[This study uses laboratory markets to examine how the level of market efficiency influences managers' use of reporting discretion, and how allowing reporting discretion alters market efficiency. The results show managers that incur costs make favorable information available to more investors in less efficient markets but not in more efficient markets. Although reporting discretion does not change market price levels, it causes the markets to under-react to public information, apparently because investors overestimate the degree to which a favorable (unfavorable) public signal indicates that the public signal was inflated (deflated). Managerial reporting discretion may be related to under-reactions to earnings reports, which are also public disclosures subject to manipulation by managers.]

[In auditing an account balance, an auditor must first assess the inherent risk that the balance is misrepresented. This paper identifies factors determining the accuracy of the auditor's inherent risk assessment in a hidden information audit setting, under the assumption that both players construct expectations through a process of rational inference known as rationalization. The accuracy of the auditor's risk assessment is shown to be influenced by the risk of unintentional errors, the players' incentives, the precision of the auditor's data, and regulatory bounds on detection risk.]

This study examines the behavior of laboratory markets in which two uninformed marketmakers compete to trade with heterogeneously informed investors. The data provide three main results. First, marketmakers set quotes to protect against adverse selection and to control inventory. Second, when investors are 1ess well-informed, their trades are less reliable measures of their information, and marketmakers respond to those trades with greater skepticism. Third, errors in marketmakers' reactions to trades cause the time-series behavior of quotes and prices to depend on the information environment in ways beyond those captured in extant theory.

[This study shows that subjects acting as auditors in laboratory experiments have more trouble assessing fraud risk when their optimal strategies are highly sensitive to those assessments. Interestingly, risk assessment is particularly difficult when the auditor faces high legal liability for audit failure and audits a firm with strong internal controls. The results have practical implications for auditors, who must assess fraud risk accurately in order to be cost competitive while avoiding audit failures that might result in legal liability. The results also have implications for auditing research, because they indicate settings in which traditional equilibrium analyses (which assume accurate fraud risk assessment) are likely to have low predictive power.]

People who use venues for productive conversations impose norms (“LAAPs”) encouraging statements that are meaningful, relevant, honest, understandable, diplomatic, engaging, helpful, and supportive of the long-term success of the venue. Statements that undermine productivity by falling short on some of these characteristics without sufficient strength on others are excluded, policed and punished as “crebit”. I describe a variety of LAAPs and their crebit, use the framework to offer testable predictions about when speech will be punished as crebit, and propose some exclusions that would allow more productive conversations online and about the limits of speech on campus.

[This study uses laboratory experiments to determine the effects of trade and quote disclosure on market efficiency, bid-ask spreads, and trader welfare. We show that trade disclosure increases the informational efficiency of transaction prices, but also increases opening bid-ask spreads, apparently by reducing market-makers' incentives to compete for order flow. As a result, trade disclosure benefits market makers at the expense of liquidity traders and informed traders. We find that quote disclosure has no discernible effects on market performance. Overall our results demonstrate that the degree of market transparency has important effects on market equilibria and on trader and market-maker welfare.]

The stated goals of the SEC are to protect investors, maintain orderly markets and facilitate capital formation. These goals can be achieved with very light regulation if, as assumed by traditional economic theory, investors process information costlessly and protect themselves from informational disadvantages, and firms optimally balance the costs and benefits of committing to make their reports reliable. A growing body of research demonstrates that light regulation fails to achieve the SEC 's goals, because investors find information processing costly and fail to protect themselves. After reviewing theory and prior evidence, I discuss new lessons learned from Jiang, Petroni, and Wang ( ), who show that Pink Sheets ® reduced the liquidity of firms with low reporting quality and increased the liquidity of firms with high reporting quality, merely by highlighting the quality of their listed firms’ disclosure. While the Pink Sheets ® innovation might have occurred through many causal channels, all of them entail a violation of costless processing and self‐protection, and lead to the conclusion that this lightly regulated market did not initially meet the stated goals of the SEC . I conclude by arguing that markets can achieve the SEC 's goals only if they exhibit a particularly strong version of “dynamic” market efficiency, which requires that each individual trade on the path to even incomplete revelation occurs at the then‐optimal price. Because dynamic efficiency is unlikely, we should stop being surprised to see evidence that lightly regulated markets fall short on key dimensions. Instead, we should use our well‐developed understanding of market inefficiency to guide regulation.

[We use a laboratory market to investigate the behavior of traders who lack informational advantages and have no exogenous reason to trade. We find that these uninformed traders behave largely as irrational contrarian "noise traders," trading against recent price movements to their own detriment. The uninformed traders provide some benefits to the market: increasing market volume and depth, while reducing bid-ask spreads and the temporary price impact of trades. However, their noise trading also diminishes the ability of market prices to adjust to new information. A securities transaction tax reduces uninformed trader activity, but it reduces informed trader activity by approximately the same amount; as a result, the tax does not alter the impact of noise trading on the informational efficiency of the market.]

Examines how the level of market efficiency influences managers' use of reporting discretion and how allowing reporting discretion alters market efficiency. Nature of price efficiencies; Managerial reporting discretion; Market responses; Pricing errors; Manager's exercise of reporting discretion.

Focuses on factors that affect the accuracy of auditors' inherent risk assessment in a hidden information audit setting. Risk of unintentional errors; Players' incentives; Precision of the auditors' data; Regulatory bounds on detection risk.