We investigate a 2012 comply-or-explain regulation implemented by China’s Shanghai Stock Exchange. The regulation requires eligible firms to pay 30% of their current-year profits as cash dividends or explain the reasons why they do not meet this requirement through a public conference call. Using firms listed on the Shenzhen Stock Exchange as a control group, our difference-in-differences estimates suggest that firms subject to the regulation decreased tunneling, irrespective of whether they complied by paying or disclosing. Further analyses suggest that the reduction in tunneling is partially attributed to enhanced regulatory monitoring over explaining firms and the constraint on excess cash of paying firms. These findings offer novel policy insights into how a flexible comply-or-explain form of regulation can mitigate agency costs between controlling and minority shareholders in a weak institutional environment.

This paper develops and estimates a structural model of the labor market for accountants that integrates forward-looking lifetime occupational choices with oligopsonistic employer demand. Using longitudinal resume data covering career transitions of business graduates across six sectors (Big 4, non-Big 4, internal accounting, finance/consulting, technology, and other), we specify a discrete choice dynamic programming model in which workers accumulate sector-specific skills while considering monetary and non-monetary factors, and employers compete for talent under imperfectly elastic labor supply. Estimates indicate that accounting labor markets are characterized by economically significant markdowns (the gap between a worker’s marginal product and their wage) and entry barriers. Counterfactual analyses suggest that reducing employer market power and, to a lesser degree, eliminating entry barriers would increase accountants’ lifetime career values and improve (labor) resource allocation across sectors.

We examine how the SEC's 2014 Municipalities Continuing Disclosure Cooperation initiative (MCDC) affects disclosure compliance in the municipal bond market. The MCDC granted favorable settlement terms to municipal debt issuers and underwriters who voluntarily self-reported having violated SEC disclosure requirements. Although underwriters participated widely, most municipal issuers did not participate in the MCDC initiative despite having publicly observable disclosure violations. We find that, after the MCDC, official statements were less likely to contain false claims about past compliance-particularly when underwriters had participated-suggesting improved underwriter oversight of the initial bond offering. However, contrary to the SEC's intention, we observe a 9 percent post-MCDC decrease in issuers' compliance with continuing disclosure requirements compared with a control group of voluntarily disclosing issuers. Our findings provide no evidence that the MCDC improved continuing disclosure compliance; rather, the MCDC may have instead exacerbated noncompliance by exposing the weaknesses of the existing regulatory regime.

ABSTRACT Using misstatement data, we find that the distribution of detected fraud features a heavy tail. We propose a theoretical mechanism that explains such a relatively high frequency of extreme frauds. In our dynamic model, a manager manipulates earnings for personal gain. A monitor of uncertain quality can detect fraud and punish the manager. As the monitor fails to detect fraud, the manager's posterior belief about the monitor's effectiveness decreases. Over time, the manager's learning leads to a slippery slope, in which the size of frauds grows steeply, and to a power law for detected fraud. Empirical analyses corroborate the slippery slope and the learning channel. As a policy implication, we establish that a higher detection intensity can increase fraud by enabling the manager to identify an ineffective monitor more quickly. Further, nondetection of frauds below a materiality threshold, paired with a sufficiently steep punishment scheme, can prevent large frauds.

ABSTRACT Can culture explain regional differences in minority shareholder expropriation? Examining regional variation in China, we document that the influence of historical Confucian values persists, despite decades of political movements clamping down on these values, and that these values reduce minority shareholder expropriation in local public firms. The effect on minority shareholder expropriation, in part, operates through the establishment of oversight mechanisms (i.e., greater financial reporting quality and dividend payouts) that constrain expropriation. The findings have important implications for understanding the origins of enduring regional differences in minority shareholder expropriation and capital market development.

We estimate an infinite-horizon dynamic oligopoly model of audit firm tenure and misstatements and evaluate a policy counterfactual involving mandatory audit firm rotation. Longer tenure lowers the cost of producing audits, increasing audit quality and reducing audit fees. Thus clients are less likely to misstate and more likely to keep the incumbent audit firm as tenure increases. By reducing the value of retaining audit firms, mandatory rotation leads to large increases in auditor switches, even before the term limit, implying increases in the switching costs borne by clients. Misstatement rates increase because audit firms endogenously lower audit quality and newly hired audit firms have lower quality. Overall, the model suggests caution when evaluating the costs and benefits of government oversight over the audit profession. This paper was accepted by Suraj Srinivasan, accounting. Funding: The authors thank the financial support from the Olin Busiiness School and the Wharton School of the University of Pennsylvania. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.4944 .

We study how financial certifier competition influences loan contracting in the context of financial auditing. Exploiting the unexpected demise of Arthur Andersen that exogenously decreased auditor competition, we find a greater decrease in loan spread for borrowers in markets in which certifier competition declined more. Additional analyses suggest the result stems from enhanced audit quality and reduced credit risk. The effect of certifier competition is stronger for borrowers with weaker external monitoring and those generating significant revenue for their auditors. Our evidence highlights negative consequences of financial certifier competition. (JEL D43, G21, M42, M49)

ABSTRACT We present theory and empirical evidence that greater financial reporting quality can incentivize myopic investments. In the model, greater financial reporting quality increases investor response to earnings, elevating the manager’s incentive to invest myopically to improve earnings. Using the setting of Big N auditors’ acquisitions of non-Big Ns, which increased investor response to earnings for the acquired client firms, we find evidence supporting myopic investments. Specifically, acquired clients decrease intangible investments, particularly when (1) the increase in investor response to earnings is larger and (2) the horizon of shareholders is shorter. The investment decrease is inefficient, as evidenced by reduced profitability, fewer exploratory innovations, and other measures. JEL Classifications: G14; G34; M41; M42; O31; O34; N22.

It is widely speculated that auditors' public forecasts of bankruptcy are, at least in part, self-fulfilling prophecies in the sense that they might actually cause bankruptcies that would not have otherwise occurred. This conjecture is hard to prove, however, because the strong association between bankruptcies and bankruptcy forecasts could simply indicate that auditors are skillful forecasters with unique access to highly predictive covariates. In this paper, we investigate the causal effect of bankruptcy forecasts on bankruptcy using nonparametric sensitivity analysis. We contrast our analysis with two alternative approaches: a linear bivariate probit model with an endogenous regressor, and a recently developed bound on risk ratios called E-values. Additionally, our machine learning approach incorporates a monotonicity constraint corresponding to the assumption that bankruptcy forecasts do not make bankruptcies less likely. Finally, a tree-based posterior summary of the treatment effect estimates allows us to explore which observable firm characteristics moderate the inducement effect.

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We investigate the effects of financial reporting on current employee job search; i.e., whether firms' public financial reports cause their employees to reevaluate their jobs and consider leaving. We develop theory for why current employees use earnings announcements to inform job search decisions, and empirically investigate job search based on employees' activity on a popular job market website. We find that job search by current employees increases significantly during earnings announcement weeks, especially when employees are more mobile and when their information frictions are greater. We also find that employees use earnings announcements to update their expectations about their employers' economic prospects, consistent with learning, and some evidence that positive announcements elicit less search. Our paper contributes to the burgeoning labor and accounting literature by providing among the first evidence closely linking financial reports to employee learning and job search.

Employing a novel control function regression method that accounts for the endogenous matching of banks and executives, we find that equity portfolio vega, the sensitivity of executives’ equity portfolio value to their firms’ stock return volatility, leads to systemic risk that manifests during subsequent economic contractions but not expansions. We further find that vega encourages systemically risky policies, including maintaining lower common equity Tier 1 capital ratios, relying on more run-prone debt financing, and making more procyclical investments. Collectively, our evidence suggests that executives’ incentive-compensation contracts promote systemic risk-taking through banks’ lending, investing, and financing practices.

This paper shows that past disclosure decisions cause the current disclosure decision using a Bayesian hierarchical model that flexibly accounts for firm economic characteristics that may explain persistence in disclosure decisions. A management forecast in the prior quarter, relative to its absence in the prior quarter, increases the likelihood of forecast issuance in the current quarter by about 70 percentage points. The distribution of this causal effect over the cross section exhibits empirical patterns consistent with existing dynamic disclosure theories. The paper adds to the growing evidence on the sources of the dynamics of firm voluntary disclosure decisions.

Can historical culture explain persistent regional differences in minority shareholder expropriation? We document that minority shareholder expropriation in Chinese public firms is negatively associated with regional Confucian culture, captured by data from the Qing Dynasty of Imperial China (1644--1912 AD). The results are robust to controlling for local economic development, enforcement of property rights, and geography and to using two instruments constructed from data in the Ming Dynasty (1368--1644 AD). The findings suggest that Confucian culture represents a fundamental force that constrains minority shareholder expropriation, which has important implications for capital market and economic development (Acemoglu, Johnson, and Robinson, 2001; Rajan and Zingales, 2003).

Recent SEC regulations mandate that hedge fund advisers provide narrative disclosures of their business and operations. We find that 40% of these disclosures contain plausible inconsistencies regarding advisers' regulatory histories, conflicts of interest (COIs), and risks. Inconsistencies are associated with predictably lower performance and thus reflect omissions of likely material information. Inconsistent funds do not differ in their fund flows, flow-performance relation, leverage, ownership structure, or management fees, and thus appear to benefit by de-emphasizing fund problems and misleading attention-constrained market participants. Our study shows that inconsistencies represent a valuable signal largely ignored by even "sophisticated'' investors and highlights the need for regulatory review to reduce misleading disclosures.

This paper studies the effect of financial certifier competition on syndicated loan contracting. Using the sudden demise of the U.S. fifth largest certifier of financial statements (i.e., auditor) as a shock to local certifier competition, we find a greater decrease in loan pricing for borrowers in markets where certifier competition declined more. The effect of certifier competition is concentrated in borrowers with weaker shareholder monitoring and those contributing more revenue to their auditors. Our evidence shows that certifier competition deteriorates service quality, which lenders (i.e., consumers of the certification outcomes) understand and price when contracting with borrowers.

We propose a measure of disagreement, which reflects differences of opinion as opposed to information asymmetry, that can be extracted from sequences of analyst forecasts. Using a Bayesian theoretical framework, we prove that when analysts agree, a regression of an analyst's forecast on the previous forecast issued by another analyst should have a slope coefficient of one. The magnitude of the estimated regression coefficient's deviation from one is then employed as a disagreement measure. We validate the measure using tests tied to predicted relations between disagreement and trading volume and bid-ask spreads. Finally, we employ our measure to test for associations between disagreement and expected returns predicted by antecedent theoretical studies.

This paper examines whether investor learning about profitability (i.e., the mean of earnings distribution) leads to persistence in disclosure decisions. A repeated single-period model shows that persistent investor beliefs about profitability lead to persistent disclosure decisions. Using earnings forecast data, I structurally estimate the model and perform several counterfactual analyses. I find that, when investors are assumed to know profitability, the persistence of management forecast decisions significantly declines by 17%–27%. About 24% of firms would have disclosed differently, resulting in 3.9% net change in the amount of information (i.e., posterior variance) provided to the capital market. Collectively, the results indicate the importance of learning profitability in understanding disclosure decisions and the capital market consequences of disclosures. This paper was accepted by Shiva Rajgopal, accounting.