[It is well established that value stocks outperform glamour stocks, yet considerable debate exists about whether the return differential reflects compensation for risk or mispricing. Under mispricing explanations, prices of glamour (value) firms reflect systematically optimistic (pessimistic) expectations; thus, the value/glamour effect should be concentrated (absent) among firms with (without) ex ante identifiable expectation errors. Classifying firms based upon whether expectations implied by current pricing multiples are congruent with the strength of their fundamentals, we document that value/glamour returns and ex post revisions to market expectations are predictably concentrated (absent) among firms with ex ante biased (unbiased) market expectations.]

The conference paper by Gerakos, Lang and Maffett (2013) provides reliable, descriptive evidence on the post-IPO performance of firms listing on the London Stock Exchange's Alternative Investment Market (AIM). Their findings are consistent with both a failure of private sector regulation and incorrect market expectations about AIM's investor protections. In this discussion of Gerakos et al. (2013), I highlight the strengths and limitations of their conference paper, summarize how various regulatory and market factors could produce the observed systematic under-performance of AIM offerings, and outline paths for future research on the topic.

Joseph D. Piotroski, Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers, Journal of Accounting Research, Vol. 38, Supplement: Studies on Accounting Information and the Economics of the Firm (2000), pp. 1-41

It is well established that value stocks outperform glamour stocks, yet considerable debate exists about whether the return differential reflects compensation for risk or mispricing. Under mispricing explanations, prices of glamour (value) firms reflect systematically optimistic (pessimistic) expectations; thus, the value/glamour effect should be concentrated (absent) among firms with (without) ex ante identifiable expectation errors. Classifying firms based upon whether expectations implied by current pricing multiples are congruent with the strength of their fundamentals, we document that value/glamour returns and ex post revisions to market expectations are predictably concentrated (absent) among firms with ex ante biased (unbiased) market expectations.

In this paper, we examine the economic impact of the Sarbanes‐Oxley Act (SOX) by analyzing foreign listing behavior onto U.S. and U.K. stock exchanges before and after the enactment of SOX in 2002. Using a sample of all listing events onto U.S. and U.K. exchanges from 1995–2006, we develop an exchange choice model that captures firm‐level, industry‐level, exchange‐level, and country‐level listing incentives, and test whether these listing preferences changed following the enactment of SOX. After controlling for firm characteristics and other economic determinants of these firms' exchange choice, we find that the listing preferences of large foreign firms choosing between U.S. exchanges and the London Stock Exchange's (LSE) Main Market did not change following the enactment of SOX. In contrast, we find that the likelihood of a U.S. listing among small foreign firms choosing between the NASDAQ and LSE's Alternative Investment Market decreased following the enactment of SOX. The negative effect among small firms is consistent with these marginal companies being less able to absorb the incremental costs associated with SOX compliance. The screening of smaller firms with weaker governance attributes from U.S. exchanges is consistent with the heightened governance costs imposed by SOX increasing the bonding‐related benefits of a U.S. listing.

This paper explores financial reporting incentives created by an economy's institutional structure. The underlying premise of our analysis is that a country's legal/judicial system, securities laws, and political economy create incentives that influence the behavior of corporate executives, investors, regulators and other market participants. Further, such incentives ultimately shape the properties of reported accounting numbers. We empirically analyze relations between key characteristics of country-level institutions and the asymmetric recognition of economic gains and losses into earnings (i.e., conditional conservatism). We also provide evidence on channels through which specific institutions manifest their influence on observed conservatism.

This paper documents that insiders are both contrarians and possessors of superior information. We find that insider trades are positively related to the firm's future earnings performance (proxy for superior cash flow information), positively related to the firm's book-to-market ratio and inversely related to recent returns (proxies for trading against misvaluation). Each relation has incremental explanatory power, yet information about future cash flow changes explains a smaller portion of insider purchases than do proxies for security misvaluation. The relation between insider trades and future earnings performance is amplified (attenuated) as the benefits (costs) to trading on financial performance information increase.

This paper shows that incentives created by the impending turnover of local politicians can accelerate the pace of initial public offering (IPO) activity in certain politicized environments. Focusing on China, we exploit a research setting where politicians are rewarded for capital market development, firms rely on political connections for access to capital, rent-seeking behavior is rampant, and the objectives of the state might not be to maximize capital market efficiency. We find that the rate of exchange eligible firms engaging in an IPO temporarily increases in advance of impending political promotion events. This effect holds for both state-owned and non-state-owned entities. For state-owned firms, the effect is strongest in those provinces where the politicians are more likely to be rewarded for market development activity. For non-state-owned firms, the temporary increase in IPO activity appears to be (rationally) opportunistic in nature, with the effect stronger around events more likely to disrupt the firms' political connections. Promotion period IPOs underperform non-promotion period IPOs in terms of both future financial performance and long-run stock returns, have controlling shareholders who retain a larger fraction of the company, and are more likely to divert proceeds away from their intended use after the offering.

We investigate whether unpleasant environmental conditions affect stock market participants’ responses to information events. We draw from psychology research to develop a new prediction that weather-induced negative moods reduce market participants’ activity levels. Exploiting geographic variation in equity analysts’ locations, we find compelling evidence that analysts experiencing unpleasant weather are slower or less likely to respond to an earnings announcement relative to analysts responding to the same announcement but experiencing pleasant weather. Price association tests find evidence consistent with reduced activity due to weather-induced moods delaying equilibrium price adjustments following earnings announcements. We also use our analyst-based research design to re-examine an existing prediction that unpleasant weather induces investor pessimism, and find evidence of both analyst pessimism and reduced activity in the presence of unpleasant weather. Together, our study provides new evidence that both extends and reaffirms findings of a relation between unpleasant weather and market activities, and contributes to the broader psychology and economics literature on the impact of weather-induced mood on labor productivity.