Clear annual reports are essential for stakeholders' informed decision-making, yet firms often obscure critical information through vague language. This study examines whether linguistic vagueness serves as a leading indicator of concealed bad news and stock price crash risk in China. We first construct a theoretically grounded vagueness index and then demonstrate a robust positive association between linguistic vagueness and future stock price crash risk. This finding is corroborated by robustness checks using both a BERT-based vagueness metric and an inverse measure of linguistic specificity. Mechanism analysis reveals that linguistic vagueness drives crash risk by intensifying information asymmetry and accumulating negative earnings surprises. Further analyses indicate that this relationship is stronger for non-state-owned enterprises and in periods of high market sentiment. These findings provide implications for investors and regulators by highlighting the informational value of linguistic vagueness in corporate disclosures.
Based on the decomposition of tone management in a firm's management discussion and analysis (MD&A) section, we find a positive relationship between peer firms' unexpected outperformance and focal firm's upward tone management. Our main results remain valid after accounting for various robustness tests of endogeneity issues. Our tests of mechanisms show that the impact of peer outperformance on tone management is primarily driven by the “rational optimism” effect where managers employ an overly positive disclosure tone to reflect optimistic expectations informed by peer outperformance and the “sentiment catering” effect where managers strategically align their disclosure tone with the prevailing optimistic sentiment of investors induced by peer outperformance. We find no empirical support for the “pressure alleviation” effect where managers strategically use optimistic tone as a tool to alleviate market-based pressure resulting from peer outperformance. In addition, we show that upward tone management induced by peer outperformance significantly increases future stock price crash risk.
In the rapidly evolving digital economy, data resources have emerged as a novel type of economic asset characterized by dual attributes as both strategic resources and productive factors. Understanding whether these assets can bolster the real sector is of vital importance. Using a sample of Chinese A-share listed companies from 2008 to 2023, this paper empirically examines the impact of data assets on corporate financialization. The results demonstrate that data assets significantly inhibit corporate financialization. Mechanism analysis reveals that data assets suppress financialization through two primary channels: first, by alleviating financing constraints, which weakens the “precautionary” motive; and second, by enhancing the returns on real investment, which inhibits the “substitution” motive. Heterogeneity analysis further shows that the inhibitory effect of data assets is more pronounced among non-state-owned enterprises, small-scale firms, high-tech enterprises, and firms located in eastern China. This study offers new insights into mitigating the financialization of real-sector enterprises and provides an empirical foundation for integrating data assets into the financial reporting framework.
We investigate how client economic contributions and auditor economic risks influence clients' permanent book-tax differences (BTDPERM) from the perspectives of both audit groups and audit firms. Our study, which focuses on publicly listed companies in Taiwan, reveals a positive association between client economic contributions and BTDPERM. This relationship weakens when clients are economically significant to audit groups but not to the audit firm. Additionally, family firms exhibit lower levels of tax avoidance. We find that non-audit services are the primary factor contributing to BTDPERM. Furthermore, our analysis shows a negative relation between auditor economic risks — indicated by reduced audit fees and changes in auditors or firms — and BTDPERM. To address potential endogeneity concerns, we implement a Difference-in-Differences (DiD) design exploiting Taiwan's Controlled Foreign Corporation (CFC) and Place of Effective Management (PEM) regulatory reforms. Using 2012 as the primary policy cutoff — which satisfies the parallel trends assumption — we find a significantly negative treatment effect, confirming that CFC-related legislation effectively reduced offshore tax avoidance. These results provide independent, policy-based causal evidence consistent with our main findings.
This study investigates whether legally educated executives affect the likelihood and valuation implications of financial restatements. Analyzing a sample of Taiwan-listed firms from 2006 to 2022, we document that the presence of legally educated executives significantly increases the likelihood of restatements-particularly in cases involving overstatements of operating profit, net income, or equity-even after controlling for endogeneity through 2SRI estimation, entropy balancing, and difference-in-differences design. Channel tests reveal that this effect is partially mediated by lower accrual-based reporting quality, while heterogeneity analyses show that strong external monitoring-via institutional ownership, analyst coverage, and media scrutiny-substantially attenuates the impact of legal expertise. Restatement announcements made by legally educated executives further elicit more negative abnormal returns, consistent with investors interpreting such executives as sophisticated enablers of opportunistic reporting rather than guardians of compliance. Overall, the evidence supports the Opportunistic Arbitrageur Hypothesis: legal expertise, in weak-enforcement environments such as Taiwan, may be strategically deployed to exploit regulatory gray areas rather than enhance disclosure integrity. Our conclusion offers practical implications for strengthening risk-based regulatory oversight, balanced board composition, and enhanced investor vigilance toward firms led by legally educated executives.
We examine how a firm's brand capital - a primary form of intangible capital - affects its labor investment efficiency. Using a sample of 15,698 firm-year observations from 1990 to 2024, we find that firms with higher brand capital demonstrate more efficient labor investment. Moreover, this relationship is partly explained by the external monitoring channel. Using difference-indifferences tests with the 1996 Federal Trademark Dilution Act as an exogenous variation in brand capital, we provide strong evidence for the positive association between brand capital and labor investment efficiency.
We examine whether CEO age influences corporate social responsibility (CSR) and how this relation varies with firm risk and economic policy uncertainty. Using a sample of U.S. public firms from 2015 to 2023, we find that CEO age is positively associated with CSR engagement. This effect is significantly stronger in firms with higher financial leverage, greater earnings volatility, and during periods of elevated economic policy uncertainty. The evidence is consistent with older CEOs using CSR as a tool to mitigate risk and manage stakeholder exposure in uncertain environments. The results are robust to alternative CSR measures, estimation approaches, and tests addressing endogeneity and reverse causality. These findings indicate that the effect of CEO age on CSR is conditional on the firm's risk environment and provide evidence on how executive characteristics shape corporate responses to uncertainty.
This study investigates how local government land finance influences corporate corruption in China. When land finance deteriorates, local governments experience fiscal shortfalls that may prompt them to intensify both tax and non-tax enforcement on firms. In response, firms engage more actively in corrupt practices to secure protection from potential government expropriation. Using firms' entertainment and travel expenses (ETC) as a proxy for corporate corruption, we find that declines in local land transfer revenues are associated with increases in firm corrupt spending within affected jurisdictions. This effect is more pronounced among firms headquartered in cities with a stronger corruption culture, operating under governments with greater market intervention, led by political leaders with stronger promotion incentives, and lacking political connections. The effect is weaker post-China's 2012 anti-corruption campaigns. Further analyses show that firms devoting greater resources to corruption are less likely to experience increased tax burdens or reductions in government subsidies following land revenue shortfalls. Overall, our study offers novel insights into the interplay between government land finance and corporate ethics in China.
This study examines how independent and in-house company experts and their interactions with management and auditors affect the fair value measurement (FVM) process. To investigate predictions derived from agency theory and the monitoring role of company experts, interviews are conducted with 19 Norwegian company experts — with expertise spanning financial instruments, investment property, oil & gas reserves, and shipping — and 8 audit partners with extensive valuation experience. The results broadly support the predictions: company experts recognize strong incentives to build and maintain their reputation; most experience management pressure, with management employing tactics such as reappointment threats and the strategic use of multiple experts to influence reported values; they are aware that providing multiple services (e.g., brokerage and trading) may create organizational pressure on their valuations, yet believe adequate safeguards exist; and they differ by expert type in the access they grant auditors to their models and data. The results also show variation across expert types in how they interact with audit teams and in their perceptions of auditors' tendency to focus narrowly on individual model assumptions. Together, these findings offer insights for researchers, regulators, and practitioners into the role company experts play in the FVM process.
This paper investigates the impact of social connectedness between borrowers and lenders on the cost of private debt for U.S. firms over the period 2012–2020. We employ the Social Connectedness Index (SCI) to measure the level of social connectedness between two counties, and find that borrowers with higher social proximity to the lenders are charged lower loan spreads. Our results also show that the relation between social connectedness and cost of bank loans is more pronounced among firms located farther away from the lenders. In addition, we document that the effect of social connectedness on cost of bank loans is largely observed among informationally opaque borrowers and among smaller syndicates with fewer distinct lenders. Our additional analyses show that the effect of social connectedness on the cost of bank loans is stronger in regions with higher economic development and greater litigation intensity. We further document that greater social connectedness is associated with smaller loan sizes but is unrelated to loan maturity or the intensity of financial covenants. Finally, mechanism analyses show that social connectedness lowers loan spreads by reducing borrower risk and uncertainty, consistent with enhanced soft information transmission between borrowers and lenders. Taken together, our findings suggest that social connectedness between borrowers and lenders has informational benefit in reducing the risks and uncertainties in the private debt market.
This study examines significant external and internal anchoring effects in government-initiated corporate poverty alleviation (PA) participation decisions. It finds that policy guidance, the embeddedness of Communist Party structures within firms, firms’ own advantages, and prosocial cultural factors collectively mitigate the emergence of irrational anchoring. This makes the anchoring effect on corporate PA participation different from other traditional corporate social responsibility (CSR) activities. This study contributes to the literature by clarifying the motivations behind corporate PA participation and comparing the anchoring effect across CSR and corporate PA participation, while also offering practical insights for policymakers and firms.
This study examines how privatization influences corporate labor investment decisions. Using China's split-share structure reform, which made previously non-tradable shares marketable, we find that the reform significantly improves labor investment efficiency in state-owned enterprises (SOEs). The evidence suggests that this effect operates primarily through stronger incentive alignment between controlling state shareholders and minority investors, as well as a greater informational role of stock prices, while ruling out the alternative explanation based on manager-shareholder agency conflicts. The effect is more pronounced in provinces with stronger government involvement and more developed labor and capital allocation mechanisms, highlighting the moderating role of local institutions. Further analyses show that the reform mainly reduces excessive hiring, alleviates insufficient hiring, and is accompanied by a reallocation of labor toward more skill-intensive positions such as R&D, without evidence that the main result is driven solely by wage-quantity substitution. Overall, our findings reveal how ownership restructuring shapes firms' labor allocation and provide policy-relevant insights for improving privatization outcomes.
This study examines how firms at different life-cycle stages select between executive auditors—who possess hierarchical authority—and industry expert auditors, and how these choices shape subsequent reporting outcomes. While new clients generally avoid both types, incorporating life-cycle heterogeneity reveals distinct patterns: growth firms preferentially engage expert auditors, declining firms favor executive auditors; and mature firms exhibit broader, non-exclusive demand for both, with a stronger tilt toward executive auditors. Analyses of accrual-based outcomes show that executive auditors allow greater negotiated discretion only for low-risk clients, whereas expert auditors consistently constrain opportunistic reporting across risk conditions. These inferences remain robust when accounting for endogeneity using entropy balancing and when applying an alternative life-cycle classification. Overall, the evidence demonstrates how life-cycle dynamics shape auditor contracting and how auditor attributes differentially influence financial reporting quality.
Human-centered auditing has increasingly been recognized as a core objective of China’s audit system reform, yet its practical advancement remains constrained by historical inertia and institutional lock-in. Drawing on Path Dependence Theory, this study traces the long-run evolution of China’s auditing institutions from the pre-Qin period to the present and examines how human-centered values have been embedded, weakened, and reactivated across different historical stages. Based on twelve critical historical phases, the study identifies key critical junctures, mechanisms of institutional lock-in, and patterns of path continuity in the development of Chinese auditing. A four-dimensional analytical framework—governance structure, fiscal mechanism, organizational system, and audit professionalism—is used to explain how supervisory institutions have historically incorporated human-centered logic. The findings show that although Chinese auditing has long been influenced by traditions such as taking the people as the foundation, prioritizing virtue over punishment, and governing through virtue, institutional evolution has often drifted away from these foundations because of political centralization, fiscal dominance, and ideological intervention. In particular, during periods of strong ideological control, auditing became subject to instrumental lock-ins that hindered the development of a genuinely human-centered philosophy. Since the Reform and Opening-Up, and especially since the 18th National Congress of the Communist Party of China, performance auditing, livelihood auditing, and intelligent auditing have supported a gradual return to people-centered audit governance. This study clarifies the historical logic of this trajectory and offers implications for the modernization of China’s audit system and for comparative research on audit institutions.
We examine the potential unintended repercussions of the Securities and Exchange Commission's 2017 mandate requiring public companies to disclose the CEO pay ratio, specifically its effect on aggressive financial reporting. We propose that CEOs, in an effort to rationalize substantial pay, may engage in manipulative reporting practices. Employing a difference-in-differences design with a sample of 4,245 observations from 746 firms in the U.S. over 2014-2019, we uncover a correlation between higher pay ratios and increased income-inflating behavior post-disclosure. This behavior escalates under conditions of pronounced say-on-pay dissent and limited CEO labor market mobility. A further test shows that aggressive reporting weakens the adverse link between pay ratios and subsequent employee performance, supporting its effectiveness as a managerial response. This research sheds light on the multifaceted consequences of pay ratio disclosure, thereby deepening our understanding of the policy's impacts.
This paper investigates the effect of regional intellectual property rights (IPR) protection on the voluntary disclosure of customer identity. Using the voluntary disclosure of customer identity data in China, we find that firms located in the regions with stronger IPR protection are more likely to disclose customers’ identities. Channel tests show that this association is through reducing the proprietary risk and enhancing the signaling value of customer disclosure. In addition, the positive association between IPR protection and customer identity disclosure is more pronounced for firms with greater management cognition, higher degree of digital transformation, and higher customer economic importance. Further analysis shows that public disclosure of customer identity reduces the market-based information asymmetry. Overall, we provide novel insights into effectively mitigating the dilemma of customer identity disclosure from a legal security perspective.
This study investigates the relationship between top management team (TMT) functional diversity and firm performance, focusing on two forms of diversity: between-member (dominant functional diversity, DFD) and within-member (intrapersonal functional diversity, IFD). Using a sample of 15,521 firm-year observations from 1,770 U.S. firms between 2009 and 2020, we find that IFD is positively and significantly associated with firm performance, measured by industry-adjusted Tobin’s Q, while the relationship between DFD and firm performance is positive but not statistically significant. Using the bootstrapping methodology, a mediation analysis reveals that managerial ability serves as a key mechanism through which TMT IFD enhances firm performance. Contextual analyses show that organizational innovativeness and CEO power moderate the relationship between IFD and firm performance, with innovative firms and powerful CEOs better leveraging TMT functional diversity to enhance strategic decision-making and operational efficiency. Robustness tests, including propensity score matching and instrumental variable approaches, address potential endogeneity concerns and confirm the validity of our findings. This study contributes to the literature on TMT diversity by providing new insights into the role of functional diversity in driving firm performance and highlighting the importance of managerial ability as a mediating factor.
