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We show that social connections between a firm's executives and directors and brokerages that follow the firm decrease the firm's cost of equity. We use quasi-natural experiments to address endogeneity concerns and find that the uncovered effect of firm-brokerage social connections on cost of equity is likely causal. The effect is found to be more pronounced for firms with more soft information, opaque information environments, tight financial constraints, weak corporate monitoring, or high executive equity ownership. Further, consistent with the evidence on cost of equity, we find that firm-brokerage social connections reduce SEO underpricing, decrease information asymmetry in stock markets, and improve the firm's equity valuation.

This paper examines how the departure of star analysts influences the performance of their non-star peers. Using manually collected data from China, we observe that non-star analysts enhance their forecast accuracy after a star analyst leaves. This effect is particularly pronounced when non-star analysts have previously worked within hierarchical teams or when the departing star analyst held significant internal resources within the brokerage. Additionally, the performance improvements are more substantial in environments with greater promotion opportunities and in brokerages characterized by a collective organizational culture. To establish causality, we leverage the suspension and subsequent reform of the star analyst voting system as an exogenous shock. A difference-in-difference (DID) analysis demonstrates that brokerages more affected by this shock exhibit larger improvements in analyst forecast accuracy. These findings offer new insights into the celebrity effect, highlighting how changes in team structure and internal competition influence analyst performance.

ABSTRACT Reported deficiencies continue to persist in audits of fair value measurements and other complex accounting estimates (hereafter, “FVMs”), despite improvements in auditor performance observed by regulators. The persistence of reported deficiencies in audits of FVMs suggests that factors underlying this trend may be more complicated and multidimensional than previously suggested by regulators and academic research, which has focused largely on auditors' unsatisfactory performance as the principal source of reported deficiencies. Drawing from the judgment and decision‐making expertise literature, we gather field‐based data from audit experts to identify additional factors that are likely to be contributing to differences of opinion between audit and inspection experts and the persistence of reported deficiencies in audits of FVMs. We find evidence that audit experts interpret standards and evaluate audit evidence differently than inspectors, and thus perceive there to be a gap between what auditors and inspectors regard as sufficient appropriate audit evidence to support audits of FVMs (hereafter, “FVM gap”). Moreover, results highlight several areas in audits of FVMs where differences of opinion exist between auditor and inspector experts regarding what constitutes a reported deficiency. Within the contexts we examine, our results identify additional factors, beyond deficient auditor performance, that may contribute to the FVM gap. We also report audit partners' recommendations for ways to reduce the FVM gap and suggest avenues for future research. Gaining a more complete understanding of sources contributing to reported deficiencies will help regulators, standard setters, audit firms, and academics to identify ways to reduce the FVM gap and reported deficiencies in audits of FVMs.

ABSTRACT Research documents significant management bias and opportunism around the discretionary inputs of audited complex estimates, including fair value measurements (FVMs), which raises questions about auditors' ability to test these estimates. We examine how the degree of quantification in client evidence and client control environment risk influence auditors' planned substantive testing of management's discretionary inputs to FVMs. We find that auditors allocate a lower proportion of effort to testing the subjective inputs to the fair value estimate when the degree of quantification in the client evidence and level of client risk are both high. Further, this tendency persists even after auditors receive a regulatory practice alert reminding them to focus more audit effort on testing fair value (FV) inputs that are susceptible to management bias, and despite the auditors increasing their overall audit effort. Qualitative analyses of the procedures auditors selected indicate that inapt attention to the degree of quantification in evidence is a potential root cause of the difficulty auditors encounter when testing complex estimates. Our results imply that in situations where both quantified and non-quantified data are important to the audit, there is the potential for management to manipulate the evidence they provide to auditors to distract auditors from testing the discretionary inputs to complex estimates that are susceptible to management opportunism. Data Availability: Contact authors for data availability.

ABSTRACT We examine whether tone at the top emphasizing firm-level commercial, audit quality, or both goals (balanced) can nonconsciously affect auditors' engagement-level tendency to accept management's estimates, and whether the effects differ if management engages a specialist. This study is motivated by academics' and regulators' increasing attention on firm-level tone at the top and concerns about management bias in audited estimates, especially when the evidence is prepared by management's specialist. We find firm-level goals can be pursued nonconsciously by auditors when performing a complex task. When management's specialist is absent, a balanced approach reduces auditors' tendency to agree with management's estimate compared to a commercial approach; however, it is less effective when management's specialist is present. We find an audit quality approach reduces auditors' tendency to accept management's estimate compared to a commercial approach, regardless of the absence/presence of a specialist. Our results have important implications for regulators and audit firms. Data Availability: Data are available from the authors upon request.