We propose that the likelihood that a firm commits financial reporting fraud is related to executive overconfidence. A manager facing an earnings shortfall is more likely to manage earnings to overcome it if he believes the shortfall is temporary. Hence, the earnings management will be a one-off event that likely will go undetected. If performance does not improve, however, the manager, faced with reversals of prior period earnings management and continuing poor performance, is left with no choice but to engage in the type of egregious financial reporting that the SEC prosecutes. Overconfident managers with unrealistic beliefs about future performance are more likely to find themselves in this situation. For a sample of frauds based on AAERs in the 1990s and 2000s, we analyze industry-level, firm-level, and executive-level proxies for overconfidence. The sample demonstrates industry clustering in risky, dynamic, high growth industries that face significant idiosyncratic risk. Such industries are attractive to overconfident executives according to locus of control theories. The firm-level and executive-level analyses suggest that there are two types of frauds: Those perpetrated by executives who ex post fall down the slippery slope and those perpetrated by executives that ex ante commit fraud for opportunistic reasons. Finally, we document that a matched sample of non-fraud firms do not have stronger governance mechanisms that prevent fraud. This result mitigates the possibility that it is weak governance rather than executive overconfidence that is a significant determinant of fraud.

Underpricing in IPOs is a significant cost of raising capital that theories purport arises from adverse selection at the IPO date. Disclosure is a tool firms can use to ameliorate adverse selection. We show that greater disclosure frequency in the pre-IPO period is associated with lower underpricing. The negative relation is significant only for informative disclosures, not for disclosures such as public relations announcements. The negative relation is significant after controlling for factors that affect ex ante uncertainty about the offering and for alternative mechanisms that firms can use to signal firm quality. The results are opposite for internet firms. They demonstrate a significant positive association between disclosure frequency and underpricing, consistent with claims that internet firms use underpricing to generate attention. Disclosure frequency also is associated with greater market liquidity subsequent to the IPO as measured by more traditional proxies: bid-ask spread and market depth.

Strategic disclosure, which we define as the reporting of good news and the withholding of bad news, provides an explanation for predictable dynamic patterns in returns including the negative relation between return shocks and conditional return volatility, referred to as the "leverage effect." With strategic reporting, positive share price responses in the event of good news result from news arrival. Negative share price responses associated with bad news, in contrast, are more likely due to an inference, which implies a smaller reduction in residual uncertainty. We document that the leverage effect is stronger in portfolios of firms where strategic disclosure of good news and withholding of bad news is more likely to characterize disclosure decisions: 1) The leverage effect is stronger for firms in industries with lower private information, and 2) It is weaker for firms (or time periods) when litigation risk mitigates incentives for strategic disclosure (before the Private Securities Litigation Reform Act of 1995, for firms in industries with a high risk of shareholder litigation, and for U.S. stock market indices relative to Canadian indices.)