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Purpose This paper aims to examine whether investors perceive the adoption of Public Company Accounting Oversight Board (PCAOB) Rule 3211, which mandates disclosure of the identity of audit engagement partners for the US-listed companies, as providing net benefits to the companies. Design/methodology/approach This study identifies 33 events leading up to the adoption of the PCAOB rule and examines the market reaction around these events. Findings The author finds positive abnormal market-wide returns in response to events that increase the likelihood of adopting the mandate. These positive returns are relatively stronger among companies with higher audit risk and companies with high-quality auditors. Practical implications The results of this study indicate that market participants expect that the overall benefits from the audit engagement partner disclosure rule outweigh the associated costs for average firms and in particular for firms with high audit risk and high-quality auditors. Originality/value Prior studies document mixed evidence on the net effects of PCAOB Rule 3211 on audit quality and audit fees, potentially because of the short post-rule adoption period and the weak effect of the rule on audit quality and audit fees during the transition period. The author complements these studies by providing the first evidence on the way that the stock market reacts to events that change the likelihood of the adoption of the audit engagement partner disclosure mandate.

We decompose analysts’ earnings forecast error into predictable and unpredictable components and investigate individual vis-à-vis institutional investors’ reactions to each of these components. We find that in the immediate post-earnings announcement window, only individuals under-react to the predictable component, while both individuals and institutions under-react to the unpredictable component. The price drift in this window is driven primarily by investors’ under-reaction to the unpredictable component. This drift remains highly significant in larger firms and intensifies in firms with complex financial reports, suggesting that it likely represents the slow and noisy process of price discovery. Around the next quarterly earnings announcement, only individuals under-react to the previous quarter’s predictable component, and this fixation drives the entire price drift in this window. This drift disappears in larger firms and gets exacerbated in firms with greater forecast error autocorrelations, suggesting that it is likely attributable to incomplete processing of earnings information by individuals.

We examine how a firm’s operational slack is associated with current income and future stock price crash risk. By doing so, we test the validity of a firm’s alternative motivations for holding operational slack. We show that Supply Chain Slack, which is based on excess working capital, is associated with higher current profits and higher future crash risk. This evidence is consistent with the firm hoarding bad news. In contrast, SG&A Slack, which is based on excess selling, general, and administrative expenses, is associated with lower current income and lower future crash risk. This evidence is consistent with the firm insuring against rare and adverse events. Furthermore, a firm’s stock price crash risk is lower when a slack type is more costly, consistent with both motivations. Overall, our findings suggest a stronger profit-crash risk tradeoff when firms hold more operational slack.

Exploiting the natural experiment created by the adoption of wrongful discharge laws (WDLs) across U.S. states, we examine the effect of legal protection against unjust employment termination on firm-level cost behavior. We find that the adoption of WDLs increases the asymmetric sensitivity of costs to activity (i.e., cost stickiness). The effect of WDLs on cost stickiness varies across firms and industries, as well as by adoption timing and multiplicity. Our evidence suggests that changes in the state-level legal environment have a significant effect on firm-level resource adjustment decisions and asymmetric cost behavior.

We offer evidence that the use of relative performance evaluation (RPE) in CEOs’ incentive contracts influences the effect of risk-taking incentives on both the magnitude and composition of firm risk. We find that, when the incentive design lacks RPE features, the incentive portfolio vega motivates CEOs to increase total risk through the systematic component because it can be hedged. In contrast, when the incentive design includes RPE features, CEOs prefer idiosyncratic risk because RPE filters out the systematic component of firm performance. We also document that the use of RPE reinforces the incentive portfolio vega's effect on the total risk