We examine how information risk and transaction costs influence the initial and subsequent market reaction to earnings news. We find that the initial market reaction is higher per unit of earnings surprise for higher information risk firms (information content effect). Furthermore, it is information risk that induces transaction costs that limit the initial market reaction and lead to higher subsequent drift (transaction costs effect). Information risk does not have an effect on drift beyond that achieved through transaction costs. Our findings highlight the importance of understanding the linkage between information risk and transaction costs in price discovery around public disclosure.

We propose a model of preferences in which the effect of randomization on ambiguity depends on how the unknown probability law is determined. We adopt the framework of Anscombe and Aumann (1963) and relax the axioms. In the resulting representation of the individual's preference, the individual has a collection of sets of priors <a:math xmlns:a="http://www.w3.org/1998/Math/MathML" display="inline"> <a:mi mathvariant="script">M</a:mi> </a:math>. She believes that before she moves, nature has chosen an unknown scenario (a set of priors) from <d:math xmlns:d="http://www.w3.org/1998/Math/MathML" display="inline"> <d:mi mathvariant="script">M</d:mi> </d:math>, and from that scenario, nature will choose a prior after she moves. The representation illustrates how randomization may partially eliminate the effect of ambiguity.

We study time-varying price leadership between international stock markets using a Markov switching causality model. We demonstrate variations in the causality pattern over time, with the US being the dominant country in causing other markets. We examine the factors which determine a country’s role in the causal relationship. For country-specific factors, we show that trades openness increases price leadership. We also find that the lead–lag relationship between the stock markets is weaker during crisis periods, confirming the “wake-up call” hypothesis, with markets and investors focusing substantially more on idiosyncratic, country-specific characteristics during the crisis.

We use brokerage account records to study trading during the Chinese put warrants bubble and find evidence consistent with extrapolative theories of speculative asset price bubbles. We identify the event that started the bubble and show that investors engaged in a form of feedback trading based on their own past returns. The interaction of feedback trading with the precipitating event caused additional buying and price increases in a feedback loop, and estimates of the trading volume due to this mechanism explain prices and returns during the bubble.

ABSTRACT We examine firms' trade‐offs in their voluntary disclosure decisions following negative media coverage of climate change incidents. By combining a keyword discovery algorithm and a fine‐tuned BERT model, we identify “hard” and “soft” climate disclosures on Twitter. Our findings indicate that firms tend to issue climate tweets as a rapid response to negative climate incidents. Additionally, firms with a history of hard climate change disclosure, as measured by ESG reports, are more likely to issue climate‐related responses than firms without such a history. Furthermore, we show that prior hard disclosure is associated with hard responses when the incident receives moderate media attention, but with soft responses when the incident receives low media attention. Our findings provide empirical insights for dynamic disclosure theory by illustrating how prior disclosure shapes firms' response strategies to negative media coverage.

In this paper, we investigate whether federal judge ideology, ceteris paribus, affects auditor litigation risk and auditor behavior. We find that auditors whose client firms are in jurisdictions dominated by liberal judges are more likely to be sued and make higher payouts to plaintiffs when sued. Furthermore, these client firms are more likely to receive going‐concern opinions and pay higher audit fees. Finally, we find no evidence that the quality of audited financial statements is affected by judge ideology. The evidence documented in this paper indicates that federal judge ideology affects auditor litigation risk and some aspects of auditor behavior.

We conduct a thorough analysis on the role played by the unobserved systematic risk factor in default prediction. We find that this latent factor outweighs the observed systematic risk factors and can substantially improve the in-sample predictive accuracy at the firm, rating group, and aggregate levels. Thus it might be helpful to include the unobserved systematic risk factor when simulating portfolio credit losses. However, we also find that this factor only marginally improves out-of-sample model performance. Therefore, although the models we investigated all show reasonably good ability to rank order firms by default risk, accurate prediction of default rate remains challenging even when the unobserved systematic risk factor is considered.

Previous literature finds anomalies are at least as prevalent in developed markets as in emerging markets; namely, the global anomaly puzzle. We show that while market development and information diffusion are linearly related, information diffusion has a nonlinear impact on anomalies. This is consistent with theoretical developments concerning the process of information diffusion. In extremely low-efficiency regimes, without newswatchers sowing the seeds of price discovery and ensuring the long-run convergence of price to fundamentals, initial mispricing and subsequent correction will not occur. The concentration of emerging countries in low-efficiency regimes provides an explanation to the puzzle.

Does government debt impede firm innovation? We address this question by examining the effects of the debt accumulated by local government financing vehicles (LGFVs) across Chinese prefectures between 2006 and 2012 on industrial firms’ R&D spending and patents. We find that government debt reduces firms’ R&D expenditures and lowers firms’ number of new patents. One plausible explanation is that government debt raises firms’ capital costs, which limits innovation activities. Consistently, we find that the innovations of firms that are more likely to be financially constrained – small firms and firms with low cash flow – are more affected by the expansion of government debt. Our results imply that although government deficit spending may stimulate the economy in the short run, it could have negative repercussions for economic productivity in the longer run.

We develop a non-linear Markov error correction approach to examine the general co-integration relation between the H- and A-prices of cross-listed Chinese stock issuers across the period January 1999 to March 2009. We unravel three important dimensions of this relation. These pertain to (i) the long-run expectation of the H- (to A-price) discount; (ii) the level of short-run co-movement in prices; and (iii) the magnitude of error corrections. Findings point to significant improvements in all three areas. Policy and corporate governance change appears to be the principal force driving the efficiency gains. Weakening informational asymmetries underlie much of the change in the markets’ relative pricing. In contrast, sentiment effects strongly underpin the contemporaneous response and error correction adjustments. Finally, the escalating Global Financial Crisis of 2008 appears to have not only bolstered the A- and H-markets’ short-term pricing dynamic but also temporarily increased the long-term H-share discount.