ABSTRACT We examine how the 2016 Municipal Advisor Regulatory Reform, which professionalized municipal advisors by imposing standards of conduct and minimum competency requirements, affected advisory firms and issuers. Using a difference-in-differences (DiD) research design, we find that the reform improved the quality of financial advice provided by independent municipal advisory firms relative to dealer firms. Specifically, independent municipal advisors assemble higher-quality financing teams and ensure greater financial disclosure compliance and timeliness in the post-reform period. These improvements provide tangible economic benefits to issuers through lower bond issuance costs and smaller underwriter fees. Finally, we document that independent advisory firms gain market share and charge higher fees relative to dealer firms after the reform. Overall, our study provides novel evidence linking the professionalization of financial intermediaries to improvements in the quality of advice, financial transparency, and issuer borrowing costs. Data Availability: Data are available from the commercial and public sources identified in the paper. JEL Classifications: G10; G18; G24; G28; M40; M48.
ABSTRACT The past two decades have witnessed dramatic growth in passive investing via exchange-traded funds (ETFs). To the extent that ETF flows reflect nonfundamental investor demand, large ETF flows may push the prices of the underlying stocks away from their fundamental values. Consistent with this conjecture, I first find that ETF flows chase past fund performance, suggesting that ETF flows contain a systematic nonfundamental demand component. I then document that ETF flow-induced trading is associated with contemporaneous stock price increases, followed by return reversals. Accounting-based valuation tests show that ETF flow-induced trading is negatively associated with value-to-price (V/P) ratios, consistent with overvaluation. The effect strengthens for specialized ETFs and stocks with high short-selling constraints. Finally, firms with high ETF flow-induced trading behave in ways typically associated with perceived overvaluation. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G14; G32; G40; M41.
ABSTRACT We show that favoritism biases subjective evaluations and that the presence of a third party can mitigate this bias. Using archival data from professional ski jumping, we find that, controlling for objective performance, judges favor athletes of their own nationality and athletes who have a compatriot on the panel. We predict and provide evidence that in-person observation by an audience is associated with lower levels of favoritism compared with third-party observation via mediated communication. We contribute to the accounting literature by highlighting how in-person observation by a third party can reduce the likelihood that favoritism biases subjective evaluations. Data availability: The data used in this study are publicly available from open-access sources. JEL Classifications: D91; M40; M51; L83; Z20.
ABSTRACT Despite persistent academic and regulatory concerns, collateralized loan obligations (CLOs) have consistently demonstrated resiliency over the past two decades. We document that firms whose loans are acquired by CLOs are less likely to experience adverse credit events within 12 months of inclusion in the CLO portfolio, particularly when CLOs maintain institutional-level relationships with originating banks (through repeated transactions) or when individual-level relationships exist (as evidenced by personnel flows between originating banks and CLOs). The effects of these relationships are more pronounced when banks likely possess superior private information about borrowers. Furthermore, conditional upon filing for bankruptcy, borrowers whose loans are held by CLOs with institutional- or individual-level relationships are more likely to successfully reorganize under Chapter 11. Collectively, our findings highlight the dual information channels, both institutional and personnel based, that mitigate information frictions in the leveraged loan market. Data Availability: Data are available from commercial sources cited in the text. JEL Classifications: M41; G32; G34; G12.
We examine the consequences of the 2020 amendment to Exchange Act Rule 12b-2, which exempted low-revenue issuers from the ICFR audit requirement and reignited the debate among regulators, issuers, auditors, and academics about the costs and benefits of ICFR audits. We find that exempt issuers rarely obtain ICFR audits voluntarily, indicating they generally do not view such audits as cost beneficial. We also find that exempt issuers report fewer MWs than nonexempt issuers, although this effect is driven by a recent increase in MWs for nonexempt issuers rather than a decline in MW for exempt issuers. We find no evidence that exempt issuers misstate more frequently or that they have less informative control effectiveness disclosures. Overall, our findings suggest that the exemption was welcomed by affected issuers and did not materially impair reporting quality, informing the literature and ongoing policy discussions regarding the appropriate scope of ICFR audit requirements.
The recent influx of deals between accounting and private equity (PE) firms has raised concerns regarding potential implications for the attest profession. We interview 20 attest partners from PE-backed accounting firms, along with four experienced professionals, to examine how these partnerships affect the attest practice. Using Freidson's (2001) theory of professional autonomy as a theoretical lens, we find that despite independence requirements mandating PE-backed firms separate from their attest function, firms largely retain a one-firm mentality. Moreover, although attest firms retain responsibility for audit execution, PE firms influence attests' strategic priorities through ROI targets, increased strategic acquisitions, evolved compensation structures, and reevaluated client portfolios. These dynamics underscore a PE-driven shift toward commercialism, potentially eroding-although not eliminating-the attest profession's professional ideals of public service. This stifling of professionalism raises ethical concerns about PE-driven commercialism amid the growing uncertainty raised by respondents around the future of PE-backed firms.
This study examines the impact of ex ante litigation risk on auditor hiring and retention. Using employee data from LinkedIn, we find ex ante accounting-related litigation risk is associated with fewer auditors joining and more auditors leaving an audit office, while we fail to find any impact of non-accounting litigation risk. Moreover, ex ante accounting-related litigation risk is associated with audit firms' hiring less experienced and less educated auditors, suggesting ex ante litigation risk impacts the quality of auditing hires. We also find that the impact of ex ante litigation risk is concentrated in audit offices with more outside job opportunities and in those that are more susceptible to changes in litigation risk. Our results highlight the impact of ex ante litigation risk on audit labor supply, providing insights concerning the unintended consequences of increasing auditors' legal liability.
I examine the association between data visualizations in earnings conference call presentations and contemporaneous disclosure processing outcomes. I find that the use of data visualizations in this setting is associated with decreases in abnormal information asymmetry and increases in abnormal market liquidity. In addition, I find that data visualizations help investors process information when investors face greater acquisition and integration costs. Finally, I find that data visualizations are associated with increased trading activity and trade profitability for less-sophisticated investors. Overall, my results suggest that the use of data visualizations in earnings conference calls can reduce investors' processing costs and improve market outcomes.
In April 2016, the European Union adopted the General Data Protection Regulation (GDPR), significantly expanding privacy protections for personal data handled by firms. I examine the regulation's impact on U.S. firms' internal information quality (IIQ) and operational efficiency. Although privacy regulations target one subset of firms' information assets (i.e., personal data), they may spur broad improvements in firms' information governance practices and systems, resulting in higher quality information available for decision-making and, by extension, more efficient operations. Using a difference-in-differences design, I find that U.S. firms with European operations (i.e., treated firms) exhibit improvements in IIQ around the adoption of the GDPR. Furthermore, although the GDPR's regulatory burden is overall costly to firms, GDPR-induced improvements in IIQ contribute positively to operational efficiency. These findings highlight that privacy regulation can act as a catalyst for firms to improve IIQ, yielding operational benefits that may partially offset the regulation's costs.
Results from multiple experiments demonstrate that evaluators more favorably evaluate creative output produced by designers with higher expertise, even when the underlying creativity of the output is held constant (hereafter, expertise bias). We find, however, that this bias is mitigated when evaluators know that Artificial Intelligence (AI) can augment creative design processes, because AI's capabilities reduce the perceived exclusivity of designers' domain expertise. We also show that designers can restore the perceived exclusivity of their expertise, reestablishing the expertise bias, by choosing not to use available AI tools. Although prior research focuses on AI's ability to enhance or inhibit the creativity of output, we highlight that it can enhance the creative process by mitigating a prevalent human bias in the subjective evaluation of this output. We also contribute to a better understanding of why some experienced designers refuse to utilize AI.
I examine whether contracts that require customers to privately share with suppliers forecasts of their future demand for the supplier's products (“demand forecast contracts,” or “DF contracts”) affect the supplier’s reliance on an alternative information source — stock prices — when making investment decisions. If suppliers find these forecasts a more direct signal of future demand than stock prices, they may reduce their reliance on stock prices to guide investments. Using hand-collected data, I find that suppliers’ investments become significantly less sensitive to stock prices after entering a DF contract for the first time. This effect is stronger when forecasts are more credible, demand more uncertain, and investments more irreversible. Supplier performance, measured by return on assets and cash flow from operations, improves post-DF. Overall, these findings suggest that when a relatively direct information source about future demand becomes available, managers reduce their reliance on stock prices in making real decisions.
Facing pressure to meet short-term earnings expectations, corporate managers often take actions that are perceived as value-destroying. Our study provides empirical evidence supporting an alternative view: earnings pressure can discipline managers to undertake value-enhancing actions by refocusing on the firm's core products. Consistent with this product refocus hypothesis, we find that firms under earnings pressure reduce investment in non-core products, leading to the subsequent underperformance of these non-core products, whereas the performance of core products remains unaffected. As predicted, product refocus is stronger when managers exhibit ex ante high-level agency problems. To strengthen identification, we exploit shocks arising from analyst brokerage mergers and closures. Our study suggests a bright side of earnings pressure-it helps reduce agency-motivated product diversification.
Financial reporting standard-setting bodies are expected to include academic research in their decision-making processes. However, little is known about whether, why, and how they engage with research. We interview staff from two major accounting standard-setting bodies and, using the information seeking and communication model as a theoretical lens, identify factors shaping their research engagement. These factors include perceptions of academic research, search difficulties, and challenges with assessing the credibility and utility of academic research. Our findings reveal an unstructured, idiosyncratic approach to information seeking, a reliance on academic papers over direct researcher interaction, a significant lack of two-way communication, and concerns relating to incentive differences between academics and standard setters. These structural issues limit the extent to which academic research can inform standard setting. We provide insights on improving the inclusion of academic research in the standard-setting decision-making process and contribute to broader discussions on research relevance.
We examine year-to-year adjustments of performance measure weights in managers' incentive contracts. Using survey panel data on financial middle managers over four years, we document that higher target achievement on a given measure is associated with an increase in the measure's relative weight for the subsequent year. We explore three potential explanations for this pattern: retention considerations, managerial influence, and gradual strategic shifts. Consistent with retention considerations, we find that shifts toward better performing measures are stronger for managers who outperform their peers and in firms facing greater labor market competition. Consistent with managerial influence, we find that shifts are also stronger for managers with greater influence on their incentives and in firms with lower incentive design transparency. We find, however, no support for the gradual strategy change explanation, as results do not show that shifts vary with managers' involvement in strategic decision-making or subsequently observed strategy changes.
This paper examines whether U.S. domestic firms' investment decisions are affected by their expectations of market leaders' tax-motivated income shifting. Market leaders' financial reports can help peers evaluate industry conditions and potential investment payoffs, but income shifting obscures the geographic source of profits and reduces the informativeness of these disclosures. Thus, when peers expect that leaders shift income, they face greater uncertainty about the outcomes of their own investments. Consistent with the theory of investment under uncertainty, we find that U.S. domestic firms are less responsive to investment opportunities as expectations of leaders' shifting increase. This reduced responsiveness is concentrated among firms facing higher investment irreversibility and those whose market leaders provide less transparent geographic disclosures. Our findings identify a novel spillover cost of income shifting and suggest that policies enhancing the transparency of multinational firms' geographic reporting or constraining income shifting could help improve domestic firms' investment decisions.
We study the desirability of transparent accounting information for banks depending on their liability structure. In our model, a bank finances a long-term project with both uninsured and insured deposits. Although uninsured deposits increase rollover risk, they may also generate efficient liquidations. Importantly, a transparent regime provides timelier information about the project's payoff than an opaque regime. We show that the transparent regime is surplus-enhancing when the amount of insured deposits is small, as the bank issues the optimal amount of uninsured deposits and transparency leads to efficient liquidations. Otherwise, when the amount of insured deposits is large, the cost of inefficient liquidations dominates, making the opaque regime optimal. In addition, the bank may favor transparency to reduce its funding cost even when it is surplus-decreasing. Overall, our results show that transparent accounting is not a panacea and provide some support for the "mark-to-funding" accounting rule.
Labor unions are central to promoting worker protection and fairness, yet misconduct can undermine their ability to advocate. Despite over 60 years of regulations requiring unions to file financial reports, debate persists about those rules' effectiveness. Proponents argue that transparency exposes wrongdoing, whereas critics question whether reporting constrains misconduct. Accounting research shows that financial information can uncover fraud in public firms, but its generalizability to unions is unclear. Using a hand-collected dataset, I examine the role of financial reporting in detecting and disciplining union misconduct. Results show that reporting information can reveal misconduct and that detection and discipline increase for unions subject to enhanced reporting requirements following a 2004 regulatory change. Further analysis indicates that union stakeholders, including members, employers, media, and antiunion organizations, use this information to help reveal misconduct. Overall, the findings suggest that financial reporting plays a significant role in promoting accountability within labor unions.
Recruiting talent is a major issue for the accounting profession and is especially salient for small firms with limited resources and brand recognition. In this study, we examine the challenges small accounting firms face when recruiting from universities and the strategies they use to overcome them. Drawing on interviews with 34 stakeholders (primarily recruiting specialists and human resource managers), we develop a process model of small-firm recruiting and present evidence related to each phase: (1) targeting certain universities and students, (2) engaging in university recruiting activities, (3) extending offers, and (4) aiming to evaluate recruiting outcomes. Guided by theory, our findings reveal that small accounting firms develop organizational familiarity and image with students while navigating fatalism and balancing imitation and differentiation in their recruiting strategies. We conclude with a call to reconsider the "biggest is best" assumptions that dominate mainstream accounting research and provide suggestions for future research.
We examine the impact of the SEC's Office of Minority and Women Inclusion (OMWI) on the role of employee gender in the Division of Corporation Finance's filing review process. Gender bias theory suggests that women may work harder to compensate for perceived bias and discrimination. Consistent with this theory, we find that women reviewers issue longer comment letters, raise more issues, ask more accounting-specific questions, reference more authoritative guidance, request more filing amendments, follow up on more issues from prior rounds, and take longer to close the comment letter process. We also find that women are less prevalent in higher paygrades and leadership positions. These gender differences attenuate after the establishment of OMWI in 2011, but significant differences remain. Analyses of SEC employee survey data corroborate our comment letter results.
