Hai Wu

We show that the excess stock return comovement between firm pairs is positively associated with the political orientation similarity of their managers. This partisan‐based return comovement can be attributed to style‐based and habitat‐based investing, as well as shared exposure to common information sources. Notably, partisan return comovement has increased significantly in recent years, coinciding with rising ideological polarisation and affective hostility between Republicans and Democrats. Overall, our results suggest that political polarisation in the United States is spilling over into the stock market, which is becoming increasingly segmented along party lines.

Using a newly developed institutional investor distraction measure, we examine whether auditors increase their risk assessment when clients’ institutional investors temporarily reduce their monitoring activities. We find that audit fees and audit report lags increase during periods when institutional investors temporarily focus their attention on other parts of their portfolio. This effect is stronger when dedicated institutional investors are distracted. We further show that the identified relationship is weaker in the post‐Sarbanes‐Oxley Act period. Finally, we find that the impact of investor distraction on audit fees and lags is more pronounced for firms with weaker board oversight and higher discretionary accruals. Collectively, our results suggest that institutional shareholders’ monitoring activities benefit auditors by reducing audit risk. This paper also shows that the negative effect of investors’ limited attention on corporate monitoring can be somewhat mitigated by auditors.

The Leahy-Smith America Invents Act of 2011 (AIA) fundamentally changed the U.S. public patent system. This study examines whether and how the enactment of the AIA affects innovation-intensive firms’ narrative R&D disclosure. Adopting a difference-in-difference design, we find that the enactment of the AIA is associated with a greater decline in narrative R&D disclosure of innovation-intensive firms relative to non-innovation-intensive firms. This effect is more pronounced for firms that are more concerned about the proprietary costs of disclosure and firms with lower financial constraints. Moreover, we show that the enactment of the AIA dampens analysts’ information environment and aggravates information asymmetry. Overall, our results suggest that the AIA has a negative impact on corporate disclosure and information asymmetry. The documented unintended effect of the AIA could potentially work against lawmakers’ efforts to bolster innovation and the dissemination of knowledge.

The Leahy-Smith America Invents Act of 2011 (AIA) fundamentally changed the U.S. public patent system. This study examines whether and how the enactment of the AIA affects innovation-intensive firms’ narrative R&D disclosure. Adopting a difference-in-difference design, we find that the enactment of the AIA is associated with a greater decline in narrative R&D disclosure of innovation-intensive firms relative to non-innovation-intensive firms. This effect is more pronounced for firms that are more concerned about the proprietary costs of disclosure and firms with fewer financial constraints. Moreover, we show that the enactment of the AIA dampens analysts’ information environment and aggravates information asymmetry. Overall, our results suggest that the AIA has a negative impact on corporate disclosure and information asymmetry. The documented unintended effect of the AIA could potentially work against lawmakers’ efforts to bolster innovation and the dissemination of knowledge.

This study examines whether analysts in the extractive industries in Australia adjust their private information searching and processing in response to the complexity of information about a firm’s exploration and evaluation (E&E) activities. We find that both the proportion of private information in their forecasts and the accuracy of their forecasts increase with the intensity of E&E activities. Additional analyses reveal that this effect is more pronounced for firms with substantial E&E activities but limited production activities, and that analysts’ private information development activities are mainly related to the capitalized E&E expenditures. Our results provide guidance for both investors and future standard setters. They show that investors can benefit from analysts’ expertise in situations of high information asymmetry. They also provide evidence of the advantage of distinguishing successful from unsuccessful investments in resource exploration when accounting for E&E expenditures, which may inform future decisions about accounting for intangible assets.

We investigate the role of enforcement strategy in improving firms’ compliance with corporate disclosure regulations. We find that a responsive enforcement strategy developed by the Australian corporate and financial markets regulator, the Australian Securities and Investments Commission (ASIC), yielded significant improvements in analysts’ information environment and market liquidity over the period when a series of additional sanctions were progressively introduced. We conclude that the design and implementation of an appropriate enforcement strategy is an important determinant of the effectiveness of public enforcement of securities laws.

This study examines whether analysts in the extractive industries in Australia adjust their private information searching and processing in response to the complexity of information about a firm’s exploration and evaluation (E&E) activities. We find that both the proportion of private information in their forecasts and the accuracy of their forecasts increase with the intensity of E&E activities. Additional analyses reveal that this effect is more pronounced for firms with substantial E&E activities but limited production activities, and that analysts’ private information development activities are mainly related to the capitalized E&E expenditures. Our results provide guidance for both investors and future standard setters. They show that investors can benefit from analysts’ expertise in situations of high information asymmetry. They also provide evidence of the advantage of distinguishing successful from unsuccessful investments in resource exploration when accounting for E&E expenditures, which may inform future decisions about accounting for intangible assets.

This paper contributes empirical evidence to the international accounting debate over whether capitalisation of research and development (R&D) expenditure should be permitted. It exploits more flexible accounting rules in Australia prior to 2005 which allowed expensing or capitalisation of R&D at management discretion. Following Kothari, Laguerre and Leone (2002), association with the uncertainty of future economic benefits is used to evaluate the capitalising versus expensing decision. This paper examines the associations of total R&D expenditures and separate capitalised and expensed R&D expenditures, as well as PPE expenditures, with future earnings variability. The results, which are robust to alternative measures of key variables, show that the expensed R&D is associated with higher earnings variability. We interpret this as indicating that management uses its accounting choice to signal the uncertainty of future economic benefits from R&D expenditures to investors, rather than using it to manage earnings.