Using the market values of audit partners’ houses as a measure of their personal wealth, we find that wealthier U.S. partners provide higher-quality audits, as evidenced by fewer material restatements, fewer material SEC comment letters, and higher audit fees. A battery of falsification tests shows that these findings are not driven by the matching of wealthier partners with clients with higher financial reporting quality. Our additional analyses suggest two explanations: greater personal wealth both incentivizes partners to exert more effort in delivering high-quality audits and reveals partners’ audit competence.

We empirically examine the effects of venture capital (VC) firms on VC-backed listed companies in Singapore. While previous studies have shown the VC value-added in lower underpricing and better post-IPO operational performance of VC-backed IPOs, we find the effects of venture capitalists’ participation are very complicated. Most significantly, the post-IPO operating performance of VC-backed companies is inferior though they are less underpriced. The finding supports both the certification model and the adverse selection model. Furthermore, we find that IPOs backed by older VC firms perform better, supporting the grandstanding model that younger VC firms bring their portfolios to the market prematurely.

This study examines the role of investor sentiment in the pricing dynamics between the spot and futures markets. The empirical evidence suggests that investor sentiment has a positive impact on price volatility and the bid–ask spread on both the spot and futures markets, which induces higher arbitrage risk and trading costs during high sentiment periods. Consequently, during high sentiment periods, informed traders become less willing to leverage their information advantages on the futures market, which diminishes the futures markets’ leading informational role and contributions to price discovery. Our findings provide support for the theory of limits to arbitrage.

Using index and financial exchange-traded funds (ETFs), this study explores the relation between funding liquidity and equity liquidity during the subprime crisis period. Our empirical results show that a higher degree of funding illiquidity leads to an increase in bid–ask spread and a reduction in both market depth and net buying imbalance. Such findings indicate that an increase in funding liquidity can improve equity liquidity, with a stronger effect for the financial ETFs than for the index ETFs. Our study provides a better overall understanding of the effect of the liquidity–supplier funding constraint during the subprime crisis period.

Complex disclosures have long been a major source of borrowers’ poor understanding of mortgages. We examine the effect of simplifying mortgage disclosures in a difference-in-differences design around a significant disclosure rule mandated by the Consumer Financial Protection Bureau in 2015. We find that inexperienced borrowers (first-time home buyers) pay significantly lower interest rates after the disclosure regulation than experienced borrowers (repeat buyers), suggesting that simplifying these disclosures reduces mortgage interest costs. Additional tests show that the reduction in interest costs is not accompanied with more upfront noninterest costs paid by borrowers. Our cross-sectional analyses reveal two mechanisms through which simplifying disclosures lowers interest costs: curbing predatory lending and facilitating borrower shopping. We further find that disadvantaged borrowers (Black, Hispanic, and single female) benefit more from simplified disclosures. Last, we do not find that simplifying disclosures affects mortgage loan performance.

As of November 2016, SEC Regulation (“Reg”) AB II requires issuers of certain types of asset‐backed securities (“ABS”) to disclose the credit‐risk attributes of each asset in the underlying pool, a substantial expansion of prior disclosure requirements. We examine how ABS issuers’ asset‐level disclosures under Reg AB II affect the (e)valuation of ABS by investors and credit rating agencies. Using difference‐in‐differences models that compare affected and unaffected types of ABS, we find that these disclosures improve the ability of initial ABS yields and credit ratings to predict the performance of the underlying assets. These results are concentrated in deals with above‐median risk layering in the underlying assets and complexity in the tranching of credit risk. We further find that asset‐level disclosures are associated with lower yields. Lastly, we provide evidence that most prospective ABS investors download asset‐level information during the price formation period prior to ABS issuance.

We examine the impact of reducing information processing costs on U.S. state regulators who supervise mortgage companies. State regulators traditionally disclosed enforcement actions only on their individual websites. A centralized repository, introduced in 2012, assembled enforcement records across states in one place, reducing a regulator’s cost to learn about enforcements in other states. Using a difference-in-differences design, we find that enforcement records posted on the centralized repository significantly increase the probability of subsequent enforcement actions against the same firm in other states. This suggests that reducing information processing costs helps state regulators identify companies engaging in misconduct. This effect is stronger for records from state websites where information is harder to process and for state regulators with more limited resources. Last, we observe that sanctioned lenders reduce the credit supply in other states after their enforcement records in one state are posted on the centralized repository.

Prior research shows that individuals exhibit a propensity to surrogate performance measures for their underlying strategy, resulting in suboptimal strategic decisions. We investigate whether the incorporation of flexibility in contemporary performance measurement systems (PMSs) reduces surrogation propensity in the context of product innovation and whether this effect varies depending on environmental dynamism. We conduct a 2 × 2 experiment and find that PMS flexibility significantly lowers managers' surrogation propensity when the business environment is more dynamic and when the investment decisions have opportunity costs. Our study contributes to the literature by identifying a viable way to reduce managers' surrogation propensity.

Whether Big N auditors provide higher audit quality than non-Big N auditors remains a debate. We add new evidence to this debate by utilizing the setting of Big N auditors' acquisitions of non-Big N auditors. We identify 331 treatment firms that switched to Big N auditors due to the exogenous shocks imposed by Big N acquisitions. Our difference-in-differences analyses show that treatment firms' audit quality improves after switching to Big N auditors. In comparison, mergers or acquisitions among non-Big Ns have little impact on audit quality. Our cross-sectional analyses suggest the audit quality improvement among treatment firms is more likely due to Big N auditors' general competence rather than their industry-specific expertise. Finally, we find that treatment firms experience no significant market reactions around the announcements of Big N acquisitions, indicating that the capital markets may not attach any premium to the improved audit quality associated with Big N auditors.

Whether audit firms should disclose financial statements is controversial among investors, practitioners, and regulators. The debate centers on whether audit firms’ financial statements provide information about audit quality. Using hand-collected data from U.K. audit firms’ financial statements, we construct four measures that capture audit firms’ resource investments (i.e., human capital, workplace environment, technologies) and risk exposures (i.e., litigation provisions). We find that increases in audit firms’ staff costs, investments in tangible assets and IT software, and reductions in litigation provisions are associated with improved audit quality. The information in audit firms’ financial statements is not contained in their transparency reports or regulatory inspection reports. Additional tests show that increases in audit firms’ staff costs and tangible assets, as well as reductions in litigation provisions, are associated with improved audit efficiency.