In the German two-tier system, the board of executives and board of (independent) directors are two distinct bodies; directors may not simultaneously be executives. German regulatory provisions on codetermination require employee representatives to hold at least one-third, and sometimes even half, of the board seats in companies with more than 500 employees. This gives employees some power to influence executive compensation. Given that employees invest specifically in a firm and suffer psychological and financial costs in the event of financial distress, they may be interested in the firm's long-term performance, low firm risk, and favourable working conditions. Analysing the CEO compensation characteristics of German publicly listed firms for 2015-2022, we find that higher levels of codetermination are associated with more variable CEO pay. Furthermore, under stronger codetermination, CEO compensation is more likely to use deferred bonus compensation. We also find weak evidence that stock option plans are less likely in this scenario. Finally, firms with higher levels of codetermination are more likely to use employee-related performance criteria for variable CEO pay. These results tend to be robust to alternative measures of codetermination and controlling for endogeneity. Overall, our results suggest that codetermination creates long-term incentives for CEO pay.

Wird die Finanzberichtsqualität davon beeinflusst, ob Banken als Gläubiger oder als Anteilseigner des Unternehmens auftreten? Eine groß angelegte Analyse börsennotierter japanischer Unternehmen zeigt: Kreditdominierte Beziehungen gehen mit geringerer Finanzberichtsqualität einher, während Bankbeteiligungen die Qualität erhöhen. Konjunktur und Regulierung modulieren diese Effekte.

Unlike corporations, cooperatives are typically governed by the democratic principle of 'one shareholder, one vote', ensuring that every member has an equal say, regardless of the amount of capital they contribute. However, some cooperatives allow members to have multiple voting rights. Our study, based on a sample from Germany, reveals that cooperatives that allow multiple voting rights tend to exhibit significantly lower financial reporting quality, as indicated by higher discretionary accruals, compared to those that adhere to the 'one-shareholder-one-vote' principle. These results remain robust after applying propensity score matching, using different measures of financial reporting quality, and considering the endogenous choice to allow multiple voting rights. This study adds to the emerging literature on cooperatives' financial reporting practices and explores the relationship between owners' voting power and financial reporting quality.

In contrast to shareholders of limited-liability firms, the owners of sole proprietorships and partnerships are fully liable for their firm’s liabilities. We expect owners’ full liability to mitigate agency problems of debt and to lower creditors’ demand for financial debt covenants and accounting conservatism. Using a European sample of private firms, we find robust evidence that full-liability firms exhibit about 20–25

There is evidence that judges evaluate auditor effort with hindsight bias, overestimating the likelihood that the auditor has not met the standard of due care. In an analytical analysis, this paper shows that auditors will rationally anticipate judges’ hindsight bias and will thus likely exert excessive effort in the first place. Furthermore, the paper shows that, counterintuitively, (a) capping liability and (b) lowering the standard of due care to gross negligence are generally not helpful remedies to efficiently counteract hindsight bias. Indeed, a debiasing strategy intended to mitigate judges’ hindsight bias, such as by providing appropriate training, may actually cause excessive auditor effort. However, if the legislator tightens the standard of due care sufficiently, this will provide efficient incentives. At the same time, tightening the standard of due care is not a suitable remedy for a different form of hindsight bias, which induces a judge to find the auditor's behaviour reckless and to award punitive damages. Consequently, the proper design of remedies to mitigate the effects of judges’ hindsight bias depends on whether or not punitive damages are allowed.

Deposit insurance and investor protection save private customers from losses in consequence of a financial intermediary insolvency. Jochen Bigus and Patrick C. Leyens present a comprehensive analysis of possible reform measures from a comparative law and economics perspective.

There is mixed empirical evidence on whether close banking relationships are associated with lower or higher earnings quality of borrowing firms. This paper analyzes how this evidence can be explained by the role of the bank, whether the bank is a creditor or equity-holder of the firm. We use a sample of Japanese public firms. In Japan, (1) banks historically have both close financial and personal ties to borrowing firms, (2) banks are not only lenders, but are also permitted to have an equity stake in the firm, and (3) detailed data on bank relationship characteristics are publicly available. One key result is that relationship banking is associated with lower earnings quality if the bank only provides debt. This effect is more pronounced in years of economic expansion. The results are in line with the theoretical literature, which argues that borrowing firms that want to conceal good performance from competitors benefit from relationship banking because banks' access to private information lowers the demand for high earnings quality. However, if banks have an equity stake, they are more concerned about complying with insider-trading rules and governing agency problems of equity by efficient executive compensation contracts. Consistently, the second main finding is that the firm's earnings quality improves significantly with a bank's equity stake, regardless of the state of the economy. These results are robust according to various specifications of relationship banking or earnings quality.

This study reviews and compares the definitions and measurements of 'corporate reputation' used in 173 studies published in seven top-tier accounting and management journals between 1980 and 2020. Accounting scholars frequently fail to define 'reputation,' and if they do, definitions vary considerably between the accounting and management fields. We further find that measures of reputation do not fit well with its definition. The accounting literature often employs secondary financial measures, which poorly reflect stakeholders' reputation assessments. We develop a conceptual framework to better classify prior research and identify appropriate measures of reputation that match the chosen definition. We also suggest a number of further research opportunities: Accounting scholars may focus more on (a) stakeholders' subjective nonfinancial assessments; (b) the emotional appeal of companies and its relationship with competence and integrity assessments; (c) the role of stakeholders' normative expectations and (d) explicitly consider a multi-stakeholder perspective, where corporations have multiple reputations rather than one.

This paper provides initial evidence on executive pay in small private limited liability firms in Germany. More than 80% of the firms report fewer than 50 employees. We find that executive pay increases with firm size and variable pay. We also find weak evidence that executive pay is lower in the presence of female executives, and increases with profitability. Surprisingly, variable pay is related in an inverted U-shape to total salary. Significant executive ownership (> 25%) is associated with higher compensation. Executive pay varies widely by region. Some, but not all results are in line with efficient contracting theory. In sum, we provide novel evidence on executive pay in small private firms outside the U.S.

Using a sample of up to 2,503 initial public offerings (IPOs) in 32 countries from 2011–2017, we predict and find that higher levels of country‐level accounting enforcement are associated with lower levels of IPO underpricing. IPOs in countries with a relatively low accounting enforcement score (second quintile) exhibit a mean underpricing of 19%, whereas the mean underpricing amounts to just 9% in countries with a relatively high score (fourth quintile). The results remain qualitatively the same when we employ a multi‐level model or a difference‐in‐difference design. In countries that substantially strengthened their accounting enforcement in the 2003–2009 period, the level of IPO underpricing decreased significantly. We show that accounting enforcement matters for the cost of going public.

When a cooperative goes bankrupt, its members often lose more than their paid-in capital. Members might be subject to personal liability, and may lose other benefits tied to membership, such as employment, benefits as a consumer or supplier, or housing at a lower price. We find that cooperatives are more likely to avoid reporting small losses when the members are more committed to the cooperative when it is in financial distress, e.g., with members’ personal liability, with longer notice periods to return member shares, or with minimum holding periods for shares. If financial reporting were mainly targeted towards debt financing demands, we would have expected opposite results. We also find evidence that cooperatives with stronger member commitment are more likely to disclose small profits, and pass on more economic benefits to their members. Our study contributes to the literature by being the first to provide insights on cooperatives’ financial reporting choices and their drivers.

Aiming at the strategic behaviour in ‘technology make-or-buy decisions’ in the real economy, this study develops a Cournot competition model with endogenous technological level, by comparing the technology acquisition cost of technologically backward firms under different technology acquisition strategies, we theoretically analysed the ‘anti-extortion’ mechanism of indigenous innovation by technologically backward firms, and the relationship between indigenous innovation and technology imports is empirically tested by using the data of Chinese industrial enterprises above designated size. We show that indigenous innovation can significantly enhance a firm's bargaining power, and the technology acquisition strategy of simultaneous technology imports and indigenous innovation can not only reduce the technology imports cost but also reduce the indigenous innovation cost. Therefore, only by indigenous innovation based on technology imports, can firms enhance their market competitiveness.

We expect that private firms choose a close relationship with a bank – often based on private information – in order to save on direct or proprietary costs of disclosure. For a large sample of bank relationships in 12 European countries, we find evidence that close bank relationships are associated with lower earnings quality as measured by higher absolute discretionary accruals and less timely loss recognition. This effect is stronger for firms with high proprietary costs. Further, we find that the strength of creditor rights intensifies the link between close bank relationships and earnings quality, while tax-book conformity moderates it. Finally, we show that close bank relationships directly tend to decrease the borrowing firms’ cost of debt by about 40 basis points on average. Indirectly, the cost of debt increase, because relationship lending goes along with lower earnings quality and relationship banks charge higher interest rates for poorer earnings quality than do other lenders. The findings suggest that relationship lending and financial disclosures can be considered as substitutes and that this relation is affected by the institutional framework. The paper also highlights that relationship lending implies a direct negative and an indirect positive effect on the borrowing firm’s cost of debt.

There is hardly any evidence on earnings properties of co-operatives for which profit maximisation is not a primary goal. We find that cooperatives in Germany exhibit higher levels of timely loss recognition when they have more members(owners), when they pursue charitable objectives, and when the local corporate income tax rate is high. Cooperatives are more prone to avoid reporting small losses when members can be held privately liable in the cooperative’s bankruptcy and when the local income tax rate is low. Housing cooperatives exhibit different earnings properties than other types of cooperatives. Overall, tax motives are strongly related to cooperatives’ earnings properties, but members’ private liability and agency problems of “equity” also have an influence.<br><br>We also analyze how the earnings properties of cooperatives differ from those of (propensity- score matched) privately held corporations. Both types of firm typically have a relatively large number of owners, but in contrast to privately held corporations, cooperatives are generally not profit-maximizing firms and must be run by their owners. We find that cooperatives exhibit a significantly higher propensity to avoid reporting small losses, but also lower absolute discretionary accruals. The evidence on the differences in timely loss recognition is not conclusive. Managers of privately held corporations seem to engage in opportunistic earnings management more aggressively. Still, cooperatives try harder to avoid reporting small losses, indicating that the negative financial and non-financial consequences of “false alarms” seem to be relatively high for cooperatives and their members.

This paper analyzes the interplay between shareholder loans and earnings smoothing in German private corporations. Shareholders who grant loans have a dual stakeholder role, being both equity holders and creditors. Those loans could be lost, because bankruptcy law requires their subordination in the event of bankruptcy. We therefore expect shareholder loans to mitigate agency problems of debt. This reduces the need for debt covenants and earnings smoothing. Moreover, the interest payments from shareholder loans tend to lower payout volatility which also reduces the need for dividend and earnings smoothing. We expect and find that private firms with shareholder loans exhibit significantly lower levels of earnings smoothing than other private firms. We find that with a 10 percentage-point increase in the shareholder loans to total assets ratio, earnings smoothing decreases by about 10% of the mean value. We also find that this substitution effect usually occurs in case of managerial ownership and tends to be slightly weaker in the event of dispersed ownership. The results are robust for different econometric specifications, including different measures of key variables and propensity score matching. The paper suggests that financial reporting by private firms responds to the dual stakeholder role of shareholder loans.

There is strong evidence that individuals are optimistic in the sense that they underrate the probability of a negative event occurring. This paper provides a positive theoretical analysis of how auditor optimism affects their incentives to take care under two liability rules: strict liability and a negligence rule. Under strict liability, auditors are held liable when they cause damages to investors. Under a negligence rule, auditors are held liable when they cause damages and in addition, act negligently, that is, fail to meet the standard of due care specified in legal and professional rules. I find the following results. (1) If due care is sufficiently close to the efficient level, a negligence rule distorts auditors’ incentives less than strict liability. Under strict liability, optimism makes the auditor overestimate the chances of finding material mistakes and thus induces suboptimal care. (2) If due care is too strict, the auditor will not exert due care but the same level of suboptimal care under either liability rule. (3) With increasing optimism and in the absence of punitive damages, strict liability becomes less preferable to a precise negligence rule. This statement also holds for vaguely defined standards of due care if due care is sufficiently strict or if auditor optimism is sufficiently high. (4) Punitive damages counteract suboptimal incentives generated by auditor optimism, especially under strict liability.

We analyze various Eurobond proposals and show that they have different effects on moral hazard, interest rates, international transfer payments and the necessity for European fiscal centralization. On closer inspection, these consequences are more diverse than the discussion on Eurobonds so far suggests. For instance, Eurobonds might increase rather than decrease marginal interest rates in weaker countries. Some proposals lead to international transfer payments while others do not. Some require changes to the Treaty on the Functioning of the European Union, others require changes to national constitutions, and others yet require both. Some proposals, while not necessitating such legal change, may still have mutual advantages for the issuing states.

We investigate whether the financial accounting choices made by German private firms depend on legal form. Legal form determines dividend rights, liability status and the owners' obligations to run the business and, thus, influences agency problems of debt and equity. Consequently, we find that earnings properties depend on legal form. We expect, and find, that corporations exhibit higher levels of income smoothing and conservatism than partnerships and one-person businesses. Corporations are also more likely to disclose small profits. However, generally, there are no significant differences in earnings properties between one-person businesses and partnerships. The results are robust to different econometric specifications including endogeneity concerns (e.g. propensity score matching). Earnings properties of private firms seem to be driven to a considerable extent by agency problems of debt.

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