This study provides exploratory evidence on auditors’ framing and evaluation of hypotheses, identifies implications for improving audit decision-making and facilitates the interpretation of prior research. Prior studies usually assume hypotheses to be framed as mutually exclusive and exhaustive. However, both verbal protocol evidence and probability assessments reveal that in a realistic case m...

Managers, consultants, and the financial press assert that compensation plans based on residual income change managers’ behavior. This assertion is empirically tested by selecting a sample of firms that began using a residual income performance measure in their compensation plans and comparing their performance to a control sample of firms that continue to use traditional accounting earnings-ba...

I find evidence consistent with managers manipulating real activities to avoid reporting annual losses. Specifically, I find evidence suggesting price discounts to temporarily increase sales, overproduction to report lower cost of goods sold, and reduction of discretionary expenditures to improve reported margins. Cross-sectional analysis reveals that these activities are less prevalent in the ...

This study examines whether institutional investors’ voting for All-Star financial analysts is affected by analyst beauty. Using a sample of 1,135 U.S. analysts and controlling for analyst performance, we document that beauty, on average, does not affect the outcome of All-Star analyst voting. However, a beauty premium emerges in those sectors where there is high information asymmetry on analys...

This paper examines the relation between annual report readability and firm performance and earnings persistence. I measure the readability of public company annual reports using the Fog index from the computational linguistics literature and the length of the document. I find that: (1) the annual reports of firms with lower earnings are harder to read (i.e., they have a higher Fog index and ar...

We examine the interaction between risk (uncertainty) and production efficiency in determining pay-performance sensitivity in optimal executive compensation. Particularly, we show that the risk-incentive trade-off is exacerbated (attenuated) as production efficiency increases when the efficiency level is greater (less) than the level of compensation risk. This result suggests that the optimalit...

We examine the relationship between CEO ownership and stock market performance. Firms in which the CEO voluntarily holds a considerable share of outstanding stocks outperform the market by more than 10 percent p.a. after controlling for traditional risk factors. The effect is most pronounced in firms that are characterized by large managerial discretion of the CEO. The abnormal returns we docum...

G00–G09, Inflammatory diseases of the central nervous system G10–G14, Systemic atrophies primarily affecting the central nervous system G20–G26, Extrapyramidal and movement disorders G30–G32, Other degenerative diseases of the nervous system G35–G37, Demyelinating diseases of the central nervous system G40–G47, Episodic and paroxysmal disorders G50–G59, Nerve, nerve root, and plexus disorders G...

We develop a structural model to investigate the effects of asymmetric beliefs and agency conflicts on dynamic principal–agent relationships. Optimism has a first-order effect on incentives, investments, and output, which could reconcile the private equity puzzle. Asymmetric beliefs cause optimal contracts to have features consistent with observed venture capital and research and development (R...

We document evidence of corruption in Chinese state asset sales. These sales involved stakes in partially privatized firms, providing a benchmark—the price of publicly traded shares—to measure underpricing. Underpricing is correlated with deal attributes associated with misgovernance and corruption. Sales by “disguised” owners that misrepresent their state ownership to elude regulatory scrutiny...