ABSTRACT Based on Japan’s institutional background, this study examines the effects of increased reporting frequency on corporate capital financing. Prior studies have found that frequent financial reporting reduces capital market frictions and alters corporate investment behavior. However, the relationship between these two findings remains unclear. Specifically, the effect of the reduction in market frictions attributable to more frequent reporting on corporate financing decisions has not been determined. Using a difference-in-differences (DiD) approach, this study shows that more frequent reporting increases external financing but not bank loans. Moreover, increased reporting frequency has a stronger positive effect on firms with financial constraints, ex ante information asymmetry, and greater external capital demand. Furthermore, this study examines how firms use raised capital and finds that they do not change their capital structure or cash-holding intensity but invest more. These findings suggest that increased reporting frequency enhances firm activity by mitigating asymmetric information. Data Availability: Data are publicly accessible. JEL Classifications: G31; G32; M41.
ABSTRACT This study considers cross-border auditor switching by Chinese firms and its implications for reporting quality. We provide descriptive details from 2007 to 2022, a period spanning the initial negotiations between U.S. and Chinese authorities through an ensuing tightening of U.S. regulations affecting Chinese firms whose local auditors are inaccessible to the Public Company Accounting Oversight Board (PCAOB). Generally, we observe switching in both directions over the full testing period, with switches from non-local to local auditors broadly marking improvements in reporting quality. However, for the subperiod of 2018 through 2022, in which the Holding Foreign Companies Accountable Act was introduced by U.S. legislation, we note a shift in Chinese firms’ switching behavior toward the engagement of non-local, PCAOB-accessible auditors, when firms’ failure to do so positioned them at risk of being delisted from U.S. exchanges. This shift coincides with some evidence pointing to a decline in reporting quality. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M42; M48.
This essay discusses some thoughts that emerged from looking back on three decades of researching international accounting. First, and most obviously, the literature has grown substantially in volume and in sophistication over that time. Second, for good reason there has been a tendency to focus on international differences, especially but not entirely before the advent of International Financial Reporting Standards (IFRS), whereas among market economies there are fundamental similarities that make the differences seem comparatively superficial. Third, accounting is an institution that has evolved in countries jointly with their firms and markets, the implication being that it is not possible to identify separate effects on aggregate welfare of innovations in accounting and innovations in complementary institutions. The essay is a brief "thought piece," not an overview like my previous article in this journal [Ball (2016)]. It is a personal reflection that draws heavily on my own research and consequently-as already will be evident from the previous sentence-it contains an immodestly large number of selfcitations.
In this study, we leverage recent disclosure requirements in China to provide a descriptive analysis of individual-level engagement quality reviewers (EQRs), offering a detailed profile of the attributes of EQRs assigned to listed company audits. We find substantial within-firm network connections between EQRs and engagement partners through prior collaborations, as well as a notable share of engagements in which the EQR either previously served as the client's engagement partner or alternates roles with the same engagement partner within a year. Further, a significant proportion of EQRs either lack prior experience in the client's industry or have lower industry specialization or organizational standing than the engagement partner. In addition, we observe cross-firm variation in the size of the EQR pool and in individual reviewer workload, with some EQRs responsible for a large number of engagements. These findings offer valuable descriptive evidence on EQ review practices and suggest avenues for future research.
This study examines the impact of mandatory contributions to a climate risk fund (CRF) on firms' subsequent financial performance using 2,117 firm-year observations from 2010-2019. Using a difference-indifferences approach, we find that firms subject to the CRF requirement experience significant increases in both market-based and accounting-based performance following the regulatory mandate. These results suggest that stakeholders positively value firms' CRF contributions, leading to improved financial outcomes. Further analyses indicate that this improvement is driven by two primary channels: a signaling effect, whereby compliance and additional contributions enhance perceived credibility; and a capital availability channel, through which treated firms attract greater interest from global ESG-sensitive investors. Cross-sectional analyses show that this mandate has a stronger positive effect among firms with higher market-and accounting-based performance volatility. Overall, our findings inform the cost-benefit debate on mandated climate risk financing and have important implications for regulators, policymakers, investors, and firms globally.
This study examines whether CEO organizational identification (OI) influences corporate social responsibility (CSR) performance. Using an archival-based measure of CEO OI, we find a positive association between CEO OI and firm CSR outcomes. This finding is consistent with the idea that CEOs who strongly identify with their organizations prioritize long-term value over personal gain. The relationship is more pronounced in firms pursuing a product differentiation strategy and in settings with higher cost of equity or firm risk. Additional analyses show that the effect is stronger for CEOs in the early stages of their tenure and is concentrated in CSR categories related to employee relations and the environment. We also find that both top-down and bottom-up dimensions of CEO OI contribute significantly to CSR. This study contributes to the literature by highlighting the role of CEO psychological orientation, measured using publicly available archival data, in shaping firm-level social responsibility.
This study examines the anticipatory effects of recognizing previously off-balance sheet liabilities for retirement benefits on corporate financial decisions. We focus on the issuance of the Accounting Standards Board of Japan's Statement No. 26, Accounting Standard for Retirement Benefits (Statement 26). Statement 26 affects only Japanese firms preparing consolidated financial statements (recognition firms), not those preparing only unconsolidated financial statements (disclosure firms). By comparing these two groups, we find that financial leverage decreases more for recognition firms than for disclosure firms after the issuance of Statement 26. This anticipatory effect is more pronounced for recognition firms with larger unrecognized retirement liabilities, and these firms tend to increase their shareholders' equity to reduce their financial leverage. Overall, this study supports the idea that the issue of recognition versus disclosure matters in corporate financial decision-making.
I investigate the impact of greenhouse gas (GHG) emissions on firm performance by using mandatory indoor temperature restrictions as an exogenous shock. I find that designated energy-using firms experienced a decline in performance following the implementation of mandatory indoor temperature restrictions. This effect was not driven by customer or employee but by increased compliance costs. Although affected firms raised advertising expenditures to retain or attract customers, this strategy did not improve performance. Family-owned firms were more negatively affected than non-family-owned firms due to weaker preparedness for regulatory adaptation. The negative effect was concentrated in the second to fourth quarters, when outdoor temperatures exceeded the threshold. These findings contribute to the ongoing debate over the economic consequences of environmental regulation and highlight the importance of firm adaptability. The study also provides timely insights for policymakers aiming to balance carbon reduction goals with economic performance under increasingly stringent environmental mandates.
The perception exists that offshore activities have negative consequences for both companies and society. Prior research and practice suggest that such activities may undermine tax fairness, widen economic inequality, and facilitate illegal activities. This paper examines the impact of offshore activities on analysts' earnings forecasts. Analysts play a crucial intermediary role in capital markets as sophisticated users of financial information. Using a novel dataset, we analyze offshore activities of publicly listed U.S. firms across all countries, distinguishing among overall offshore, input, and output activities. We find that offshore activities increase forecast errors, dispersion, and result in more rounding. These effects are more pronounced for firms with operations in tax havens and countries characterized by weak rule of law. This study contributes to the literature by providing new evidence on how offshore activities affect market participants' decision-making.
In 1999, the internationally applicable role of the internal audit function was redefined to be a trusted advisor to the organization rather than a stereotypical "corporate watchdog." However, even today there is no clear understanding of what characteristics are associated with an internal audit function's adopting a trusted advisor role, nor of what benefits the trusted advisor role yields for the organization. Using survey data from 250 chief audit executives, we find that a mix of professional and interpersonal internal audit characteristics is associated with adopting a trusted advisor role. Additionally, we find associations between trusted advisor internal audit functions and perceived benefits to the organization such as audit effectiveness, efficiency, and usability of audit outputs. Our findings contribute to the academic knowledge on the evolution of internal audit functions and identify incentives for adopting trusted advisor roles.
A split operation is often promoted as a way to enhance auditor independence in accounting firms with a consulting arm. We conducted two experiments to explore how this split affects jurors' perceptions of auditor independence and whether a cooling-off intervention mitigates post-split concerns. The first study shows that jurors view auditor independence as lower when newly formed consulting firms immediately serve former audit clients, due to heightened perceptions of closeness between the audit and consulting firms. We further find that jurors perceive auditor independence as marginally higher when a cooling-off period is implemented than when former audit clients are served immediately. The second study reveals marginal evidence that the impact of a split on perceived auditor independence is more pronounced for firms with a high pre-split NAS fee ratio. Collectively, these findings suggest a cooling-off period may offer limited mitigation benefits and highlight opportunities for future research on independence safeguards.
This study examines the ability of abnormal accruals measures to capture earnings manipulation in international settings. Variations in accrual recognition are common in international settings due to differences in reporting standards and institutional features. Moreover, data availability imposes significant constraints on sample sizes in international research examining accruals. Thus, we evaluate how well abnormal accruals measures capture earnings manipulation under alternative model specifications that maximize sample sizes. We demonstrate that sales growth can reliably replace employee growth in the estimation of abnormal accruals, thereby alleviating employee data constraints for non-U.S. firms. Our study shows that the Dechow, Hutton, Kim, and Sloan (2012) and modified Larson, Sloan, and Zha Giedt (2018) models are most consistent in capturing earnings manipulation across international samples. Additional analysis indicates that the effectiveness of accruals manipulation measures is consistent across commonly used databases: Worldscope, Compustat, and Osiris.
Prior studies show that country-level board reforms, aimed at enhancing independence, positively affect firm value, but the channels remain unclear. This paper investigates improved corporate financing and investment as a channel. Using an estimation method robust to heterogeneous treatment effects, we find that board reforms increase external financing and investment, suggesting that they enhance investors' confidence about board oversight and willingness to provide capital. Subsample analyses reveal conditions where reforms are more effective. First, the positive impact on external financing is driven by comply-or-explain reforms vis-a-vis rule-based reforms. This indicates that flexible reforms work better and that strict board reforms disrupt optimally designed board structures. Second, financially constrained firms benefit more, reinforcing the role of reforms in raising investor capital provision. Finally, we document a complementary relation between board reforms and country-level investor protection and legal enforceability, underscoring the role of high-quality institutions in enhancing the effectiveness of board reforms.
This study investigates the impact of vertical interlock in its listed company's shareholder wealth. This simultaneous appointment of directors to both listed companies and their parent companies is a common practice in many emerging markets. Whereas vertical interlock is designed to enhance control and coordination, it may also enable controlling shareholders to expropriate minority shareholders. Using a sample of Chinese listed companies from 2007 to 2022, we find that the vertically interlocked companies are more prone to engage in related party mergers and acquisitions. Moreover, these transactions lead to lower buy-and-hold abnormal returns subsequently, suggesting that the vertically interlocked directors have facilitated shareholder expropriation through related party mergers and acquisitions. Further empirical analyses consistently indicate that such mergers and acquisitions are characterized by features of minority shareholder expropriation, with the likelihood of expropriation increasing when interlocked directors hold more senior positions within the parent companies.
This study examines whether private small and medium-sized enterprises (SMEs) that voluntarily commissioned financial statement audits before the COVID-19 pandemic are better equipped to navigate pandemic-era operational challenges, access financial support, and reduce business disruptions. Using survey data from the World Bank, we find that audited SMEs exhibit greater operational responses to the pandemic and enjoy enhanced access to finance. These factors lead to fewer weeks of temporary closure than their unaudited peers. Further analysis reveals that this effect is stronger in environments of higher information asymmetry. We also find evidence suggesting that audited firms facing stricter COVID-19 policy stringency or receiving less government assistance exhibit greater operational adjustments. The results are robust to entropy balancing, and Heckman specifications. Overall, this study provides novel insights into the influence of financial statement audit on business resilience during a macroeconomic crisis.
This study examines whether global accounting standards influence firms using local Generally Accepted Accounting Principles (GAAP) before formal convergence. In Japan, where standard setters publicly commit to substantive convergence with International Financial Reporting Standards (IFRS), the release of a new IFRS provides a credible signal of future changes to local GAAP. I exploit the issuance of IFRS 16 and show that Japanese local GAAP firms with high operating lease exposure began reducing operating lease use and the leaseto-buy ratio following IFRS 16 issuance, whereas capital investment also declined. These patterns indicate that managers anticipated the future capitalization of operating leases under JGAAP and proactively adjusted to mitigate expected balance-sheet shocks. The anticipatory response is stronger for managers with longer decision horizons. Overall, the findings document a clear pre-convergence effect: global standards can reshape real decisions by local GAAP firms even before the issuance of the corresponding revised local standard.
This study investigates how engagement auditors' social ties with investment bankers and engagement auditors' industry specialization affect earnings management among initial public offering (IPO) firms. Using proprietary data from Taiwan-a relationship-oriented market characterized by reciprocal exchange and a high degree of auditor accountability-we explore whether social connections lead to favoritism bias or facilitate effective information sharing. Our findings reveal significantly less accrual-based and real earnings management when engagement auditors are socially connected with investment bankers. Furthermore, the mitigating effect of these ties on earnings management is more pronounced when the auditors are industry specialists, suggesting that industry-specialized knowledge enhances the quality and efficiency of information exchange. Overall, our results highlight the importance of social networks and auditor expertise in promoting audit quality and constraining opportunistic financial reporting in the IPO setting.
We investigate the association between domestic versus foreign institutional investors' ownership and companies' decision to enhance the reliability of their sustainability report through external assurance and their choice of assurance provider. Using an international sample of 1,927 firms, we find evidence of the importance of distinguishing between foreign and domestic investors during the 2010-2017 period. Results indicate that foreign investors' ownership levels are associated with the choice of internationally recognized assurance providers (i.e., Big 4 firms), whereas domestic investors' holdings are negatively associated with the assurance decision overall and positively associated with other types of assurers. Additionally, we study foreign investors from stakeholderoriented countries and find that their holdings are positively associated with the decision to assure sustainability reports and choose a Big 4. Finally, results reveal that holdings from responsible foreign investors are positively associated with the assurance decision and the choice of a Big 4.
This commentary explores the implications of global personal data protection regulations for accounting researchers and practitioners. At the 2025 American Accounting Association (AAA) International Accounting Section Midyear Meeting, a panel discussion was held on global technology trends impacting accounting with one of the topics being the trend toward increasing legislative protections over data privacy in the wake of the European Union's General Data Protection Regulation. The expansion of these laws across global jurisdictions, spurred by advancements in digital technologies (e.g., social media, artificial intelligence) and concerns over personal data handling by organizations, presents important opportunities for accountants, whose role has increasingly evolved toward broader responsibilities in information assurance. This article summarizes (and expands upon) some of the key points of the presentation relating to data privacy at the 2025 panel and offers suggestions for how both researchers and practitioners can contribute to and benefit from this evolving regulatory paradigm. JEL Classifications: M41; M48; K24.
Earnings-based debt covenants in Japan typically reference GAAP earnings, particularly "ordinary income," an earnings measure unique to Japan defined as earnings before taxes and special items. We posit that ordinary income serves as an effective summary indicator of firms' operating and financing performance and that its use in debt covenants helps lenders reduce their contracting costs. Consistent with this prediction, we find that the use of ordinary income in earnings-based loan covenant is negatively associated with the number of covenant types, suggesting that it reduces the need for additional covenants. Interestingly, we also find that EBITDA is more useful than other earnings measures, including ordinary income, in explaining credit risk and predicting future cash flows. Overall, our evidence suggests that ordinary income is employed primarily to economize on contracting costs, rather than to serve as an information signal.
