[This paper presents a model that relates properties of the analysts' information environment to the properties of their forecasts. First, we express forecast dispersion and error in the mean forecast in terms of analyst uncertainty and consensus (that is, the degree to which analysts share a common belief). Second, we reverse the relations to show how uncertainty and consensus can be measured by combining forecast dispersion, error in the mean forecast, and the number of forecasts. Third, we show that the quality of common and private information available to analysts can be measured using these same observable variables. The relations we present are intuitive and easily applied in empirical studies.]

The increase in investor diversity over the last 35–40 years prompted us to revisit trading volume reactions to earnings announcements and how these reactions vary with firm size. We argue that this increase in investor diversity would likely increase differences in the precision of pre‐announcement information around earnings announcements, particularly for large firms. This suggests that the role of earnings announcements in resolving investor disagreement, as reflected in trading volume reactions, has increased. Over the 35‐year period 1977–2011, we find a dramatic increase in the magnitude and frequency of volume reactions to earnings announcements, particularly for large firms. The increase in large firms’ trading volume reactions is so pronounced that the relation between volume reactions and firm size has turned positive in recent years, reversing Bamber's ( , ) previously documented negative relation. We provide intuition and empirical evidence that our results are attributable to the resolution of differential prior precision among increasingly diverse investors following large firms.

Rankin, Schwartz, and Young (2008) find experimental evidence that manipulating whether the budget request of the subordinate requires a factual assertion has no effect on budgetary slack when the superior can reject the budget. This calls into question the role of honesty in participative budgeting settings. Using Rankin et al.'s (2008) manipulation to capture honesty effects, we examine the robustness of honesty effects on budget proposals when the superior has rejection authority in two experiments. In Experiment 1, we document that honesty has a strong effect on budgetary slack when the salience of distributional fairness is reduced by withholding the relative pay of the superior from the subordinate. In Experiment 2, we document that honesty continues to have a strong effect on budgetary slack when the salience of reciprocity is increased by giving the superior the ability to set the subordinate's salary. Thus, our evidence suggests that honesty effects on budget proposals are generally robust to giving the superior rejection authority. Our study helps explain prior experimental results and clarifies the role of honesty in participative budgeting settings. Data Availability: Experimental data are available from the authors upon request.

Policy makers and corporations have recently emphasized a code of ethics as an effective aspect of corporate governance. The corporate governance literature in accounting, however, provides little empirical or theoretical support for this emphasis. We address this gap between public policy and the literature by studying the effectiveness of a code of ethics in an experimental setting. Using Bicchieri's (2006) model of social norm activation, we predict that a code of ethics will improve manager return behavior and investor confidence to the extent that it activates social norms that control opportunistic behavior. Further, we predict that adding a certification choice whereby the manager can publicly certify that he will adhere to the code will enhance the potential for the code of ethics to activate such norms. We find that a code of ethics only improves manager return behavior and investor confidence when the code incorporates a public certification choice by the manager. When the code is present but there is no certification choice, manager return behavior does not improve and investor confidence erodes over time because of increased expectations that are not met by managers. An analysis of individual return decisions and exit questionnaire responses supports the activation of social norms as the underlying mechanism behind our results. Data Availability: Experimental data are available from the authors upon request.

Growing calls for expanded disclosure on managerial stewardship raise important questions about how finer (i.e., disaggregated) reporting, when paired with discretion over classification, will influence managerial behavior. To study this question, we develop an investment game in which, if the investor chooses to invest, the manager privately observes production costs, chooses their personal pay, and provides a cost report in one of three reporting regimes: aggregated, disaggregated without discretion, or disaggregated with discretion. In Experiment 1, as predicted, managers report lower personal pay under both disaggregated regimes than what they consume under the aggregated regime. Yet, when disaggregated reports allow for discretion, managers misclassify personal pay as production costs to such an extent that their actual consumption is no different than in the aggregated condition. In Experiment 2, we allow managers to choose either an aggregated report or a disaggregated report with discretion. We find that, rather than remaining silent, the vast majority of managers still prefer the opportunity to report on their pay explicitly so that they can use their reporting discretion to appear trustworthy, despite not actually being so. In summary, our evidence suggests a strong weight of preferences for appearing trustworthy in the managers' utility function, a much lower weight for actually being trustworthy, and little evidence that preferences for being honest are strong enough for discretionary disaggregated reporting to curb agency costs. In other words, whether disaggregation can reduce agency costs will depend on managers' reporting discretion. Our findings have important implications for control system designers, financial and sustainability accounting standard setters, and regulators.

This study provides evidence regarding the effects of online trading on stock price and trading volume reactions to quarterly earnings announcements. We test for differences in stock price and volume reactions to quarterly earnings announcements between a period with a significant amount of online trading (1996‐99) and a period without online trading (1992‐95). We conjecture that online trading has increased the proportion of naive investors in the market. We predict that this will result in (1) a decrease in the average precision of investor information prior to earnings announcements leading to higher earnings response coefficients (ERCs), (2) an increase in differential interpretation of earnings leading to higher trading volume reactions that are unrelated to price change, and (3) a decrease in differential prior precision leading to a decrease in the association between trading volume and absolute price change. We find evidence consistent with all three predictions. Our findings are relevant for assessing the validity of concerns about online trading expressed by regulators and the validity of theoretical models of trade with asymmetrically informed investors.

This paper examines how market prices, volume, and traders' dividend expectations respond to public information releases in laboratory markets for a long‐lived financial asset. The objective is to study deviations from the symmetric information risk‐neutral rational expectations (RE) benchmark, which predicts no trade in such settings. The results of a series of double‐auction and call markets are reported in which traders manage a portfolio of cash and asset shares over 15 rounds of trading. A public signal regarding the value of the liquidating dividend is released every third round, and traders' subjective expectations of the liquidating dividend are elicited each round as cash‐motivated forecasts. We find that, despite the public dividend signal, traders' dividend forecasts are heterogeneous. Forecasts and prices both underreact to the public signals, with prices under‐reacting more than forecasts. In general, price changes are not closely associated with public signals, and there is greater excess price volatility in double auctions than in call markets. Forty‐three percent of trades are inconsistent with the trader's forecasts, and inconsistent trades occur more frequently in the double‐auction markets. On average, approximately 10 percent of the outstanding shares are traded in each round, and trading volume is increasing in the mean absolute forecast revision and decreasing in the contemporaneous dispersion in forecasts. These results suggest that differential processing of the public signal and/or speculative trading for short‐term gain may help to explain why symmetric information RE predictions are often not supported in empirical and experimental settings. They also suggest that market reactions to public information releases may be influenced by market microstructure.