We examine how disclosing information about audit quality affects auditors' effort and investors' investment efficiency. In our setting, the usefulness of audited financial reports for investors depends on both the quality of the underlying financial reporting (e.g., as embodied by GAAP) and the...

We study a model where a capital provider learns from the price of a firm’s security in deciding how much capital to provide for new investment. This feedback effect from the financial market to the investment decision gives rise to trading frenzies, where speculators all wish to trade like...