Srinivasan Sankaraguruswamy

Audit Market Concentration and Audit Quality

Policymakers and regulators have been concerned about the impact of audit market concentration resulting from decline in the number of audit firms due to mergers and the demise of Arthur Andersen. In this paper we find a positive association between audit market concentration (Herfindahl index) at the MSA level and audit quality (measured by discretionary accruals and the Dechow-Dichev (2002) measure of accrual quality). We control for fixed year effects, therefore our results are unlikely to be affected by the increase in concentration due to Andersen’s demise contemporaneous with an increase in audit quality because of regulatory measures such as SOX. Our results are robust to alternative concentration and audit quality measures, and several sensitivity tests attempting to rule out omitted variables correlated with client firms’ MSA location or attributes of clients and auditors. Our results are also robust to controls for endogeneity between audit market concentration and audit quality. Our evidence therefore supports the Government Accountability Office (2003, 2008) conclusions that increased audit market concentration is not currently a cause for concern.

Investor Sentiment and Stock Market Response to Corporate News

We examine whether market-wide investor sentiment influences the stock price response to firm-specific news. We use the recently developed measure of investor sentiment by Baker and Wurgler (2006, 2007) and focus on the stock price response to earnings announcements. Our results indicate that the prevailing sentiment sways stock price response to news in the direction of the sentiment - the positive stock price response to good news increases with sentiment, whereas the negative stock price response to bad news decreases with sentiment. The influence of sentiment on the stock price response is especially pronounced for small stocks, young stocks, volatile stocks, non-dividend paying stocks and distressed stocks. We find that sentiment also impacts the stock price response to dividend changes and stock split announcements.

Skewness of Earnings and the Believability Hypothesis: How Does The Financial Market Discount Accounting Earnings Disclosures?

When firms attempt to manage their earnings disclosures by presenting evidence selectively, sophisticated inference on the part of financial market participants entails a positive association between the market to bood ratio of a firm and the skewness of the distribution of its announced earnings. In this paper, we put this hypothesis to the test, and confirm its main predictions.

Systematic Sentiment, Idiosyncratic Sentiment, and the IPO Pricing Process

We examine the impact of investor sentiment on the IPO pricing process. We propose that investor sentiment has a systematic component, which is due to market-wide sentiment, and an idiosyncratic (residual) component. We find some evidence that systematic sentiment impacts IPO valuations, but this relationship is not robust. We find that systematic sentiment is positively related with IPO underpricing and this relationship is more pronounced for difficult-to-arbitrage firms. Systematic sentiment is negatively related to long-run IPO returns. However, the evidence about the impact of idiosyncratic sentiment on IPO pricing process is less compelling. Overall, our findings suggest that the behavioral biases of market participants influencing IPO pricing process have a systematic market component.