Mandatory Disclosure and Operational Risk: Evidence from Hedge Fund Registration

Mandatory disclosure is a regulatory tool intended to allow market participants to assess operational risk. We examine the value of disclosure through the controversial SEC requirement, since overturned, which required major hedge funds to register as investment advisors and file Form ADV disclosures. Leverage and ownership structures suggest that lenders and equity investors were already aware of operational risk. However, operational risk does not mediate flow‐performance relationships. Investors either lack this information or regard it as immaterial. These findings suggest that regulators should account for the endogenous production of information and the marginal benefit of disclosure to different investment clienteles.     

Analyzing Speech to Detect Financial Misreporting

We examine whether vocal markers of cognitive dissonance are useful for detecting financial misreporting. We use speech samples of CEOs during earnings conference calls, and generate vocal dissonance markers using automated vocal emotion analysis software. We begin by assessing construct validity for the software‐generated dissonance markers by correlating them with four dissonance‐from‐misreporting proxies obtained in a laboratory setting. We find a positive association between these proxies and vocal dissonance markers generated by the software, suggesting the software's dissonance markers have construct validity. Applying the software to CEO speech, we find that vocal dissonance markers are positively associated with the likelihood of irregularity restatements. The diagnostic accuracy levels are 11% better than chance and of similar magnitude to models based solely on financial accounting information. Moreover, the association between vocal dissonance markers and irregularity restatements holds even after controlling for financial accounting and linguistic‐based predictors. Our results provide new evidence on the role of vocal cues in detecting financial misreporting.     

Growth of Participant Direction in Defined Contribution Plans

Using data from IRS Form 5500, this study examines the causes and consequences of the shift toward participant direction of investments in defined contribution plans. The analysis reveals that collective bargaining and pension investments in employer stock reduce the chance of a switch to participant direction, whereas below average returns increases the chance. Also, a switch to participant direction increases employee contributions to the pension and reduces the share of assets invested in employer securities.     

Does Auditor Quality and Tenure Matter to Investors? Evidence from the Bond Market

We examine the relation between auditor characteristics (quality and tenure) and the cost of debt financing. Consistent with the hypothesis that audit characteristics are important to the capital markets, we find that (1) auditor quality and tenure are negatively and significantly related to the cost of debt financing, (2) the relation between auditor characteristics and the cost of debt is most pronounced in firms with debt that is noninvestment grade, and (3) both the insurance and information role of audits are economically significant to the cost of debt. Overall, our results suggest that, through their dual roles of providing information and insurance, auditor quality and tenure matter to capital market participants.