This study compares the performance of sell-side equity analysts with and without a Chartered Financial Analyst® (CFA) designation. Using a large sample of forecasts, our tests indicate that CFA charterholders issue forecasts that are timelier than those of non-charterholders. The results for accuracy are mixed. We establish that while charterholders perform at statistically significant higher levels than non-charterholders in some tests, the economic significance of these differences is questionable. For a subsample of analysts, we find evidence that charterholders improve along the dimension of timeliness after they receive their CFA charter. This result provides support for a human-capital explanation in which charterholders improve their productivity during the CFA program. Finally, we show that the market reaction for smaller firms is stronger for charterholders than non-charterholders after controlling for timeliness, boldness, accuracy, and optimism. This result provides evidence consistent with “credentialism,” a variant of signaling theory in which a professional's education level provides a signal about the professional's quality to his or her clients.

Mutual funds experiencing large outflows (inflows) tend to decrease (expand) their positions, creating downward (upward) price pressure in the stocks held in common by them (Coval and Stafford [2007]). This study shows that corporate insiders exploit the resulting mispricing by buying (selling) their company's stock if it is subject to such fire sales (purchases) by funds. We also show that the likelihood of option grants is greater for stocks that are subject to mutual fund fire sales. Finally, we show that both the insider trading and the option granting activities help speed up the correction of the flow-driven mispricing. Overall, this study illustrates that insiders enhance personal benefits by trading on their personal account and influencing the timing of option grants in response to mispricing due to flow-driven fund trading. Moreover, these activities help improve the informational efficiency of stock price.

We examine the valuation of financial statement note information at the time of 10-K filings. We find that stock returns around 10-K filings are positively related to accounting adjustments calculated from financial statement note information. We further document that the likelihood of equity analysts issuing a report and updating their target price estimates at the 10-K dates is increasing in the magnitude of the adjustments. Those analysts who do update their target prices at this time revise their estimates consistent with the sign and magnitude of the adjustments. These findings are consistent with financial statement users utilizing financial statement note information to make accounting adjustments, thereby incorporating this information into stock prices. JEL Classifications: G14, G29, M40, M41, M44. Data Availability: All data are publicly available from the sources identified in the article.

We exploit the staggered state‐level adoption of the Riegle‐Neal Interstate Banking and Branching Efficiency Act (IBBEA) to examine how banking deregulation and the resulting increase in bank competition affect firms’ auditor choices. We find that an exogenous increase in the degree of interstate branch banking deregulation leads to a reduction in firms’ propensity to engage a Big N or industry expert auditor. This main result, when combined with our cross‐sectional analyses, offers evidence suggesting that deregulation leads to less demand for higher quality auditors because (1) firms have increased access to credit, which reduces the benefits of higher audit quality; (2) entering banks’ lending expertise substitutes for higher quality financial statements; (3) incumbent banks with less lending expertise seek to protect their rents by preferring that borrowers provide lower quality financial statement information; and (4) external stakeholders delegate their monitoring to banks to a greater degree, resulting in less demand for higher quality financial statements. As such, our study sheds light on how the U.S. credit market's infrastructure shapes firms’ auditor choice decisions.

Using an extensive database of 356,463 sell‐side equity analysts' reports from 2002 to 2009, this study is one of the first to analyze the readability of analysts' reports. We first examine the determinants of variations in analyst report readability. Using several proxies for ability, we show that reports are more readable when issued by analysts with higher ability. Second, we test the relation between analysts' report readability and stock trading volume reactions. We find that trading volume reactions increase with the readability of analysts' text, consistent with theoretical models that predict that more precise information (and hence more informative signals) results in investors' initiating trades. These results support the view that the readability of analysts' reports is important to analysts and capital market participants.