This study examines the effect of promotion-based tournament incentives on firms' propensity to overinvest and its economic consequences. We find that tournament incentives are positively associated with corporate overinvestment. Furthermore, we show that the relation between tournament incentives and overinvestment has a positive effect on top executives' internal promotion but a negative effect on future firm performance. Our results are robust to an alternative measure of overinvestment, two-stage instrumental variable analyses, and change specification tests. Overall, we suggest that promotion-based tournament incentives increase corporate overinvestment, resulting in a high chance of CEO promotion at the expense of future performance.

We examine whether big baths (large and non-recurring charges) affect auditors' risk assessments and therefore result in higher audit fees. Prior studies have found that there is an asymmetric reaction from auditors on firms' income-increasing/decreasing accruals. We argue that auditors' response to big baths is distinguishable from other types of earnings management as big baths provide incremental information to auditors beyond other earnings manipulation indicators. Our findings show that audit fees are significantly higher for firms with big baths, compared to other firms. We also present evidence that the positive relation between big baths and audit fees is stronger for firms with weaker corporate governance and greater information asymmetry. Overall, our results suggest that auditors expand their audit effort to mitigate the greater audit risk attributable to big baths, which in turn lead to higher audit fees.

Research question/issue: The recent market trend in the United States has drawn attention to the fact that new chief executive officers (CEOs) are increasingly being recruited from outside rather than getting promoted from within. This study examines the influence of CEO origin on stock price crash risk. Research findings/insights: Using a sample of 13,331 firm-year observations during the 1997-2017 period, we find that CEOs promoted from inside the firm are less likely to trigger stock price crashes than CEOs hired from outside. Further, we show that the negative relation between insider CEOs and stock price crash risk is more pronounced for firms with more conservative accounting policies. Additional analyses document that the difference in stock price crash risk between insider and outsider CEOs is stronger in the early years of their tenure and for CEOs with higher pay-for-performance sensitivity and higher turnover risk. Theoretical/academic implications: Our study contributes to the research on stock price crash risk, especially the recent studies investigating the impact of managerial behavior and traits on stock price skewness. The findings are consistent with the bad news hoarding theory of stock price crashes. Our findings also lend further empirical support to the horizon problem of CEO origin by showing that the relatively short average horizon for outsider CEOs incentivizes them to withhold bad news, leading to higher stock price crash risk. Practitioner/policy implications: Our study adds to the debate on whether to choose a CEO from inside or outside the firm. The potential higher risk of stock price crashes might help boards of directors rethink their approaches to succession.

PurposeThis study investigates whether and how chief executive officers (CEOs) with personal risk-taking preference (expressed in owning a pilot license) will act differently when they are vested with additional power serving as board chairs.Design/methodology/approachRegressions analyses are performed using a sample of Standard and Poor’s (S&P) 1,500 firms with available data during 1996–2009. CEO's risk-taking outcomes are measured using firms' total risk, idiosyncratic risk and research and development expenditures (R&D) investment.FindingsFirms led by pilot CEOs have greater firm risks, yet CEO duality attenuates the relationship. Further channel tests show that CEO duality suppresses CEO's risk-taking tendencies through managers' reputation concerns.Research limitations/implicationsThe findings highlight the importance of incorporating human factors into consideration of appropriate governance structures for a firm. Future studies can expand the existing data and further explore the relationship between human factors and governance structures on other firm strategies.Practical implicationsRegulators may focus mainly on regulatory setting based on the “best practice” of governance yet overlook human influence in corporate dynamics. For shareholders, hiring managers with distinct styles will change corporate outcomes but different governance mechanisms could be devised to adapt to CEOs with various personalities.Originality/valuePrior studies show that both CEO personal preferences and firms' governance structure affect corporate policies, and this paper complements prior studies by exploring how the two may interact to shape corporate policy and its outcomes. This paper also adds to the literature showing that CEO duality could serve a disciplinary role.

In this study, we examine the association between CFO gender and corporate investment efficiency, namely the extent of firm-level over-investments. Prior studies show that female CFOs are more risk-averse and conservative than male CFOs when making various corporate accounting and strategic decisions. Consistent with this prediction, we find that the presence of a female CFO is significantly associated with a decreased level of corporate over-investments. Robustness checks of using alternative investment measures and a propensity-score matched sample provide consistent support to this main finding. Overall, we find empirical evidence that indicates firms with female CFOs have an improved corporate investment efficiency by decreased levels of over-investment.

This study examines the association between convertible debt usage and the pricing of audit services. We test the (nondirectional) hypothesis that convertible debt usage is associated with audit effort and therefore fees, due to its association with client business risk and its dilutive effect on earnings per share. We find a positive association between audit fees and convertible debt, suggesting that auditors view convertible debt as a source of risk. We also find that audit fees related to convertible debt are sensitive to CEO bonus incentives and to market valuation incentives. Our results suggest that following the Public Company Accounting Oversight Board (PCAOB) regulation, auditors exert greater effort on convertible debt, but no additional effort on straight debt. Our inferences are robust to using a change in audit fees specification, controlling for litigation risk, and controlling for functional form misspecification.

We use the setting of board interlock (i.e., firms sharing directors) to examine whether director style influences accounting properties. We find that board interlock is associated with greater similarity in accounting properties such as accounting conservatism and reporting timeliness. Building on this result, we find a stronger similarity when the board member creating the board interlock holds a key position or when a greater number of board members create the board interlock. This evidence provides construct validity to the result that directors influence accounting policy as reflected in accounting properties (i.e., accounting conservatism and reporting timeliness). As further evidence, we find that the convergence in accounting properties is attributable to the director-destination firm and that the director-source firms' characteristics affect interlocking directors' influence over the director-destination firms. Overall, our evidence affirms that directors have style in the sense that their distinct influence or imprint is evident in data on accounting properties. Moreover, our study indicates an actual process through which individual directors put their stamp on accounting policy.

The key roles of the Chief Financial Officer (CFO) in firm operating performance, corporate strategic choices, and corporate governance have been increasingly emphasized in recent decades. In this study, we empirically investigate the relation between CFO board membership and corporate investment efficiency to determine whether CFO presence on the board reduces firms’ propensity to over- or underinvest. We find that CFO board membership is significantly associated with a decreased level of corporate over- and underinvestment. Further, the positive effects of CFO board membership on corporate investment efficiency are greater for firms with greater information asymmetries. Last but not least, we find that the improved investment efficiency experienced by firms with CFOs on their boards has a positive effect on the firms’ future performance. Overall, we find that CFO board membership is associated with improved investment efficiency and firms’ future profitability. By documenting the real business impact of CFO board membership on investment efficiency and firms’ future performance, we add bricks to the literature on board composition and how it influences firms’ strategic choices and performance. Our findings suggest that having CFOs on boards could benefit firms’ investment practices, which directly relate to corporate strategic performance.

This paper examines how a firm's long-term earnings rankings within the industry convey valuable information about its competitive advantages. Earnings rankings are isolated from industry and market-wide factors, therefore, contain firm-specific information that reflects the rareness of the firm's resources and strategies. A higher ranking also indicates more effective value creation and difficulty in imitation, which translates into more sustainable future performance. Since a firm's competitive advantages are defined by rareness, imitability, value, and sustainability, earnings rankings provide a numeric summary of competitive advantages. We decile rank a firm's earnings within the industry and conduct a principal component analysis to measure competitive advantages. The findings confirm a significant positive association between earnings rankings and competitive advantages. In particular, long-term earnings rankings, measured by the 5-year moving averages, should be the most informative. Our results shed light on the usefulness of accounting numbers in implementing strategic management based on competitive advantages.

We investigate the spillover effect of corporate social responsibility (CSR) concerns along the supply chain. We propose an information incorporation effect for whether suppliers' CSR concerns affect customers' stock price crash risk. Customers' investors can incorporate information about suppliers' CSR into stock price valuations, lowering the probability of abrupt stock price crashes. Our findings support the information incorporation effect. Suppliers' CSR concerns are negatively associated with customers' stock price crash risk. The negative relationship is more pronounced for firms with high media coverage, negative media sentiment, high investor attention, negative investor sentiment, low trade policy uncertainty, and low political uncertainty. Moreover, we rule out the alternative explanation that suppliers' CSR strengths dominate the effect. Our main finding is supported by change analysis and robustness tests, including an alternative measure test.

This paper examines how a firm's long-term earnings rankings within the industry convey valuable information about its competitive advantages. Earnings rankings are isolated from industry and market-wide factors, therefore, contain firm-specific information that reflects the rareness of the firm's resources and strategies. A higher ranking also indicates more effective value creation and difficulty in imitation, which translates into more sustainable future performance. Since a firm's competitive advantages are defined by rareness, imitability, value, and sustainability, earnings rankings provide a numeric summary of competitive advantages. We decile rank a firm's earnings within the industry and conduct a principal component analysis to measure competitive advantages. The findings confirm a significant positive association between earnings rankings and competitive advantages. In particular, long-term earnings rankings, measured by the 5-year moving averages, should be the most informative. Our results shed light on the usefulness of accounting numbers in implementing strategic management based on competitive advantages.

The adoption of clawbacks purports to mitigate harmful behavior to firms’ operation, including excessive corporate risk-taking at the expense of investors’ interests and firms’ long-term benefits. This study empirically examines whether corporate risk-taking declines after the adoption of clawback provisions in the compensation contracts of top executives in publicly traded US firms. Using a sample of clawback adopters and non-adopters in the Russell 3000 Index firms during the period 2005–2014, we find that the presence of clawback provisions is significantly associated with a lower level of corporate risk-taking as reflected by firms’ investment strategies and their capital structure. Additional analyses suggest that this association is stronger for small firms and for firms audited by Big 4 auditors. Robustness checks of using alternative measures for corporate risk-taking, controlling for the occurrence of financial restatements, board independence, and internal control quality, and employing a propensity matching score matching sample further support the main results. Overall, the results of this study indicate more conservative corporate risk-taking behavior after the adoption of clawbacks.

This study examines the relationship between the consistency of book-tax differences and the quality of analysts’ earnings forecasts. We find that the consistency of book-tax differences is associated with more accurate and informative forecasts. This suggests that the information embedded in the consistency of book-tax differences plays an important role in elevating the quality of analysts’ forecasts. Furthermore, the effect of consistency in book-tax differences on analyst forecast quality is greater for firms with noisier information environment. Finally, we find that the relation between consistency in book-tax differences and improvements in forecast accuracy and informativeness is stronger after the implementation of Regulation Fair Disclosure, which increased the role of public information in analysts’ forecasts.

ABSTRACTRecent research documents the improvement of Form 8-K disclosure timeliness in the post-Sarbanes-Oxley Act (SOX) era. However, it remains unclear why disclosure timeliness overall has improved, but disclosure timeliness for certain events has not improved. We examine firms' information technology (IT) management and IT governance in order to investigate their potential positive impacts on 8-K reporting timeliness. We find that, on average, IT-expert Chief Executive Officers (CEOs) and firms with board-level technology committees file Form 8-Ks in a timelier manner. Specifically, firms with IT-expert CEOs file a half-day sooner and firms with technology committees file a full-day sooner. Additional analyses show that firms with technology committees file 8-Ks in a timelier manner than firms without technology committees, even when the events are complicated or surprising. In aggregate, our evidence suggests that IT-expert CEOs and IT expertise on the board facilitates efficient IT utilization and is associated with timely disclosure.Data Availability: The data used are publicly available from the sources cited in the text.

Prior studies document that politically connected independent directors ("political IDs") bring both benefits (e.g., easier access to long-term debt financing) and costs to firms (e.g., greater minority shareholder expropriations), but the observed relationship may be spurious because board composition is endogenously determined. Moreover, no direct evidence shows how minority shareholders value these political IDs. Using an exogenous shock that forces firms to lose their political IDs, we investigate the value of political IDs for Chinese listed companies. Specifically, using a difference-in-difference methodology, we find that the mandated departures of political IDs lead to reduced long-term debt financing and decreased government subsidies for nonstate-owned listed companies. Nonstate-owned listed companies that experience the sudden loss of political IDs adapt to the shock and improve their minority shareholder protections by engaging in fewer self-dealing activities and by enhancing investment efficiency. Although minority shareholders experience greater levels of expropriation in the presence of political IDs, they react negatively to the forced departure of political IDs. This evidence suggests that minority shareholders weigh the loss of political ties over the potential gain of corporate governance improvement. Our study provides direct evidence on how political IDs affect firms' strategic decisions. The study also sheds light on political IDs' roles in facilitating rent-seeking by controlling shareholders.

Purpose This paper aims to discuss the application of Big Data analytics to the brainstorming session in the current auditing standards. Design/methodology/approach The authors review the literature related to fraud, brainstorming sessions and Big Data, and propose a model that auditors can follow during the brainstorming sessions by applying Big Data analytics at different steps. Findings The existing audit practice aimed at identifying the fraud risk factors needs enhancement, due to the inefficient use of unstructured data. The brainstorming session provides a useful setting for such concern as it draws on collective wisdom and encourages idea generation. The integration of Big Data analytics into brainstorming can broaden the information size, strengthen the results from analytical procedures and facilitate auditors’ communication. In the model proposed, an audit team can use Big Data tools at every step of the brainstorming process, including initial data collection, data integration, fraud indicator identification, group meetings, conclusions and documentation. Originality/value The proposed model can both address the current issues contained in brainstorming (e.g. low-quality discussions and production blocking) and improve the overall effectiveness of fraud detection.

In this study, we examine the role of temporal framing in the context of tax audit risk. Using construal-level theory, we propose that compared with an every-year frame (e.g., 1.5 million returns are audited every year), framing audit risk in an everyday frame (e.g., 4,000 returns are audited every day) will make audit risk seem more likely and thus increase taxpayer compliance. We test whether perceived fairness of the tax system, an individual difference variable related to tax compliance, moderates the effect of temporal framing on behavioral intentions. The results show that communicating risk in a day frame rather than a year frame increases compliance for taxpayers who perceive the tax system as unfair but not for taxpayers who perceive the tax system as fair. Increasing compliance among taxpayers who perceive the tax system as unfair is crucial, as they are less likely to be compliant. Thus, framing audit risk can assist in increasing taxpayer compliance.

ABSTRACTAccounting standard setting is a high-stakes, political, and market process influenced by constituents through a public commenting mechanism. Comment letters are widely studied by researchers and the Financial Accounting Standards Board (FASB), typically manually because the letters contain unstructured data. Our study employs a topic modeling method, latent Dirichlet allocation (LDA), to overcome the difficulties posed by the unstructured data. We analyze comment letters on two exposure drafts proposed by the FASB in 2008 and 2010 regarding loss contingencies. Results show that LDA is effective in compiling information from unstructured data. LDA also enables us to identify topics and detect shift in focus of the letters responding to the two exposure drafts. The findings have practical implications for standard setters, regulators, and researchers while also contributing to the digital reporting, data analysis, economic theory of democracy, and coalition and influence theory literatures.

We examine the association between analysts' stock recommendations and their tendency to round annual EPS forecasts to nickel intervals (i.e. placing a zero or five in the penny location of the forecast). We find that prior to Regulation Fair Disclosure (Reg FD), analysts were more likely to provide rounded EPS forecasts in association with unfavorable (underperform and sell) recommendations. However, after Reg FD, we find no significant association between rounded forecasts and unfavorable stock recommendations. Further, other regulations (NASD 2711, NYSE 472, and Global Research Analyst Settlement) have no impact on analyst rounding behavior. The findings in this study suggest that analyst rounding behavior is a particular form of forecasting optimism motivated, at least in part, by management relations incentives. Further, Reg FD appears partially successful at curbing the influence of management relations incentives on analysts' research.

This paper examines how economic conditions impact a firm's corporate social responsibility performance and influence the relationship between financial performance and corporate social responsibility. One theory suggests that in a good economy, firms engage in more corporate social responsibility to reap the marginal benefits of increased consumer purchasing power. Another theory suggests that during a bad economy, firms engage in more corporate social responsibility to chase reduced market share and manage reputation. The expected impact of the economy on corporate social responsibility performance, therefore, depends on which theory dominates. Using data from 2005–2010, we found that firms' corporate social responsibility performance changed significantly during the financial crisis, relative to both the pre- and post-crisis periods. Further, the relationship between financial performance and corporate social responsibility varied based on economic conditions. These results indicate that the motivations for conducting corporate social responsibility hinge on both economic conditions and firms' profitability.