[On August 12-13, 2005, the department of finance at the Kelley School of Business, Indiana University, collaborated with the "Review of Financial Studies" to host a conference titled "The Causes and Consequences of Recent Financial Market Bubbles." This article begins with our overview of the themes and findings of the conference, and it ends with the questions that the literature has yet to answer.]

What is the role of information intermediaries in corporate governance? This paper examines equity analysts’ influence on managers’ earnings management decisions. Do analysts serve as external monitors to managers, or do they put excessive pressure on managers? Using multiple measures of earnings management, I find that firms followed by more analysts manage their earnings less. To address the potential endogeneity problem of analyst coverage, I use two instrumental variables based on change in broker size and on firm's inclusion in the Standard & Poor's 500 index, and I find that the results are robust. Finally, given the number of covering analysts, analysts from top brokers and more experienced analysts have stronger effects against earnings management.

[We have developed Bayesian Markov chain Monte Carlo (MCMC) methods for inferences of continuous-time models with stochastic volatility and infinite-activity Lévy jumps using discretely sampled data. Simulation studies show that (i) our methods provide accurate joint identification of diffusion, stochastic volatility, and Lévy jumps, and (ii) the affine jump-diffusion (AJD) models fail to adequately approximate the behavior of infinite-activity jumps. In particular, the AJD models fail to capture the "infinitely many" small Lévy jumps, which are too big for Brownian motion to model and too small for compound Poisson process to capture. Empirical studies show that infinite-activity Lévy jumps are essential for modeling the S&P 500 index returns.]

On August 12–13, 2005, the department of finance at the Kelley School of Business, Indiana University, collaborated with the Review of Financial Studies to host a conference titled “The Causes and Consequences of Recent Financial Market Bubbles.” This article begins with our overview of the themes and findings of the conference, and it ends with the questions that the literature has yet to answer.

We provide a new test of the informational efficiency of trading in stock options in the context of stock split announcements. These announcements tend to be associated with positive abnormal returns. Our traditional event study results show abnormal returns that are significantly lower for optioned than non-optioned stocks, whether traded on the NYSE, Amex, or Nasdaq. After controlling for market returns, capitalization, book-to-market ratio, and trading volume, we find that the abnormal returns are significantly lower for NYSE/Amex optioned than non-optioned stocks. Although the results for Nasdaq stocks are not as clear, the overall effects tend to be lower after optioning. These findings are consistent with the hypothesis that the prices of optioned stocks embody more information, diminishing the impact of the stock split announcement. They provide new evidence of the beneficial effects of options on their underlying stocks.

We investigate performance effects for China's listed firms when there is a change in the controlling shareholder. These changes include ownership transfers from one state entity to another state entity and from a state entity to a private entity. We find positive performance effects when control is passed to a private entity. In contrast, when the transfer is made to another branch of the state, there is little change in performance. The stock market responds positively to a change in control, with the largest effect observed for private transfers. Our results suggest the Chinese government should continue to sell down its share ownership in listed firms as the transfer of control to private owners enhances corporate profitability and efficiency. Moreover, to help ownership reform, China should encourage an active market for corporate control.

Despite the unquestionable influence of conservatism, disagreement remains about what economic demands lead to financial reporting conservatism. Research examining lenders’ demands for reporting conservatism has been questioned for ignoring conservative contract modifications. We document that these modifications exist but are not ubiquitous. We find contract modifications are more likely when agency costs are higher and litigation, tax and equity demands for conservatism are lower. However, we find a positive association between unexplained reporting conservatism and contract modifications, suggesting contractual modifications alone do not fulfill lenders’ demands for conservatism.

We investigate IPO market efficiency using a sample of equity carve-outs offered during the period of 1985–2005. Unlike IPOs examined in previous studies where trading during the pre-IPO book-building period does not exist and trading on the IPO date is rationed, in equity carve-outs, investors can trade in the non-rationed market for shares of the parent, which holds a significant fraction of the subsidiary. We find that the subsidiary's initial day return is significantly related to its parent's return over the book-building period, but unrelated to its parent's contemporaneous return. Neither the pre-IPO price revision of the subsidiary nor the return to the parent on the initial trading day can be predicted. While the portion of the subsidiary's initial return unpredictable from information available during the book-building period is significantly related to its parent's contemporaneous return, the predictable component of the initial return is not. We interpret these results as evidence consistent with market efficiency.

ABSTRACT We assess the impact of Regulation Fair Disclosure (Reg FD) on the trading behavior of transient institutional investors in the quarter prior to a bad news break in a string of consecutive earnings increases. Bad news breaks are defined as breaks that are by growth firms, preceded by longer strings of consecutive earnings increases, followed by longer strings of consecutive earnings decreases, and associated with larger declines in earnings. Pre–Reg FD transient institutions have abnormal selling of stocks in the quarter immediately preceding a bad news break. This abnormal selling is confined to firms that hold conference calls in the pre–Reg FD period. However, in the post–Reg FD period transient institutions do not exhibit similar abnormal selling of stocks in the quarter before a bad news break. Furthermore, after Reg FD transient institutions allocate less of their stock portfolios to conference call firms relative to non–conference call firms in the quarters prior to a bad news break. These results demonstrate that Reg FD has had an impact on management's selective disclosure behavior and significantly changed the trading behavior of transient institutions.

Mandatory audit partner rotation has been adopted in certain countries while audit firm rotation is still being debated in many places. Most of the extant research on the relation between auditor tenure and earnings quality provides evidence at the audit firm level. However, since audit firm tenure is correlated with partner tenure and audit firm rotation is more costly than partner rotation, it is important to know whether earnings quality is related to audit firm tenure, partner tenure, or both. We investigate this issue using a sample of Taiwanese companies for which the audit report must be signed by two partners with their names disclosed in the report. Using performance adjusted discretionary accruals as a proxy for earnings quality, we find that the absolute and positive values of discretionary accruals decrease significantly with partner tenure. After controlling for partner tenure, we find that absolute discretionary accruals decrease significantly with audit firm tenure. Our findings are not consistent with the arguments that earnings quality decreases with extended audit partner tenure and that audit firm rotation in addition to partner rotation would improve earnings quality. Our results are robust to alternative ways of measuring partner tenure under the dual signature system. However, since the audit reports do not disclose which partner is responsible for maintaining the auditor-client relationship, measurement errors in partner tenure remain an issue that cannot be fully addressed in the context of our study.