Microstructure theory contends that dealers' bid-ask spreads should vary intertemporally with changes in the asymmetric information component of the spread. Corporate theory suggests that stock repurchase announcements signal management's private information to the securities markets. An examination of dealers' spread behavior around firms' open market repurchases in the NASDAQ market reveals a decline in spreads adjusted for dealers' inventory-holding and order-processing costs. This decline is attributed to a reduction in informed trading risk associated with the open market repurchase announcements.
This study investigates how litigation against an audit firm affects the market value of its publicly traded clients. We examine the impact of private litigation alleging audit failure on the audit firm's clients not involved in the lawsuit. Our results indicate that clients not involved in the litigation experience significant negative returns at the announcement of litigation against their audit firm. These results suggest that the market interprets litigation against an audit firm as a signal of decreased audit quality and that the market places a value on audit quality when pricing a firm's securities. The results are also consistent with an audit insurance explanation, which views the audit firm as a source of potential financial indemnification to investors and predicts that damage to the auditor's underwriting ability will be reflected in reduced securities prices for the firm's clients. When the analysis was restricted to companies in the same industry where the alleged audit failure occurred, the market response is significantly more negative when the audit firm is considered a specialist in that industry than when the audit firm is not a specialist. Finally, the market response is weaker later in the sample period, consistent with the findings of prior research that the frequency of nonmeritorious suits has increased over time.
Restructuring events, such as downsizing, can either halt a downward spiral in corporate performance or perpetuate that downward spiral (Lindsley, Brass and Thomas 1995). This dual nature of downsizing is reflected in the mixed results found by prior researchers.We recognize the dual nature of downsizing by categorizing events according to the firm’s financial condition preceding the announcement of the downsizing. We find a significant negative stock price reaction for firms that are financially healthy in the period preceding the announcement of the downsizing, but a statistically smaller reaction for firms that are in financial distress. The results suggest that the stock market views downsizing events consistent with the theory proposed by Lindsley, Brass and Thomas (1995).
ChatGPT, a language-learning model chatbot, has garnered considerable attention for its ability to respond to users’ questions. Using data from 14 countries and 186 institutions, we compare ChatGPT and student performance for 28,085 questions from accounting assessments and textbook test banks. As of January 2023, ChatGPT provides correct answers for 56.5 percent of questions and partially correct answers for an additional 9.4 percent of questions. When considering point values for questions, students significantly outperform ChatGPT with a 76.7 percent average on assessments compared to 47.5 percent for ChatGPT if no partial credit is awarded and 56.5 percent if partial credit is awarded. Still, ChatGPT performs better than the student average for 15.8 percent of assessments when we include partial credit. We provide evidence of how ChatGPT performs on different question types, accounting topics, class levels, open/closed assessments, and test bank questions. We also discuss implications for accounting education and research.
The literature on stock distributions has documented that there is a positive stock market response to the announcement of a stock distribution and a negative relation between the market response and the presplit price of the stock. The positive market reaction has been attributed to (1) the benefits that may result from a lower per share stock price and (2) a signal from management about their favorable private information. The negative correlation between the market reaction and the presplit price may indicate (1) that the firm's share price affects the extent to which the market anticipates the distribution and/or (2) that the share price acts as an inverse proxy for the credibility of the signal. Empirical evidence supports both the anticipation and credibility-of-signal hypotheses. The anticipation effect can exist only if the anticipated event has cash flow consequences for investors. Therefore, the evidence supporting an anticipation effect implies that the positive market reaction to stock distributions is partly due to trading range benefits. Likewise, the credibility-of-signal model presupposes a decision by management to signal the market. Thus, the evidence also implies that the market reaction is partly due to a favorable signal from management.
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