This study examines whether differences in proxies for audit-quality between Big 4 and non-Big 4 audit firms could be a reflection of their respective clients’ characteristics. In our analyses, we use three audit-quality proxies: discretionary accruals, the ex ante cost of equity capital, and analyst forecast accuracy, and employ propensity-score and attribute-based matching models in attempt to control for differences in client characteristics between the two auditor groups while estimating the audit-quality effects. Using these matching models, we find that the effects of Big 4 auditors are insignificantly different from those of non-Big 4 auditors with respect to the three audit-quality proxies. Our results suggest that differences in these proxies between Big 4 and non-Big 4 auditors largely reflect client characteristics, and more specifically client size. We caution the reader that this study has not resolved the question, though we hope that it encourages other researchers to explore alternative methodologies that separate client characteristics from audit-quality effects.

“INDIVIDUAL INVESTORS AND FINANCIAL DISCLOSURE” (Journal of Accounting & Economics, Vol. 56 No. 1, 2013) 

Using detailed data of individual investors, this study shows that, on average, individuals invest more in firms with clear and concise financial disclosures. The results indicate this relation is less pronounced for high frequency trading and financially-literate individuals. The study also shows that individuals’ returns are increasing with clearer and more concise disclosures, implying such disclosures reduce individuals’ relative information disadvantage. Together, the findings suggest improved corporate disclosure practices benefit individual investors, in particular buy-and-hold investors.


The paper by Gunny, Jacob, and Jorgensen provides evidence on whether the earnings volatility induced by year-end adjusting entries results from the integral method of accounting or from purposeful earnings management. The authors find that the variance and negative skewness of annual fiscal-year earnings is greater than the corresponding attributes of alternative annual earnings ending in the first three quarters and interpret these findings as evidence consistent with earnings management rather than settling up annual earnings under the integral method of accounting. While it is difficult to assess the usefulness of their conclusion due to problematic assumptions inherent in the research design, Gunny, Jacob, and Jorgensen reinforce the importance of assessing earnings performance using rolling annual windows. Specifically, they find that the quality of earnings for the alternative annual earnings is greater than that of fiscal-year earnings, highlighting that financial statement users may benefit from using alternative annual earnings to assess current and future performance.

NON-DISCRETIONARY CONSERVATISM: EVIDENCE AND IMPLICATIONS” with Sloan and Sun (Journal of Accounting & Economics, Vol. 56 No. 2-3 (Supplement), 2013–presented at the 2012 Journal of Accounting & Economics Conference)

A large body of accounting research finds that various contracting incentives lead managers to engage in conservative accounting practices. We extend existing research by modeling the impact of extant accounting rules on conservative accounting. Accounting rules typically require assets to be written down when their fair values drop sufficiently below their book values. We document evidence of the resulting non-discretionary conservatism and show that it appears to explain some of the results from previous research on contracting incentives.

“WHO’S THE FAIREST OF THEM ALL? EVIDENCE FROM CLOSED-END FUNDS” with Sloan and Siriviriyakul (The Accounting Review, Vol. 91 No. 1 , 2016)

Prior research examining the ASC 820 fair value hierarchy concludes that Level 3 fair value measurements are significantly less value relevant than Level 1 and Level 2 fair value measurements. We reevaluate this conclusion using the closed-end fund setting, in which fair value measurements are available for substantially all assets. Contrary to prior research, we find that Level 3 fair values are of similar value relevance to Level 1 and Level 2 fair values. Our findings suggest that the results in previous research are attributable to correlated omitted variable bias arising from the absence of fair value data for most assets.

“SEC COMMENT LETTERS AND INSIDER SALES” with Dechow and Ryans (The Accounting Review, Vol. 91 No. 12, 2017)

We document that insider trading is significantly higher than normal levels prior to the public disclosure of SEC comment letters relating to revenue recognition. Furthermore, insider trading is triple its normal level for firms with high short positions. We find a small negative return at the comment letter release date and a negative drift in returns of one to five percent over the next 50 days following the release. We also find that greater pre-disclosure sales are associated with a stronger negative drift. This evidence suggests that insiders appear to benefit from trading prior to revenue recognition comment letters. We investigate whether the delayed price reaction to comment letter releases is due to investor inattention. Consistent with this explanation, we document that comment letters are downloaded infrequently from EDGAR in the days following their public disclosure.


It is well documented that losses are less persistent than profits and that stock prices anticipate the lower persistence of losses. Yet the underlying explanation for these results is unclear. One explanation lies in the abandonment option, whereby firms with losses are more likely to curtail operations (e.g., Hayn 1995). Another explanation involves timely loss recognition stemming from conservative accounting (e.g., Basu 1997). We show that curtailments are an important factor contributing to the lower persistence of losses. An implication of our results is that popular measures of conservatism, such as the measure proposed by Basu (1997), can also measure curtailments.

“THE IMPORTANCE OF CLIENT SIZE IN THE ESTIMATION OF THE BIG 4 EFFECT: A COMMENT ON DEFOND, ERKENS, AND ZHANG (2016)” with Minutti-Meza and Zhang (forthcoming Management Science) [Not Peer Reviewed]

DeFond, Erkens, and Zhang (2016, hereafter DEZ) provide comprehensive analyses highlighting how random variations in propensity score matching (PSM) design choices affect inferences concerning the existence of the Big 4 auditor effect. The conclusion of DEZ is that Lawrence, Minutti-Meza, and Zhang (2011, hereafter LMZ) fail to find a Big 4 effect because of PSM’s sensitivity to design choices. We believe that DEZ emphasizes the need to think carefully when implementing PSM. We offer our views on DEZ findings and suggestions for future research.

“MANAGERS’ COST OF EQUITY CAPITAL ESTIMATES: EMPIRICAL EVIDENCE” with Larocque and Veenstra (forthcoming Journal of Accounting, Auditing, and Finance)

Using actual practice data from U.S. corporate treasury executives, we provide initial evidence of managers’ internal estimates of their firms’ cost of equity capital (COEC) and extrapolate managers’ estimation practices to the broader population of public firms. Our study provides insights into the assumptions managers use in applying the capital asset pricing model (CAPM), the model that managers generally use to estimate their firms’ COEC according to prior research. We show that COEC estimates based on managers’ surveyed estimation practices are positively correlated with realized returns only in the pre-survey period, suggesting that managers set their COEC estimates in a backward-looking manner. Moreover, managers’ estimates are most correlated with estimates reverse-engineered following Easton (2004) and Gode and Mohanram (2003).

“INVESTOR DEMAND FOR SELL-SIDE RESEARCH” with Ryans and Sun (The Accounting Review, Vol. 92 No. 2 , 2017)

We use daily page views of analyst estimates, ratings, and target prices on Yahoo Finance to understand when such users seek sell-side analyst research. Demand for this information is most pronounced on days with earnings announcements, management guidance, and All-Star analyst reports. Surprisingly, demand does not increase at Form 10-K and Form 10-Q filings. While the overall demand for analyst estimates is 19.9 percent less than for analyst ratings and target prices, on earnings announcement and management guidance days this preference is reversed. Moreover, the demand for analyst information substantially trumps that of SEC filings and financial statement information.

“U.S. AUDIT PARTNER ROTATION” with Laurion and Ryans (The Accounting Review, Vol. 92 No. 3 , 2017)

We investigate the effects of audit partner rotation among U.S. publicly listed firms, utilizing the fact that audit partners are periodically copied by name in public correspondence between issuers and the SEC. Relative to non-rotation firms, we find no evidence of a change in the frequency of restated periods following the partner rotation; however, there is an increase in the frequency of restatement discoveries and announcements. We also find an increase in deferred tax valuation allowances. Overall, the results provide some evidence suggesting that U.S. partner rotations support a fresh look at the audit engagement.

“IS OPERATIONAL CONTROL RISK INFORMATIVE OF FINANCIAL REPORTING DEFICIENCIES?” with Minutti-Meza and Vyas (forthcoming at Auditing: A Journal of Practice & Theory)

This study provides evidence concerning the significance of assessing operational control risks as part of an integrative evaluation of internal controls. We examine whether operational control weaknesses can be used as cues to potential unreported financial reporting control weaknesses, and in turn, relate to subsequent financial reporting deficiencies. We find positive relations between operational control weaknesses and future financial reporting control weaknesses, restatements, SEC comment letters, and audit fees, even after controlling for contemporaneous financial reporting control weaknesses. These findings question the completeness and accuracy of regulated assessments of financial reporting control weaknesses, and suggest that operational control risk is informative of potential financial reporting deficiencies.


There is a seven year period between the time that a country first learns that it has won a bid to host the Olympics to the playing of the games. We investigate whether investors use the Olympics as a category for investment over this time period. We examine two hosting countries: China in 2008 and the UK in 2012, and identify a set of stocks from a broad range of industries that are mentioned by media outlets as either directly or indirectly involved in the Olympics. We find that in both countries, Olympic stocks exhibit increases in comovement of returns after the Olympics are announced and declines in comovement after the games are played. We also find that Olympic stocks earn large excess returns when the stock market has performed well, consistent with investors moving funds into these stocks after observing strong past stock price performance. However, these excess returns are lost in subsequent market downturns. Further, evidence suggests that the Olympic Games have little impact on cash flows or earnings. Overall, our evidence suggests that Olympic “euphoria” is sufficient in both China and the UK to influence stock returns and valuations but the overall fundamental benefits of the Olympics are small.

“YAHOO FINANCE SEARCH AND EARNINGS ANNOUNCEMENTS” with Ryans, Sun, and Laptev (working paper)

We use Yahoo Finance search to examine the effects of investor attention at earnings announcements. We find that Yahoo Finance search at earnings announcements is a major factor explaining earnings responses and is predictive of subsequent returns. Moreover, we show that other measures of investor attention (e.g., Google search, EDGAR search) are less informative in explaining earnings responses and subsequent returns. The findings suggest the importance of investor attention, and in particular, retail attention in the pricing of financial information.

“ANATOMY OF A GROWTH STOCK” with Sloan and Wang (working paper)

Previous research suggests that investors overestimate the earnings of growth stocks. We use data on analysts’ disaggregated long-term income statement forecasts to provide new evidence on the source of these forecast errors. We find that while growth stocks largely meet investors’ forecasts for high sales growth, they fail to deliver the significant margin improvements that are anticipated by investors. Our evidence is consistent with the predictions of Aghion and Stein (2008), whereby managers devote too much effort to sales growth, leading to overinvestment and value destruction.