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Institutional investors have a better understanding of corporate performance than non-institutional investors, and their presence tends to improve the overall governance mechanism of a company and discipline top management against taking self-serving or myopic decisions. In this study, we examine shareholder voting patterns on auditor reappointments in Indian companies and examine whether institutional shareholder dissent on auditor reappointment acts as a disciplining mechanism on subsequent auditor actions and leads to improvement in audit quality. Our results indicate that institutional shareholder dissent on auditor reappointment is positively related to relative magnitude of non-audit services (NAS) fees in the previous year. More importantly, we observe that auditors are sensitive to institutional dissent and respond by charging a lower amount of NAS fees and providing superior audit quality in the subsequent year to signal increased independence and objectivity. Similar results are not observed in the case of retail shareholders. Our findings reinforce the role of institutional shareholders as important monitors in the corporate governance process and call for regulation to mandate the participation of shareholders in the auditor appointment process. [ABSTRACT FROM AUTHOR]

With substantial index universal life (IUL) policy premiums anecdotally funded through third-party loans, it might be expected that buyers would be sophisticated and apply customary due diligence practices when considering this approach to funding. However, despite the popularity of these arrangements among high-net-worth individuals, the various risks--not just the opportunities--are poorly understood. As a result, a growing number of investors have initiated lawsuits with allegations of surprise, anger, and claims of "being taken" after entering premium financing transactions. The authors provide a case study exploring the analytical techniques that should be performed before plan implementation and best practices that address the confusion among producers and consumers when evaluating how insurance products and premium financing interact under volatile economic conditions. [ABSTRACT FROM AUTHOR]

I show that hedge funds react to unrealized losses on their passive positions by engaging with the management. The hedge fund managers' psychological response is consistent with cognitive dissonance: They blame the firms' management and switch to activism. The loss, which is hedge fund-investment specific, is distinct from economic factors such as the firm's industry-adjusted performance. Loss-driven activism is more likely to be unfocused on specific issues and results in worse firm performance. This study shows that an overlooked consequence of unrealized losses is to trigger an active engagement with the firm. [ABSTRACT FROM AUTHOR]

I introduce two dimensions of uncertainty, about the upside and the downside of an asset, in a model of asset valuation under asymmetric information. This justifies capital structures with equity and risky debt for information revelation purposes. However, a capital structure with only one information-sensitive security, equity, can be optimal when investors are less informed about the dimension that matters more for valuation. This is relevant for innovative firms with a large upside subject to strong information asymmetries, which often have abnormally low leverage, and for firms at an intermediate stage of their life cycle that do not issue risky debt. [ABSTRACT FROM AUTHOR]

Copyright of Contemporary Accounting Research is the property of Canadian Academic Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

Copyright of Contemporary Accounting Research is the property of Canadian Academic Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

The debate over the impacts of shareholder value orientation on corporate management has been more intense with the increasing participation of institutional investors in companies' ownership structures. In this context, the purpose of this study is to evaluate the influence of institutional investors' shareholding on the payment of dividends in the oil industry. A regression model was used, estimated with the Generalized Method of Moments. The results indicated that the distribution of dividends is related to the profitability and the leverage of the companies, in addition to the history of distribution to shareholders. In general, the presence of institutional investors did not influence the dividend distribution. However, we observed a large participation of these investors in the ownership structure of companies in the oil and gas sector—the average control of these agents was around 25% in the companies of the sample. This study contributes to the literature regarding the influence of institutional investors on the corporate decisions of nonfinancial companies, being original in the context of the oil industry. [ABSTRACT FROM AUTHOR]

We propose a novel model-free approach to obtain the joint risk-neutral distribution among several assets that is consistent with options on these assets and their weighted index. We implement this approach for the nine industry sectors comprising the S&P 500 index and find that their option-implied dependence is highly asymmetric and time-varying. We then study two conditional correlations: when the market moves down or up. The risk premium is strongly negative for the down correlation but positive for the up correlation. Intuitively, investors dislike the loss of diversification when markets fall, but they actually prefer high correlation when markets rally. [ABSTRACT FROM AUTHOR]

Mutual funds and exchange-traded funds (ETFs) differ in significant ways. ETFs trade on exchanges whereas mutual funds do not. ETFs generate few, if any, capital gains that are passed through to shareholders which makes them tax efficient. Alternatively, mutual funds often generate capital gains that are passed through to shareholders, and this makes them tax inefficient. To correct this tax inefficiency, Vanguard astutely added an ETF share class to many of its mutual funds back in 2001. They patented this structure and recently the patent expired. Several fund sponsors have applied to the Securities and Exchange Commission (SEC) to create this structure for their own funds. If approved, this would change the operation of affected funds in ways that are important to investors. [ABSTRACT FROM AUTHOR]

Using a cross-country setting, we document differences in the relation between earnings quality and the two components of trading volume around earnings announcements, one related to differential interpretation of the earnings signal and the other related to pre-event differential information precision. We find that in countries with stronger investor protection, less corrupt governments, and more liquid stock markets, a noisier earnings signal increases differential interpretation of the earnings signal but decreases investors' incentive for information acquisition before earnings announcements, leading to lower pre-event differential information precision. However, these trading patterns flip in countries with weaker investor protection, more corrupt governments, and less liquid stock markets. We also find that institutional investors in countries with stronger institutions are likely to benefit more from their superior information processing skills, leading to more information acquisition both at and before earnings announcements. Overall, our study adds to the literature by documenting significant cross-country variations in investors' trading volume reactions to earnings quality. [ABSTRACT FROM AUTHOR]

The increasing complexity of 10-K reporting has caused difficulties for investors seeking to understand and analyze a company's financial reports. In this study, we examine whether the SEC's comment letter process, consistent with its mission to improve public company disclosure, reduces reporting complexity in subsequent filings. We find comment letter receipt has a competing impact on two distinct dimensions of reporting complexity. Specifically, reporting complexity related to accounting concepts decreases after comment letter receipt, but linguistic reporting complexity increases. Validating this competing impact, we find that both changes to complexity are associated with changes in firms' information asymmetry in the expected directions. Further analysis of the increase in linguistic reporting complexity suggests that managers obfuscate following comment letter receipt, where the increase is unnecessary and not occurring in response to changes in the firms' accounting or underlying economics/operations. Overall, results suggest that while the comment letter process simplifies the presentation of reported accounting information, it also has the unintended consequence of decreasing the readability of reports. This nuance is important to understand, given that the federal government dedicates significant resources to the comment letter process. [ABSTRACT FROM AUTHOR]

We analyze how ETFs compete. Drawing on a new model and empirical analysis, we show that ETF secondary market liquidity plays a key role in determining fees. More liquid ETFs for a given index charge higher fees and attract short-horizon investors who are more sensitive to liquidity than to fees. Higher turnover from these investors sustains the ETF's high liquidity, allowing the ETF to extract a rent through its fee, and creating a first-mover advantage. Liquidity segmentation through clientele effects generates welfare losses. Our findings resolve the apparent paradox that higher-fee ETFs not only survive but also flourish in equilibrium. [ABSTRACT FROM AUTHOR]

We find that male participants in Harvard Business School's New Venture Competition who were randomly exposed to more venture capital (VC) investors on their panel were substantially more likely to start a VC-backed startup post-graduation, indicating that access to investors impacts fundraising independent of the quality of ideas. However, female participants experience no benefit from exposure to male or female venture capitalists (VCs), which appears related to a reduced propensity to reach out to VCs to whom they were exposed. Our results therefore also demonstrate gender-based differences in the degree to which increased exposure to investors can address networking frictions in venture capital. [ABSTRACT FROM AUTHOR]

We use a random forest model to classify firms' financial constraints using only financial variables. Our methodology expands the range of classified firms compared to text-based measures while maintaining similar levels of informativeness. We construct two versions of our constraint measures, one using many firm characteristics and the other using a small set of more primitive characteristics. Using our measures, we find that institutional investors hold a lower percentage of shares in equity-focused constrained firms, while retail investors show a preference for them. Equity issuance and investment of constrained firms also increases during periods of high investor sentiment. [ABSTRACT FROM AUTHOR]

Copyright of Contemporary Accounting Research is the property of Canadian Academic Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

Copyright of Contemporary Accounting Research is the property of Canadian Academic Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

Copyright of Contemporary Accounting Research is the property of Canadian Academic Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

Copyright of Contemporary Accounting Research is the property of Canadian Academic Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

We document the unique structure of the peer-to-peer lending market. Originally designed as decentralized, the market has become highly, but not fully, reintermediated. The platforms' software now performs essentially all tasks related to loan evaluation, whereas most lenders are passive and automatically fund most applications on offer. Yet unlike banks, and in contrast to theories predicting full reintermediation, the platforms provide detailed loan information, and some active loan pickers coexist with passive investors. We argue that while intermediation attracts unsophisticated passive investors, transparency in the presence of active investors resolves the lending platform's moral hazard problem inherent in intermediated markets. [ABSTRACT FROM AUTHOR]

How much of a loan should a lender retain, and how do loan sales affect loan performance? We address these questions in a model in which a lender originates loans that it can sell to investors. The lender reduces default risk through screening at origination and monitoring after origination, but is subject to moral hazard. The optimal lender-investor contract can be implemented by requiring the lender to initially retain a share of the loan that it gradually sells to investors, rationalizing loan sales after origination. The model generates novel predictions linking loan and lender characteristics to initial retention, sales dynamics, and loan performance. [ABSTRACT FROM AUTHOR]

In 1997, Statement of Financial Reporting Standards (SFAS) 131 introduced a substantial change in how segment information is reported in US-GAAP (Generally Accepted Accounting Principles) financial statements. We seek to examine whether this change in financial reporting policy increases investors' ability to process information relevant to conglomerate firms (i.e., those operating in multiple industries) more quickly, and whether this increased efficiency in information processing varies cross-sectionally based on firm complexity and the direction of industry news. Our results indicate that SFAS 131 has increased the speed with which stock prices capture information about conglomerates, relative to focused firms, although we find that some frictions remain with regard to disclosing bad news. This study documents an example of how a change in disclosure policy can enhance pricing efficiency, and hence, it may be of interest to the Financial Accounting Standards Board (FASB) in its ongoing initiative to consider potential changes to SFAS 131. [ABSTRACT FROM AUTHOR]

Many business transactions and employment contracts are wrongfully exploitative despite being consensual and beneficial to both parties, compared with a nontransaction baseline. This form of exploitation can present governments with a dilemma. Legally permitting exploitation may send the message that the public condones it. In some economic conditions, coercively enforced antiexploitation law may harm the people it is intended to help. Under these conditions, a way out of the dilemma is to enact laws with provisions that lack coercive enforcement. Noncoercive law would convey the state's condemnation of wrongful exploitation without risking the harmful effects of coercively enforced law. It would also give firms and their agents a way of explaining nonexploitative pricing decisions to investors, and it may help give precise content to the moral duty to set prices and wages fairly. Governments should thus consider noncoercive law a viable component of their responses to exploitation. [ABSTRACT FROM AUTHOR]

This paper investigates the psychological effects from stock market returns. Using an FBI database of over 55 million daily reported crime incidents across the United States, crime is proposed as a measure of psychological well-being. The evidence suggests that stock returns affect the well-being of not only investors but also noninvestors. Specifically, a contemporaneous negative (positive) relationship between daily stock market returns and violent crime rates is found for investors (noninvestors). A similar relationship is also found between local earnings surprises and violent crime. The contrasting relationships for investors and noninvestors suggests that relative wealth may influence well-being. [ABSTRACT FROM AUTHOR]

Many investors utilize Roth retirement accounts and Roth conversions in their financial planning due to the commonly referenced benefit of tax-free distributions. In this article, potentially valuable advantages of Roth distributions, including avoiding taxes on Social Security benefits and avoiding additional Medicare Part B and Part D premiums, are explored. How Congress could limit these advantages in the future, without violating the promise of no direct taxes on Roth distributions, is then examined. Both the current state of Roth advantages and potential future changes will be of interest to financial service professionals and their clients. [ABSTRACT FROM AUTHOR]

Municipal bonds, which are also known as muni bonds or simply munis, are commonly issued by state and local governments. Interest paid on munis is generally tax exempt which benefits investors in high tax brackets. Individuals should only own munis in a taxable account so they can capture the tax-exempt benefit. They have very low default/credit risk due to either a high credit rating and/or a third-party guarantee. Capital gains associated with these bonds are taxable unless the de minimis rule applies. Tax-exempt interest payments may also trigger the alternative minimum tax (AMT). Investors can purchase munis directly, or indirectly through a fund. [ABSTRACT FROM AUTHOR]

Copyright of Contemporary Accounting Research is the property of Canadian Academic Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

Copyright of Contemporary Accounting Research is the property of Canadian Academic Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

Copyright of Contemporary Accounting Research is the property of Canadian Academic Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

Copyright of Contemporary Accounting Research is the property of Canadian Academic Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

Copyright of Contemporary Accounting Research is the property of Canadian Academic Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

The pollution haven hypothesis is widely used to explain the predatory relocation of foreign investors to emerging markets. However, the long-term effect of the pollution haven hypothesis remains a mystery, given the natural evolution of environmental regulations. This study proposes that the likelihood of foreign divestment in the emerging market increases when the regional environmental regulatory pressure becomes more stringent. Empirical support is obtained through a Cox proportional hazard model of 402 international joint ventures established in China in 2000, whose foreign divestment status is traced until 2017. The findings support the karmic debt of the pollution haven hypothesis; that is, foreign investors' focus on avoiding environmental regulatory costs by relocating to emerging markets in the short run will backfire in the long run unless they bring something of value to the host market. [ABSTRACT FROM AUTHOR]

We argue that syndicates associate venture capitalists (VCs) with uneven skill levels in order to lower their expected gains from threatening to stop financing: Non-continued participation would send a milder negative signal to alternative financiers. This can explain the empirical observations that i) early-round syndicates regularly associate VCs with different levels of experience and ii) follow-on syndicates often involve none of the early-round VCs. Consistent with the theory, we find empirically that the heterogeneity of VC experience levels in a syndicate is i) negatively related to the extent to which the founders of the VC-backed firm are professionally well connected and ii) positively related to the likelihood of syndicate switching in a later round. [ABSTRACT FROM AUTHOR]

Financial markets reveal information that firm managers can utilize when making equity value-enhancing investment decisions. However, for firms with risky debt, such investments are not necessarily socially efficient. Despite this friction, we show that learning from prices improves investment efficiency. This effect is asymmetric, however, as investors learn less about projects that decrease the riskiness of cash flows: efficiency is lower for diversifying investments than for focusing (risk-increasing) investments. This also implies that investors' endogenous learning further attenuates risk shifting but amplifies debt overhang. Our model provides a novel channel through which learning from financial markets affects agency frictions between stakeholders. [ABSTRACT FROM AUTHOR]

Outsourcing is an important strategic decision of high-tech firms. However, while the research has extensively studied the implications of outsourcing to high-tech clients, its impact on high-tech vendors remains underexplored. This study empirically estimates the impact of government outsourcing contracts on high-tech vendors. Employing the earnings-return analyses framework, we find that, for high-tech vendors engaged in government outsourcing contracts, the stock market places a higher value on each unit of unexpected earnings compared to other firms. Additionally, this impact becomes stronger for contracts with longer terms, for contracts outsourced by the U.S. government or by countries with better political and economical stability. We obtain causal evidence through difference-in-differences (DID) analyses of high-tech firms' initiations of government contracts. Mechanism analyses uncover two primary drivers behind this impact: increased persistence of future earnings and improved alignment between accrual earnings and cash flows. Overall, our research indicates that when valuing high-tech firms, the stock market incorporates information from supply-chain networks, especially that related to government customers. Our results underscore the importance of obtaining government outsourcing contracts for high-tech firms' managers. Becoming a vendor to the government helps a high-tech firm reduce the uncertainty faced by its outside investors, who in turn value the high-tech firm's earnings to a greater extent. [ABSTRACT FROM AUTHOR]

To hedge unforeseen risk, investors may prioritize male-led ventures that they anticipate most other investors will prefer, arriving at decisions that are biased against women. Yet, little is known about how investors infer such gendered preferences and when they are particularly likely to do so. Integrating insights from third-party bias research with social role theory, we posit that when women propose novel ventures, investors are more apt to make unpromising social approval forecasting—an anticipation of the extent to which other investors will endorse these ventures—and thus withhold funding support. This is because the intensified gender role violations due to women being entrepreneurial in tandem with being novel lead investors to impose harsher judgments that these ventures violate normative business practices. Our hypotheses receive support from results of three methodologically complementary studies, including an archival study of Shark Tank (2009–2019) coupled with preregistered online and field experiments. By casting light on how venture novelty, a key determining factor of entrepreneurial success, makes third-party bias against women particularly salient, our work identifies a less overt "entrepreneurial gender dilemma" and derives new insights into policy-making designed to help women entrepreneurs surmount financial and social barriers in the innovation-based economy. [ABSTRACT FROM AUTHOR]

We study how the scarcity of committed capital affects the equilibrium distribution of net alphas in the asset management industry. We propose a model of active portfolio management with different sales fee structures where committed capital is in short supply. In the model, a portfolio's excess return is not fully appropriated by the money manager but shared with long-term investors. Empirically, we show that capital commitment allows funds to hold shares longer and take advantage of slow-moving arbitrage opportunities. Consistent with the model, funds with more committed capital generate higher value added, which, net of fees, accrues to long-term investors. [ABSTRACT FROM AUTHOR]

Copyright of Contemporary Accounting Research is the property of Canadian Academic Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

Copyright of Contemporary Accounting Research is the property of Canadian Academic Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

Copyright of Contemporary Accounting Research is the property of Canadian Academic Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

Preferred shares have high, fixed-dividend rates, often comparable to investment-grade bonds but have become a forgotten asset class for most investors. Preferred shares witnessed a surge of attention during the financial crisis of 2008. Because of their high and steady dividend rates, they should be considered as an asset class for portfolios that seek income. The current analysis shows that when added to a diversified portfolio, preferred shares can increase returns and reduce variance over standard equity/ fixed-income portfolios, including those that include some exposure to real estate investment trusts (REITs) for income production. [ABSTRACT FROM AUTHOR]

The opening of equity markets to foreign investment by developing countries appears to generate an enormously large positive growth effect (see Bekaert, Harvey, and Lundblad (2005), Journal of Financial Economics 77, 3–55) in spite of a relatively small role of such markets for financing investment in most economies. We propose a spillover channel from equity market opening to lower costs of bank loans, which helps to explain this puzzle. From analyzing bank loan data associated with China's introduction of the Qualified Foreign Institutional Investors program, we find significant support for this channel. Furthermore, we show that a reduction in the risk premium in loans is an important mechanism. [ABSTRACT FROM AUTHOR]

We exploit the staggered introduction of liability waivers when investors hold stakes in conflicting business opportunities as a shock to venture capital (VC) investment and director networks. After the law changes, we find increases in within-industry VC investment and common directors serving on startup boards. Despite the potential for rent extraction, same-industry startups inside VC portfolios benefit by raising more capital, failing less, and exiting more successfully. VC directors serving on other startup boards are the primary mechanism associated with positive outcomes, consistent with common VC investment facilitating informational exchanges in VC portfolios. Authors have furnished an Internet Appendix , which is available on the Oxford University Press Web site next to the link to the final published paper online. [ABSTRACT FROM AUTHOR]