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We argue that the market for audit services closely resembles a common value procurement (seller’s) auction, where auditors generate a private estimate of the actual cost of an audit engagement prior to quoting the client a price. Thus, we conduct a systematic examination of audit pricing and audit quality in this market setting using two experiments. In experiment one, we examine a simplified setting in which auditors determine only audit price to investigate whether the “winner’s curse” found to be pervasive in the buyer’s version of the common value auction is also present in the seller’s version. In experiment two, we examine an enriched setting in which auditors determine both audit price and audit effort to investigate the robustness of our results and the effect of the winner’s curse on audit quality. In both experiments, we find that auditors fall prey to the winner’s curse and offer low ball prices on average. But we also find a differential learning process across the two markets. In experiment one, auditors learn to reduce their low ball pricing with market experience. In experiment two, however, auditors do not reduce their low ball pricing but instead reduce their audit effort when they contract at a low ball price. Our evidence suggests that low ball audit pricing arises due to the winner’s curse, and this source of low ball pricing poses a threat to audit quality.

SUMMARY After considering a proposal to require the engagement partner's signature on the audit report (PCAOB 2009), the Public Company Accounting Oversight Board chose instead to only require the disclosure of the engagement partner's name (PCAOB 2015). We make predictions regarding the effects of the two proposed requirements using insights from social norm theory, and test those predictions using an experimental audit market setting found in the literature. We find that both requirements reduce misreporting when compared to a control setting with neither requirement present. We also document that the signature requirement generates an incremental reduction in misreporting when added to the disclosure requirement. Finally, we provide evidence that these effects are driven by participants with higher sensitivity to social norms. This theory and evidence supports the new identity disclosure requirement at the PCAOB and helps explain the existence of signature requirements in many non-U.S. countries. Data Availability: Experimental data are available from the authors upon request.

We assert that audit quality can be improved to the extent that social norms for honesty and responsibility are activated in the auditor. To test this assertion, we use an experimental audit market setting found in the literature and manipulate factors expected to activate honesty and responsibility norms in the auditor. We find that auditor misreporting is reduced when the investor is another participant in the experiment rather than computer simulated, and thus, the interests of third-party investors are salient to the auditor. We also find that auditor misreporting is reduced when the auditor is required to sign-off on the audit report, but only when the investor is another participant in the experiment. Consistent with our underlying theory, we find that pre-experimental measures of sensitivity to honesty and responsibility norms help explain the effects of our manipulated variables. Finally, we find that these measures of social norm sensitivity are associated with the moral judgment that auditor misreporting is unethical. Our study helps explain previous anomalous findings in the literature and answers the call in Blay et al. (J Bus Ethics 2017. doi: 10.1007/s10551-016-3286-4 ) for empirical researchers to use social norm theory to develop stronger tests of moral reasoning in the market for auditing services.

Rankin, Schwartz, and Young (2008) find experimental evidence that manipulating whether the budget request of the subordinate requires a factual assertion has no effect on budgetary slack when the superior can reject the budget. This calls into question the role of honesty in participative budgeting settings. Using Rankin et al.'s (2008) manipulation to capture honesty effects, we examine the robustness of honesty effects on budget proposals when the superior has rejection authority in two experiments. In Experiment 1, we document that honesty has a strong effect on budgetary slack when the salience of distributional fairness is reduced by withholding the relative pay of the superior from the subordinate. In Experiment 2, we document that honesty continues to have a strong effect on budgetary slack when the salience of reciprocity is increased by giving the superior the ability to set the subordinate's salary. Thus, our evidence suggests that honesty effects on budget proposals are generally robust to giving the superior rejection authority. Our study helps explain prior experimental results and clarifies the role of honesty in participative budgeting settings. Data Availability: Experimental data are available from the authors upon request.

Policy makers and corporations have recently emphasized a code of ethics as an effective aspect of corporate governance. The corporate governance literature in accounting, however, provides little empirical or theoretical support for this emphasis. We address this gap between public policy and the literature by studying the effectiveness of a code of ethics in an experimental setting. Using Bicchieri's (2006) model of social norm activation, we predict that a code of ethics will improve manager return behavior and investor confidence to the extent that it activates social norms that control opportunistic behavior. Further, we predict that adding a certification choice whereby the manager can publicly certify that he will adhere to the code will enhance the potential for the code of ethics to activate such norms. We find that a code of ethics only improves manager return behavior and investor confidence when the code incorporates a public certification choice by the manager. When the code is present but there is no certification choice, manager return behavior does not improve and investor confidence erodes over time because of increased expectations that are not met by managers. An analysis of individual return decisions and exit questionnaire responses supports the activation of social norms as the underlying mechanism behind our results. Data Availability: Experimental data are available from the authors upon request.

Given traditional agency theory assumptions and unobservable effort in a single-period setting, a moral hazard arises in which the agent is expected to shirk and provide the minimal possible effort after contracting with the principal. Traditional solutions to this agency problem include paying the agent a financial incentive tied to some noisy measure of performance or allowing the agent to develop a reputation over multiple periods. As the noisiness of the performance measure increases, however, these traditional solutions become increasingly costly and ineffective. In many single- and multi-period agency settings in the firm, however, the agent can communicate a promised level of effort to the principal prior to contracting. We document that this pre-contract communication, which is non-enforceable and therefore considered “cheap talk” by traditional economic theory, can be highly effective in mitigating the moral hazard problem in agency theory. In a repeating single-period experimental setting where production is observable but is a very noisy indicator of effort, communication of a promised level of effort results in higher pay for the agent, higher effort, and higher expected profit for the principal than the control group. When the principal and agent interact over multiple periods, reputation building is ineffective, but cheap talk continues to yield superior outcomes. These results are consistent with recent economic theory incorporating social norms such as the norm of promise-keeping. Data Availability: The experimental data used in this paper are available from the authors upon request.

This paper reviews, synthesizes, and critiques the capital market literature examining trading volume around earnings announcements and other financial reports. Our purposes are to assess what we have learned from examining trading volume around these announcements and to suggest directions for future research. We conclude that researchers have yet to realize the potential Beaver (1968) identified for trading volume to yield unique insights regarding the nature of earnings announcements and other financial reports, and the effects of these announcements on market participants. This state of the literature is attributable to a dearth of volume theory early on, and more recently to a disconnect between theoretical development and empirical research. Thus, we begin by briefly summarizing developments in trading volume theory since Beaver (1968). We also discuss unique measurement challenges in trading volume research, including identifying appropriate proxies for abnormal trading volume and for individual investors’ beliefs. In light of theory and empirical measurement issues, we interpret the current literature and identify directions for future research. We conclude that extant research just scratches the surface of what trading volume can reveal about the characteristics of financial disclosures and the effects of these disclosures on investors.

In August 2009, a new urban public high school featuring project-based science, technology, engineering, and mathematics (STEM) education opened with a population of African-American, low-income, and special needs students. A planning team comprised of lead teachers and the school principal sought to create a positive school culture with a clear vision and core values that would engender relational trust, a strong sense of community, and principal and teacher co-leadership. The culture was to be supported by social structures instituted through teams, professional development, student orientations, venues for instructional innovation, and informal gathering places. This account, written by the principal, a teacher, and a university researcher, presents a first-hand narrative of how the school culture was created. Introduction In November 2007, the State of Ohio issued a Request for Proposals for seed grants to fund the establishment of five new public high schools with innovative programs focusing on science, technology, engineering, and mathematics (STEM). The new schools were to be geared toward the development of intellectual, entrepreneurial, and technical talent, and do so in partnership with higher education institutions, industries, and businesses. A partnership was formed in Cincinnati between Cincinnati Public Schools (CPS), Cincinnati Federation of Teachers (CFT), the University of Cincinnati (UC), Cincinnati State Technical and Community College, and STRIVE--a regional education, business, and municipal consortium. The partnership was awarded one of the grants in March 2008, and the school district decided to transform an existing public high school, Hughes High School, into a new STEM school. The new school would operate as a choice-based high school with a first-come, first-serve open enrollment policy for children residing in the district. The student population would reflect the racial, ethnic and socio-economic makeup of the district. Grades 9-12 would be phased in one year at a time beginning with the 9th grade in 2009. When the school was opened, 86% of students were African-American, 28% had special needs, and 84% received free and reduced lunches. Ninth graders in the inaugural class came from 48 feeder schools. The plan was to offer programs that would develop students' interest in STEM careers and prepare them for college. The principal, teachers, university faculty members, and others involved in the planning process understood at the outset that the key to success was the creation of a positive school culture, an insight well supported by decades of research and planners' own prior experiences in public high schools (Cheong, 1993; Fullan, 2001, 2007; Joyce, Hersh, & McKibbon, 1983; Rutter et al., 1979; Sarason, 1996). A deliberate effort was made to create a positive school culture with a clear vision and core values that would engender relational trust, a strong sense of community, and principal and teacher leadership. Planners recognized that positive culture was not possible without the support of social structures instituted through collaborative team arrangements, professional development, student orientation programs and advisement, venues for innovative instruction and, also, as they found out after the school was opened, informal gathering places. This account, written by the school principal, Dr. Virginia Rhodes; a technology teacher, Douglas Stevens; and a university faculty member, Dr. Annette Hemmings, tells the story of this effort. It presents a firsthand narrative of what the principal and teachers did to create a positive school culture, the lessons they learned, and what they are facing as they look ahead to succeeding years. Positive School Culture Innovative, interdisciplinary STEM education is being lauded as an optimal means for providing k-12 students with opportunities to learn about the world through pedagogical approaches that couple rigorous academic curriculum with real-world lessons in contexts that connect schools, communities, and work and integrate young people into the new global economy (Kaufman, Moss, & Osborn 2003). …

We apply insights from a model of social norm activation to an agency model of capital budgeting to develop a positive behavioral relation between information system precision and honesty in managerial reporting. This relation is based on the ability of a precise information system to reduce information asymmetry between the owner and the manager and thereby promote the activation of an honesty norm. Next, we use this behavioral theory to predict that high operating uncertainty in the information system offsets this positive relation by allowing the manager to hide behind the uncertainty and thereby evade the honesty norm. Using an experimental agency setting in the literature, we find evidence consistent with our behavioral theory. Information system precision increases managerial honesty under low but not under high operating uncertainty and managerial honesty is the highest under a precise information system with low operating uncertainty. An analysis of exit questionnaire responses confirms our underlying behavioral theory based on social norm activation and norm evasion. This study helps explain prior experimental results and emphasizes the importance of considering operating uncertainty in determining the optimal information system.

This experimental study tests the effects on budgetary slack of two potential controls for opportunistic self-interest—reputation and ethics. I manipulate the level of information asymmetry between the subordinate and the superior regarding productive capability and measure the subordinate's reputation and ethical concerns regarding budgetary slack. In this setting, I examine how information asymmetry affects reputation and ethical concerns, and test the effects of these concerns on budgetary slack. Consistent with prior findings, subordinates restrict the slack in their budgets to well below the maximum under a slack-inducing pay scheme, even after five periods of experience. Budgetary slack is negatively associated with a measure of ethical responsibility from a pre-experiment personality questionnaire as well as reputation and ethical concerns expressed in an exit questionnaire. Subordinates express lower reputation concerns as information asymmetry regarding productive capability increases, thereby reducing the superior's ability to monitor the slack in their budget. Ethical concerns, however, are not diminished with increases in information asymmetry. These results suggest that reputation is a socially mediated control, whereas ethics is an internally mediated control for opportunistic self-interest.

Nearly a century after Einstein first predicted the existence of gravitational waves, a global network of Earth-based gravitational wave observatories1,2,3,4 is seeking to directly detect this faint radiation using precision laser interferometry. Photon shot noise, due to the quantum nature of light, imposes a fundamental limit on the attometre-level sensitivity of the kilometre-scale Michelson interferometers deployed for this task. Here, we inject squeezed states to improve the performance of one of the detectors of the Laser Interferometer Gravitational-Wave Observatory (LIGO) beyond the quantum noise limit, most notably in the frequency region down to 150 Hz, critically important for several astrophysical sources, with no deterioration of performance observed at any frequency. With the injection of squeezed states, this LIGO detector demonstrated the best broadband sensitivity to gravitational waves ever achieved, with important implications for observing the gravitational-wave Universe with unprecedented sensitivity Fil: Aasi, J.. California Institute of Technology; Estados Unidos Fil: Abadie, J.. California Institute of Technology; Estados Unidos Fil: Abbott, P.. California Institute of Technology; Estados Unidos Fil: Abbott, R.. California Institute of Technology; Estados Unidos Fil: Abbott, T. D.. State University of Louisiana; Estados Unidos Fil: Kozameh, Carlos Nicolas. Universidad Nacional de Córdoba; Argentina. Consejo Nacional de Investigaciones Científicas y Técnicas; Argentina Fil: Winkelmann, L.. Max Planck Institut f¨ur Gravitationsphysik; Alemania. Leibniz Universit¨at Hannover; Alemania Fil: Winkler, W.. Max Planck Institut f¨ur Gravitationsphysik; Alemania. Leibniz Universit¨at Hannover; Alemania Fil: Wip, C. C.. Massachusetts Institute of Technology; Estados Unidos Fil: Wittel, H.. Max Planck Institut f¨ur Gravitationsphysik; Alemania. Leibniz Universit¨at Hannover; Alemania Fil: Woan, G.. University of Glasgow; Reino Unido Fil: Wooley, R.. Livingston Observatory; Estados Unidos Fil: Worden, J.. Hanford Observatory; Estados Unidos Fil: Yablon, J.. Northwestern University; Estados Unidos Fil: Yakushin, I.. Livingston Observatory; Estados Unidos Fil: Yamamoto, H.. California Institute of Technology; Estados Unidos Fil: Yancey, C. C.. University of Maryland; Estados Unidos Fil: Yang, H.. Caltech-CaRT; Estados Unidos Fil: Yeaton Massey, D.. California Institute of Technology; Estados Unidos Fil: Yoshida, S.. Southeastern Louisiana University; Estados Unidos Fil: Yum, H.. Northwestern University; Estados Unidos Fil: Zanolin, M.. Embry-Riddle Aeronautical University; Estados Unidos Fil: Zhang, F.. Massachusetts Institute of Technology; Estados Unidos Fil: Zhang, L.. California Institute of Technology; Estados Unidos Fil: Zhao, C.. University of Western Australia; Australia Fil: Zhu, H.. State University of Pennsylvania; Estados Unidos Fil: Zhu, X. J.. University of Western Australia; Australia Fil: Zotov, N.. Louisiana Tech University; Estados Unidos Fil: Zucker, M. E.. Massachusetts Institute of Technology; Estados Unidos Fil: Zweizig, J.. California Institute of Technology; Estados Unidos

This paper reviews, synthesizes, and critiques the capital market literature examining trading volume around earnings announcements and other financial reports. Our purposes are to assess what we have learned from examining trading volume around these announcements and to suggest directions for future research. We conclude that researchers have yet to realize the potential Beaver (1968) identified for trading volume to yield unique insights regarding the nature of earnings announcements and other financial reports, and the effects of these announcements on market participants. This state of the literature is attributable to a dearth of volume theory early on, and more recently to a disconnect between theoretical development and empirical research. Thus, we begin by briefly summarizing developments in trading volume theory since Beaver (1968). We also discuss unique measurement challenges in trading volume research, including identifying appropriate proxies for abnormal trading volume and for individual investors’ beliefs. In light of theory and empirical measurement issues, we interpret the current literature and identify directions for future research. We conclude that extant research just scratches the surface of what trading volume can reveal about the characteristics of financial disclosures and the effects of these disclosures on investors.

We study the implications of introducing ethics into the traditional principal-agent model. In our model, the principal specifies a standard for effort at the time of contracting and the agent suffers a utility loss if he chooses not to provide the standard after agreeing to the contract. The magnitude of the loss depends upon the agent's ethical sensitivity. We demonstrate the emergence of an optimal flat salary contract. We then examine the interplay between ethical sensitivity and firm productivity in determining the optimal salary contact, and contrast it with the traditional incentive solution. Our results are intuitive and help explain a variety of contracting behavior that is inconsistent with traditional agency predictions.