The purpose of this dissertation is to examine the role auditor reputation plays in the demand and supply of audits and to examine the process by which an auditor builds a reputation for audit quality. The goal is to begin to develop a comprehensive theory of the demand for auditing and the incentives this demand creates for the supply of audits. Scott (1984) cites a lack of theory capturing the precise nature of the auditor's contribution to a production and exchange economy. This paper uses an experimental economy and related model to examine the role of an auditor's reputation for delivering high quality audits in such a multiple period economy. A theory of the demand and supply of audits is necessary to help assess the need for regulation of the audit market. The need for regulation in existing audit markets has been questioned by some members of the auditing profession (Arthur Andersen, et. al. 1992). In response, experimental economic markets (EEM) research has examined different regulatory regimes (Dopuch and King 1992, Dopuch et. al., 1994). However, this research has not examined whether reputation can serve as a substitute for regulation in motivating the supply of high quality audits. Existing EEM research has provided some evidence of reputation effects in general (DeJong, et. al., 1985, Dopuch and King 1991) but has produced limited evidence of auditor reputation. Unlike prior EEM research, this paper explicitly examines auditor reputation. Three different experimental treatments were used to test the derived model: one treatment with robot investors and two treatments with human investors. The robot investor replications produced strong support for an auditor reputation model. Two of six human investor replications supported an auditor reputation model while the other four collapsed into markets for lemons. The markets suggest that the managers' demand for audit quality drove the level of audit quality supplied by auditors. When the managers did not demand and auditors did not supply high quality audits, the markets collapsed.

This study investigates the impact of taxes and risk on firm's repurchasing decision and the subsequent market reaction to their announcement. I extend the repurchase literature by examining the tax and risk motivations for firms repurchasing their stock and increasing their borrowing, while controlling for the alternative explanations for repurchases. In a stock repurchase, a firm can quickly change the ratio of debt to equity in its capital structure, and, when combined with the positive change in debt, a setting where the firm is altering the balance of its capital structure in two similar directions is revealed. If there are both significant benefits and costs to debt financing, as suggested by trade-off theory, then firms should make financing choices that are related to these factors. The results revealed that firms increasing their borrowing as part of the repurchase transaction are significantly more under-leveraged, realize greater tax benefits, and have lower default risk than firms that are decreasing their borrowing. These findings are consistent across univariate analysis and multivariate logistic analyses that control for free-cash-flow and signaling explanations. Also, I show that the tax benefits for firms increasing their debt are positively related to the announcement period abnormal returns. Collectively, these results suggest that debt-financed repurchases are being used, in part, to re-balance firms' capital structures, and that the resulting tax benefits have a positive influence on firm value.

The relationship between accrual inefficiency in analysts' forecasts and analyst following, analysts' forecasting ability, and the relative magnitude of discretionary accruals is analyzed. Results aid in answering two research questions: (1) whether the accrual mispricing anomaly has economic substance or is merely an artifact of missing risk factors; and (2) whether the observed financial analysts' response to accounting accruals is consistent with the accrual mispricing anomaly or its origins lie elsewhere. Sloan [1996] provides evidence of abnormal market returns correlated with the prior year's accrual and cash flow components of earnings. Few possible explanations are presented in the literature for the observed phenomenon: the Naive Investor Hypothesis suggests that market participants "fixate" on earnings figures and erroneously estimate earnings persistence without regard for the impact of accruals. Alternatively there are concerns that the observed abnormal returns are merely compensation for unaccounted risk factors and thus do not constitute a departure from market efficiency. Results of this study provide evidence of accrual misinterpretation among financial analysts consistent with the pattern of mispricing that is observed in the market. This conclusion supports the view of accrual mispricing as a true market anomaly. Moreover, the naive investor hypothesis is supported by the evidence that analysts' response to accounting accruals improves with their forecasting ability and that greater analyst following leads to consensus forecasts being more efficient.

The lock-in effect discourages investors from switching investments in a portfolio that is no longer optimal. It is possible, however, that the negative impact of the lock-in effect on gain realizations can be offset by the positive impact of capital gains taxes on the demand for risky assets when losses are not subject to special restrictions. While previous studies have examined the impact of the lock-in effect of current capital gains taxes on realization behavior (e.g., Feldstein, Slemrod, and Yitzhaki, 1980; Burman and Randolph, 1994) and the impact of the variance-reduction effect of future capital gains taxes on the demand for risky assets (e.g., Mossin, 1968; Stiglitz, 1969), there is little extant research that analyzes the impact of both current and future capital gains taxes on portfolio composition. This dissertation examines the impact of capital gains taxation on individual investor behavior in a proportional income tax regime. I study this problem using two different approaches. First, I develop a single period general equilibrium model to derive propositions regarding the impact of capital gains taxation on portfolio diversification. Second, I examine the impact of capital gains taxation in a multiperiod experimental asset market similar to the "bubbles" markets described in Smith, Suchanek, and Williams (1988). The experimental results show that realization behavior in markets with constant rate capital gains taxation are not significantly different than that in tax-free markets. Moreover, both analytical and experimental results indicate that capital gains taxation has a significant impact on prices and realization behavior when the tax rate on current capital gains is different than the expected tax rate on future capital gains. These results are consistent with evidence presented in Burman and Randolph (1994) which suggest that the inverse relationship between gain realizations and the capital gains tax rate is driven by temporary differences between current and future tax rates rather than the permanent level of the capital gains tax rate.

The construction of software cost estimation models remains an active topic of research. The basic premise of cost modeling is that a historical database of software project cost data can be used to develop a quantitative model to predict the cost of future projects. One of the difficulties faced by workers in this area is that many of these historical databases contain substantial amounts of missing data. Thus far, the common practice has been to ignore observations with missing data. In principle, such a practice can lead to gross biases, and may be detrimental to the accuracy of cost estimation models. In this paper, we describe an extensive simulation where we evaluate different techniques for dealing with missing data in the context of software cost modeling. Three techniques are evaluated: listwise deletion, mean imputation and eight different types of hot-deck imputation. Our results indicate that all the missing data techniques perform well, with small biases and high precision. This suggests that the simplest technique, listwise deletion, is a reasonable choice. However, this will not necessarily provide the best performance. We provide a decision tree to select the best performing missing data techniques depending upon the pattern, mechanism and percentage of missing data.

<p> In this study, I examine the influence of construals (interpretations) and mindsets on professional skepticism in auditors. Auditors have been criticized lately for not displaying enough professional skepticism, particularly in their audits of complex estimates (PCAOB 2008). Regulators speculate about and academic research shows a correlation between low professional skepticism and both audit failures and audit malpractice claims (Beasley et al. 2001; Anderson and Wolfe 2002). I hypothesize that prolonging the deliberative mindset in the audit judgment and decision-making process can increase professional skepticism in auditors. </p><p> Experienced auditors take part in a 1 x 3 between-participants experiment in which they play the role of a senior auditor charged with evaluating a client's fair value estimate. I manipulate the type of mindset (deliberative or implemental) invoked by the evidence documentation instructions and have a third condition in which participants do not have to document audit evidence. Using multiple measures of professional skepticism, I find that auditors in the deliberative mindset condition display higher professional skepticism than both auditors in the implemental mindset condition and auditors in the no documentation condition. I further analyze the types of textual responses entered by the auditors and offer direction for future research in this area. </p>

<p>The three essays focus on important facets of R&amp;D such as the impact of competition, regulation and the difficulties in measuring R&amp;D and the dollars to be allocated to R&amp;D by a firm. In the first essay, we investigate Aghion etal. (2005), model on the relationship between R&amp;D and competition. We identify limitations in previous empirical tests of the model. Further, R&amp;D appropriability plays no role in the model although literature assigns it a significant role. Our comprehensive tests reveal that the model does not fully explain the R&amp;D-competition relationship, and the results depend on the competition measure used. We investigate the role R&amp;D appropriability and confirm its significance. Hence the model needs refinements. This study enhances our knowledge of the role competition and R&amp;D appropriability play in enhancing R&amp;D and helps formulate policies that promote R&amp;D. </p><p> In the second essay, we analyze the changes in pharmaceutical firms' stock prices following the recall of Vioxx, Merck's blockbuster drug, apropos three theories based on government regulation, product liability, and firms' reputations. We conduct an event study of estimated abnormal share returns using a Fama-French 3 factor model under seemingly unrelated regression (SUR) estimation. Our investigations support government regulation theory and suggest that R&amp;D-intensive firms suffer maximum adverse returns. Adverse returns reflect anticipated regulatory changes in approvals for new drugs. Drug recall harms the industry and future availability of new drugs. Stable and fair drug approvals policy can help the industry flourish. </p><p> The third essay critically examines measurement of R&amp;D. R&amp;D capital and cited patents are used in the literature to measure R&amp;D intensity and investigate market returns for R&amp;D. The results are ambiguous. Previous literature suggests that patents are distinct from R&amp;D expenditure, and R&amp;D is influenced by competition. We suggest eight new measures based on the interplay between R&amp;D and competition. We empirically test these measures on pharmaceutical and computer software industries which have the highest R&amp;D intensities of all industries. The new measures are more significant than R&amp;D capital and offer further insights on R&amp;D in these industries. These measures help in capital allocation for R&amp;D at firm level which maximizes stock returns. </p>

In four experiments, the utility of a spreadsheet debugging tool was assessed as spreadsheet users interacted with experimental spreadsheets. Experiments 1 and 2 showed that although subjective reactions to the tools were favorable, the performance advantage offered by them was not statistically significant. Experiment 3 assessed the applicability of these tools' with respect to understanding a spreadsheet's structure and data flow. Again, although no performance advantage was shown with the use of the tools, subjective reactions to them were still favorable. Experiment 4 evaluated a more sophisticated version of the tool. The time needed to debug spreadsheets with this tool was shown to be significantly faster than the control condition. Subjective reactions continued to be very positive. Given the interactive nature of working with spreadsheets, the potential utility offered by these interactive tools will hopefully attract the attention of software developers for incorporation into future spreadsheet packages.

<p> This dissertation consists of three essays studying the role of accounting data in predicting distributions of stock returns. In the first essay, I explore the ability of accruals to predict future price (earnings) crashes and jumps, representing extreme negative and positive observations in the distribution of firm-level weekly returns (changes in quarterly ROA). I find that high (low) accruals predict a higher probability of price and earnings crashes (jumps) than medium accruals. In the second essay, I re-examine the ability of asset turnover growth, which reflects growth in both assets and sales, to predict future stock returns. While the prevailing view is that this relation is due to the spread between sales and asset growth, my results suggest it is driven mainly by the asset growth component. I do, however, find that this spread is positively related to future returns for a subsample of firms that did not make significant acquisitions or divestitures. In the third essay, I re-examine the puzzling negative correlation between aggregate stock returns and aggregate earnings at the quarterly level. I find that the negative aggregate returns-earnings correlation is unstable and the negative correlation for the period of 1976-2000 is mainly caused by the negative correlation between aggregate earnings and discount rate news.</p>

Thesis (Ph.D.)--University of California, Berkeley, 2005. / (UnM)AAI3190806. Source: Dissertation Abstracts International, Volume: 66-10, Section: A, page: 3707. Chair: Brett M. Trueman.