Ryan LaFond

Do Nonaudit Services Compromise Auditor Independence? Further Evidence

This paper challenges the findings of Frankel et al. (2002) (FJN). The results of our discretionary accruals tests differ from FJNs when we adjust discretionary current accruals for firm performance. In our earnings benchmark tests, in contrast to FJN we find no statistically significant association between firms meeting analyst forecasts and auditor fees. Our market reaction tests also provide different results than those reported by FJN. Overall, our study indicates that FJNs results are sensitive to research design choices, and we find no systematic evidence supporting their claim that auditors violate their independence as a result of clients purchasing relatively more nonaudit services.

The Information Role of Conservatism

In this paper we argue that information asymmetry between firm insiders and outside equity investors generates conservatism in financial statements. Conservatism reduces the manager’s incentives and ability to manipulate accounting numbers and so reduces information asymmetry and the deadweight losses that information asymmetry generates. This increases firm and equity values. Our empirical tests are consistent with our proposition that information asymmetry is significantly positively related to conservatism after controlling for other demands for conservatism. Further, our tests are more consistent with our prediction that changes in information asymmetry between equity investors lead changes in conservatism than the FASB’s proposition that conservatism produces information asymmetry among equity investors. An important implication is that, if the FASB was successful in meeting their stated goal of eliminating conservatism, they would increase information asymmetry between investors, not reduce it. This outcome is inconsistent with the objectives of the Securities Acts. The Information Role of Conservatism

Information Uncertainty and Post-Earnings-Announcement-Drift

We examine whether rational investor responses to information uncertainty (IU) explain properties of and returns to the post-earnings-announcement-drift (PEAD) trading anomaly. Consistent with a rational learning explanation, we find that: (1) unexpected earnings (UE) signals that are characterized as having greater IU have more muted initial market reactions; (2) extreme UE portfolios are characterized by securities with higher IU than non-extreme UE portfolios; and (3) within the extreme UE portfolios, high IU securities are more prevalent and earn larger abnormal returns than low IU securities. Further tests show that prior evidence of greater PEAD profitability for higher idiosyncratic volatility securities is explained by the greater information uncertainty associated with these securities.

Does Stock Price Synchronicity Represent Firm-Specific Information? The International Evidence

Note: This paper has been superseded by Gassen, LaFond, Skaife and Veenman: Illiquidity and Stock Price Synchronicity, http://ssrn.com/abstract=2405465. Much of prior international accounting research implicitly assumes that stock prices capture similar amounts of firm-specific information across countries. Recent research asserts that stock price synchronicity, defined as the R2 from asset pricing regressions, is a useful measure of the amount of firm-specific information impounded in stock prices in international markets. However, the results of our empirical tests provide little support for using stock price synchronicity as a measure of firm-specific information internationally. We develop an alternative measure of firm-specific information impounded in stock price based on the percentage of zero-return days, i.e., the zero-return metric, and repeat the analyses. Overall, our results suggest that the zero-return metric is a better measure of firm-specific information impounded into share prices than the synchronicity measure internationally.

Does Stock Price Synchronicity Reflect Information or Noise? The International Evidence

Prior research asserts that stock price synchronicity, defined as the R2 from asset pricing regressions, is a useful measure of the relative amount of firm-specific information reflected in stock prices. This paper investigates the validity of the information-based interpretation of stock price synchronicity in international markets. The results of our analyses provide little support for using stock price synchronicity as a measure of firm-specific information internationally. We develop an alternative measure of firm-specific information based on the percentage of zero return weeks, and repeat the analyses. The results suggest that the zero-return metric better captures differences in the amount of firm-specific information reflected in stock prices in international markets.

A Pitfall in Ethical Investing: ESG Disclosures Reveal Vulnerabilities, Not Virtues

It is widely believed that ESG (Environmental, Social, Governance) investing helps reduce regulatory and reputational risks. In a large global panel, we find that ethics controversies are more likely for firms that adopt popular ESG policies. The effect is attenuated by controlling for size, industry, and country but remains economically and statistically significant. We also show that some prominent ESG indexes favor companies that disclose more ESG policies and as a consequence generally have greater controversy exposure than an ESG-unaware benchmark.