Despite rising expectations for firms to fulfil environmental responsibilities, there is increasing emphasis on collaborative efforts between firms and governments to tackle sustainability challenges. This study demonstrates that governments can adjust tax enforcement to motivate such collaboration. Drawing on the theoretical perspective of government-firm reciprocity and leveraging China's low-carbon city pilot program, we examine how governments relax tax enforcement to incentivize firms' contributions to environmental goals. Using a multi-period difference-in-differences approach, we identify two temporal stages of reciprocity. First, pilot city governments, aiming to reduce carbon emissions, relax tax enforcement, thereby lowering firms' tax burdens to stimulate environmental effort. Second, firms use the resulting financial slack to increase environmental investment and foster green innovation, which contributes to emissions reduction in pilot cities. Cross-sectional analyses further reveal that pilot city governments are more likely to collaborate with firms with higher pollution levels, stronger governance mechanisms, and greater information transparency. These firms, benefiting from relaxed tax enforcement, are more likely to fulfil environmental responsibilities and support government targets. Additional analyses show that firms demonstrating stronger green commitments and contributing to emissions reduction subsequently receive greater government subsidies. Overall, our study offers new insights into the interplay between environmental policies, government influence on tax enforcement, and firms' green behaviour. It highlights how governments can leverage tax enforcement as a key mechanism to initiate partnerships with firms and foster collective efforts to address sustainability challenges.
We examine how political ideological dispersion within corporate boards influences firm innovation. Using a sample of US publicly traded firms from 2000 to 2020, we document a robust positive association between partisan divergence among directors and firm innovation outcomes. Firms with ideologically diverse boards exhibit higher patent counts, more patent citations, and greater patent value. To strengthen causal inference, we implement a difference-in-differences analysis around director deaths, as well as an instrumental variable approach, both confirming the positive effect of board ideological diversity on innovation. Further analyses indicate that this effect operates primarily through the board's advisory function rather than its monitoring role: the relation is stronger in firms with stronger internal and external governance, greater regulatory complexity, and higher industry innovation intensity. Moreover, we find that the positive influence of ideological diversity is amplified in periods of low political polarization, when constructive dialogue and information exchange among directors are more feasible. Overall, the findings highlight the value of ideological diversity in enhancing corporate innovation, and underscore how boards can leverage diverse political perspectives to improve strategic decision-making, particularly in a politically divided environment.
This paper examines empirically the association between sustainability restatements (SRS), that is, restatements in sustainability reports, and analyst forecast accuracy, measured by analysts' forecast errors for current-year earnings. We find that SRS are related to greater earnings forecast errors, especially when they are related to environmental or quantitative information (or predominantly to both simultaneously) and to error revisions. In terms of materiality, we find that value material revisions have a greater effect on analysts' forecasts than do nonvalue material revisions. However, we find only weak evidence that SRS that are related to material information according to the Sustainability Accounting Standards Board affect analyst estimates. We also show that the effects of SRS are influenced by firms' use of Global Reporting Initiative reporting standards. Overall, our findings are consistent with SRS impairing the forecast accuracy of financial analysts. However, our results indicate that external assurance on sustainability reports reduces the negative effects of SRS on forecast accuracy.
Extensive literature has examined audit committee (AC) characteristics, including members' prior experience and qualifications. However, much of this research uses static proxies for human capital, overlooking the potential for AC members to enhance their skills over time. In this study, we examine both the determinants and consequences of AC training. Regarding determinants, we find that the frequency of training sessions in the following year is higher in companies that have more active ACs, are larger, undergoing leadership changes, or facing greater financial reporting risk. Increased AC training is associated with higher audit fees and audit hours in the following year, particularly at partner and senior auditor levels. This suggests that better-trained ACs may demand more thorough and rigorous audits. These effects are more pronounced among AC members who hold CPA certifications, receive external training, and complete training prior to the fiscal year-end. Overall, our findings contribute to the literature on AC effectiveness by highlighting the dynamic nature of human capital and underscoring the importance of ongoing professional development.
Identifying the determinants of systemic risk contributes to global financial stability. However, the role of language in such risk remains underexplored. This study investigates how a future time reference (FTR) language shapes firms' systemic risk, measured by the Basel II/III ARIB (advanced internal rating approach) framework, in 41 countries and areas spanning the period 1985-2018. The empirical results reveal that strong FTR language reduces systemic risk. The results are robust when controlling for endogeneity concerns with instrumental variables, generalized method of moments (GMM), and high-dimensional fixed effects, as well as when eliminating concerns related to enormous economies and financial firms. Furthermore, we investigate how formal and informal institutions interact with the FTR language on firms' systemic risk. The empirical results indicate that well-developed formal and informal institutions that mitigate adverse selection and moral hazard issues also mitigate the negative role of FTR language in their systemic risk. This study contributes to the literature by exploring whether linguistic ambiguity amplifies firms' systemic risk and improves systemic risk management across regions with heterogeneous formal and informal institutions.
