectiveness debate by highlighting that risk factor disclosures, which were informative in the preceding period, become less reflective of the underlying economic risks and thus less informative to investors in the post‐crisis period. La déclaration des facteurs de risque est‐elle toujours pertinente ? Données tirées des réactions du marché à la déclaration des facteurs de risque avant et après la crise financière

ABSTRACT Using a large sample of debt contracts, we study the determinants of excluding nonrecurring items from covenant calculations. We investigate this choice across firms, across items, and through time. We find that nonrecurring items are more likely to be excluded when the agency costs of debt are higher and less likely to be excluded when they predict borrowers' performance. Our evidence further suggests that the interplay between agency costs and nonrecurring items' predictive ability affects the decision to exclude these items from covenant computations. Finally, when examining the exclusion by different nonrecurring item types, we find confirmatory evidence that the probability of exclusion decreases with the predictive ability for borrowers' future performance of major nonrecurring item types. Overall, our research extends the literature on the determinants of contract design and improves understanding of the usefulness of accounting information in debt contracting.

We establish a significant and robust connection between asset growth (AG) and style investing by showing that past style returns constructed based on AG and size jointly predict future stock returns significantly. Motivated by this notion, we propose a style momentum strategy based on AG and size and find that it dominates price momentum and size-BM style momentum in generating momentum profits. We examine two explanations for this predictability, including risk exposure to common risk factors and the limited-attention theory. Empirical evidence shows that the AG-size style momentum profit is induced because investors neglect the AG-size style performance, consistent with the limited-attention explanation, but not risk exposure to the investment factor. Further, we show that the profit of the AG-size style momentum is robust to different time periods partitioned by several time-series predictors.

ABSTRACT We examine the stock price impact of corporate site visits using a unique data set of site visits to listed firms in China. Our main findings are as follows. First, the market reaction around corporate site visits is statistically and economically significant and is stronger for group visits, visits conducted by mutual fund managers, visits covering accounting and finance topics, visits to firms with poor information environments, and visits to manufacturing firms. Second, the stock returns around site visits are positively associated with firms’ future performance. Third, the changes in visiting funds’ holdings are more predictive of firms’ future performance than those of nonvisiting funds. Overall, this study contributes to the literature by providing evidence that site visits are important venues for investors to collect information about firms and make informed trades.