Analysts and the managers of firms they track have both come under fire in recent years. In particular, managers are accused of using earnings guidance to exert undue influence on analyst forecasts. This paper analyzes optimal incentive contracts that take into account the interaction between analysts and firm managers. In our setting, biased earnings guidance is a natural consequence of contract design. The bias serves to create enough uncertainty so as to motivate the analyst and, thus, may not necessarily be the scourge suggested by conventional wisdom.

This paper analyzes the effects of public information in a perfect competition trading model populated by asymmetrically informed short‐horizon investors with different levels of private information precision. We first show that information asymmetry reduces the amount of private information revealed by price in equilibrium (i.e., price informativeness) and can lead to multiple linear equilibria. We then demonstrate that the presence of both information asymmetry and short horizons provides a channel through which public information influences price informativeness and equilibrium uniqueness. We identify conditions under which public information increases or decreases price informativeness, and when multiple equilibria may arise. Our analysis shows that public information not only directly endows prices with more (public) information, it can also have an important indirect effect on the degree to which prices reveal private information.

This paper studies the role of conservative accounting standards in alleviating rational yet dysfunctional unobservable earnings manipulation. We show that when accounting numbers serve both the valuation role (in which potential investors use accounting reports to assess a firm's expected future payoff) and the stewardship role (in which current shareholders rely on the same reports to monitor their risk‐averse manager), current firm owners have incentives to engage in earnings management. Such manipulation reduces accounting numbers' stewardship value and leads to inferior risk sharing. We then show that risk sharing, and hence contract efficiency, can be improved under a conservative accounting standard where, absent earnings management, accounting earnings represent true economic earnings with a downward bias, compared with under an unbiased standard where, absent earnings management, accounting earnings represent true economic earnings without bias.

We develop a model to evaluate the costs and benefits of disclosing information about audit quality. Specifically, we examine whether audit quality disclosure affects auditors' effort and investors' investment efficiency. In our setting, an auditor exerts unobservable effort to influence audit quality and is motivated by liability in the event of audit failure. The usefulness of audited financial reports for investors depends on both the quality of the underlying financial reporting (e.g., as embodied by GAAP) and the quality of auditors' reports (i.e., the likelihood with which audit evidence uncovers managerial misreporting). We show that audit quality disclosure increases auditors' effort incentives if and only if the underlying financial reporting quality is relatively weak. We also show that such disclosure can actually reduce investment efficiency. Our analyses contribute to the debate about policies aimed at improving audit transparency.

We examine uniform and discretionary regimes for reporting information about firm performance from the perspective of a standard setter, in a setting where the precision of reported information is difficult to verify and the reported information can help coordinate decisions by users of the information. The standard setter's task is to choose a reporting regime to maximize the expected decision value of reported information for all users at all firms. The uniform regime requires all firms to report using the same set of reporting methods regardless of the precision of their information, and the discretionary regime allows firms to freely condition their sets of reporting methods on the precision of their information. We show that when unverifiable information precision varies across firms and users' decisions based on reported information have strong strategic complementarities, a uniform regime can have a beneficial social effect as compared to a discretionary reporting regime. Our analysis generates both normative and positive implications for evaluating the necessity and effectiveness of reporting under standards.

We examine the adoption of expanded audit reports that include key audit matters (KAMs) in Hong Kong (2016) and mainland China (2017). These jurisdictions are highly integrated and together constitute one of the largest economies to adopt the IAASB's reporting standards in a staggered fashion, while also differing in investor protection and legal enforcement. Using matched samples, pre‐post tests, and staggered difference‐in‐differences analyses with company fixed effects, we do not find compelling evidence that expanded audit reports affect market reactions or audit quality. These findings suggest a substantial gap between regulatory intent and implementation—on average, in these markets, KAMs do not appear to meet investors' demand for incremental information or to improve audit quality substantially. At the same time, our cross‐sectional evidence on KAM characteristics is more nuanced. A higher number of KAMs and the presence of novel or transaction‐specific KAMs are associated with stronger pricing of fundamentals, consistent with investors perceiving the related financial statements as better vetted. Yet a higher number of KAMs and novel KAMs are also associated with lower profitability persistence, consistent with these disclosures reflecting company risk and volatility. In contrast, industry‐common KAMs appear less relevant for valuation, consistent with investors discounting routine disclosures, even though they are associated with more persistent performance likely reflecting more stable industry conditions. Overall, our evidence suggests that mandating expanded audit reports alone may be of limited value, whereas better tailored KAM disclosures may still serve as signals of firm fundamentals and future performance.