Alex Petkevich

Idiosyncratic Volatility, Institutional Ownership, and Investment Horizon

This paper reevaluates the cross-sectional effect of institutional ownership on idiosyncratic volatility by conditioning on institutions’ investment horizon. Prior literature establishes a positive link between growing institutional ownership and idiosyncratic volatility. However, this effect may vary depending on the type of institutional ownership. We document that short-term (long-term) institutional ownership is positively (negatively) linked to idiosyncratic volatility in the cross section. These opposite effects persist after controlling for institutional preferences and information-based trading and remain qualitatively unchanged after controlling for endogeneity. This suggests that short-term (long-term) institutions exhibit higher (lower) trading activity, which increases (decreases) idiosyncratic volatility.

Political Corruption and Auditor Behavior: Evidence from US Firms

Abstract This paper investigates the impact of political corruption on auditor behavior in the United States. We find that US firms headquartered in more corrupt regions pay higher audit fees, have longer audit report lags, and are more likely to receive a going concern audit opinion. Political corruption is a manifestation of a weak institutional environment and, as such, weakens the rule of law. In addition, political corruption erodes the public’s belief in a political system and reduces interpersonal trust. Our results suggest that auditors assess the risk and trustworthiness of their clients based on where firms are headquartered. The results are robust to using a 2SLS regression analysis and a propensity-score-matched sample. This study extends the prior research on political corruption and the client risk management strategies used by external auditors. Moreover, the current study will be helpful to regulators considering the more explicit role of external auditors in corruption risk assessment.

Why is Accounting Information Important to Bondholders

The authors investigate the relevance of accounting information for bondholders. Their results imply that credit markets access firms’ default information through accounting signals. This information is reflected through cash flow (CF) and discount rate (DR) news. Specifically, the sensitivity of bond prices to news increases as firms get closer to default, owing to increasing firm-level credit risk or because aggregate credit conditions worsen. However, the latter is more important. Thus, the importance of a given accounting signal depends on 1) the mix of CF and DR news it reflects; 2) the firm’s proximity to default; and 3) the aggregate credit conditions. The authors incorporate these insights into a dynamic trading strategy that earns significant risk-adjusted returns. These results are robust after controlling for liquidity and transaction costs.