The amount of operating leases for U.S. banks, such as rent paid for bank branches and equipment, is not trivial. As such, the new lease accounting standard, ASC 842, exerts a downward pressure on the regulatory capital ratios of U.S. banks due to the requirement to fully risk-weight capitalized operating lease assets. We therefore expect banks to adjust their regulatory capital ratios upward. Using a difference-in-differences design, we find that less well-capitalized banks (treatment group) increase their Tier 1 capital ratio more than better-capitalized banks (control group) after adopting ASC 842, mainly by reducing lending growth rather than increasing shareholders’ equity. This effect is stronger in treated banks with higher ex-ante operating lease commitments, indicating a lease-induced regulatory capital management. Further, less well-capitalized banks significantly adjust towards an optimal Tier 1 capital ratio, and those that are riskier, pay higher dividends, and are non-advanced approaches banks, show greater adjustments of Tier 1 capital ratio and more pronounced declines in lending growth. Finally, we show evidence that suggests the contraction of lending in less well-capitalized banks harms local economies. Overall, the evidence in this study suggests that banks reveal a preference for shrinking credit growth over raising equity levels in response to the new lease accounting standard, highlighting a potential unintended consequence of operating lease capitalization.

This study examines whether Freedom of Information Act (FOIA) requests to the Securities and Exchange Commission convey value-relevant information about publicly traded firms and whether sophisticated investors trade on that information. Our empirical analysis reveals heterogeneous value relevance associated with different types of requests. Specifically, requests submitted by proxy agents to probe for ongoing investigations as well as anonymous requests are negatively correlated with future returns, while requests from institutional investors and intellectual property entities are associated with positive future returns. Our results also support the direct-trading hypothesis, showing institutional investors and short sellers trade on FOIA-obtained information. Our findings add to the information-acquisition literature by highlighting the heterogeneous value signals in FOIA requests, particularly the negative value signals.

Mandatory disclosure is a primary source of public information available to acquirers, yet little is known about how potential target managers respond to takeover threats by avoiding mandatory disclosure. This study focuses on redactions in material contracts as a setting of mandatory disclosure avoidance. We find that managers facing takeover threats are more likely to redact material contracts than other managers. To better differentiate the motives for redactions, we classify redacted contracts into nine different categories and examine managers' redaction decisions on the three most prominently redacted types. We find managers facing takeover threats redact research and development contracts more heavily when firms possess trade secrecy, as a strategy to thwart technological acquisitions aiming at innovation combinations. By contrast, managers redact purchase and sales contracts and license and royalty contracts more heavily when they have greater private control benefits. Overall, our results highlight new tactics that managers use when they face takeover threats, especially under threats of technological acquisitions.

This study examines how short-sale constraints affect investors’ information acquisition and thereby shape stock price efficiency. By exploiting two settings that relax short-sale constraints in the US and China, respectively, we find that the removal of short-sale constraints increases investors’ information acquisition in both markets, but the effect is more prompt in China. Investors acquire value-relevant information, especially bad news, and improve their short-selling decisions in both markets. Lastly, information acquisition induced by the removal of short-sale constraints improves price efficiency. Our evidence shows that a reduction in trading frictions promotes information acquisition and improves price efficiency.

Using a large sample of US firms, we study the role of divisional managers in corporate disclosure quality. We find that when a company's divisional managers have previously worked with the chief executive officer (CEO) or chief financial officer (CFO) at other companies, in other words, they have co-working experience, the company produces more accurate management earnings forecasts, experiences lower future stock price crash risks, and engages in less accrual-based earnings management, consistent with the notion that co-working experience facilitates internal communication, which, in turn, improves external disclosure quality. Moreover, the information-enhancing role of the co-working experience is more pronounced for firms with greater organizational complexity, more opaque internal information environments, and CEOs or CFOs who are relatively new to their positions. Overall, our results provide new insight into the role of divisional managers in shaping corporate disclosure and transparency.

Foreign workers have been an important part of the labor force in public accounting firms over the past two decades. In this paper, we investigate whether and why foreign workers influence audit quality. We find that audit offices with more newly hired foreign labor have a lower mean absolute value of discretionary accruals and a smaller rate of restatements for their clients. The effect is more pronounced for audit offices that face more resource constraints or require greater foreign expertise. The results of improved audit quality are robust to alternative measures of immigrant intensity and audit quality, alternative samples, and using different ways to address endogeneity concerns. Overall, our paper contributes to the literature by showing the impact of foreign labor in the auditing profession and provides public policy implications for the recent H-1B visa debate.

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Foreign exchange volatility challenges auditors for not only demanding more audit efforts but also imposing heightened audit risk. We first show foreign exchange risks increase cash flow uncertainty and reduce financial reporting quality, supporting our premise that foreign exchange risks increase audit risk. Next, we find audit fees are higher for MNCs with greater exposure to foreign exchange volatility, but not when MNCs use financial hedging against foreign exchange risk. Furthermore, we show that the impact of foreign exchange risk on audit fees is attenuated by auditor MNC expertise, auditor busyness, and MNC’s operation diversity, whereas the impact is exacerbated for companies facing high pressure to avoid missing earnings targets and for auditors with high market concentration. Overall, our study provides novel evidence of the implications of MNCs’ exposure to foreign exchange risk on financial reporting and auditing, thereby enriching our understanding of MNCs.

Previous research examining the link between board attributes and ecological strategies such as green innovation has primarily focused on structural board attributes, yielding mixed findings. Moreover, the critical contextual grounds that shape the relationship between board attributes and green innovation have often been overlooked, leading to potential biases in empirical investigations. Considering that competence drives outstanding performance, we developed a unique measure of board competence that represents the board's intrinsic ability to perform in corporate strategies. Drawing on a holistic perspective of agency, resource dependence, and stakeholder theories, we posit a strong relationship between board competence and green innovation. Furthermore, we contend that this association is moderated by external governance mechanisms, namely audit quality, media coverage, and imitative pressure. Through our analysis of publicly traded Chinese companies, we found compelling evidence to support our assertions. These findings have important implications for policymakers, practitioners, and managers.

We show that shared and improved auditing standards, as induced by the audit oversight arising from the Public Company Accounting Oversight Board (PCAOB)’s inspections on non-U.S. auditors, help global exporting firms upgrade themselves and tap into global value chains (GVCs). Using a dataset of U.S. waterway imports from global suppliers of 36 countries, we find that PCAOB international inspections not only lead to significantly more exports to U.S. buyers, particularly for intermediate and capital goods, but exporters also upgrade their product complexity. These results are consistent with enhanced information quality of exporters and thus reduced informational frictions with downstream importers. Echoing this notion, we find stronger GVC effects of PCAOB inspections for exporters facing more informational problems, i.e., for those with ex-ante lower reporting quality or smaller market shares, and those located in countries with weaker institutions or higher geopolitical risk with the U.S. PCAOB inspections also increase the duration length of the chain relationship and supplier firms’ relationship-specific investments in the chain. We further find that U.S. importers with a greater share of suppliers audited by PCAOB-inspected auditors exhibit boosted financial outcomes. Overall, our findings suggest that audit oversight facilitates the formation, upgrading, and performance along GVCs.

This study examines the spillover effect of constituency statutes along the supply chain. We posit that the enactment of constituency statutes in customer firms' incorporation states, by removing legal obstacles for customer firms to cater to non-shareholders' interests, builds suppliers' trust and cooperation. Consistent with the notion that constituency statutes entice greater trust from suppliers, we find that suppliers make more relationship-specific investments in the supply chain after the enactment of constituency statutes in customers' states, indicating a greater commitment to the customer. We also show an improvement in customers' corporate social responsibility performance in the post-constituency-statute period, thus substantiating the claim that the constituency statutes increase customers' stakeholder orientation. Cross-sectionally, we find the positive effect of constituency statutes on supplier relationship-specific investments is attenuated if the customer and supplier have more repeated interactions in the past, whereas the effect is more pronounced if suppliers produce durable goods. Overall, we provide novel evidence on the spillover of constituency statutes along the supply chain.

ABSTRACT We examine the effect of a common auditor within a supply chain, where the auditor serves both the supplier and its customer(s). This dual role allows auditors to leverage and disseminate crucial chain-specific knowledge. Considering that supplier firms are relatively smaller and at a disadvantage compared with their customers, such supply-chain knowledge is valuable for suppliers to make better demand forecasts and business plans. Consistent with this argument, we find that a supplier sharing a common auditor with its customer(s) has a higher ROA, a higher profit margin, a shorter receivable conversion period, and a smaller demand distortion from the bullwhip effect. Performance enhancement is more pronounced when the common auditor has more opportunities to collect and transfer information and when such information transfer is more valuable to the supplier. Our results are robust to alternative measures of common-auditor presence, alternative explanations, and potential endogeneity concerns. Data Availability: The data that support the findings of this study are openly available. JEL Classifications: D82; D83; L25; M42.

The Internal Revenue Service (IRS) uses information in firms’ public disclosures as well as private tax returns to detect tax noncompliance. Consistent with managers perceiving that material contracts contain information that could be useful to the resource-constrained IRS for its enforcement and that making redactions would reduce the likelihood of IRS audits, we find that firms facing greater ex-ante IRS scrutiny are more likely to redact material contract disclosure and redact more filings and contracts. Cross-sectionally, the positive association between IRS scrutiny and redactions in material contracts is stronger for firms with more uncertain tax positions, lower GAAP effective tax rates, and foreign subsidiaries. Redactions in material contracts are concentrated in contracts related to manufacturing and sales, investment, and intangibles, suggesting that managers perceive these contracts as useful for the IRS’s enforcement activities. Greater redactions are also associated with lower likelihoods of a tax audit and of a tax settlement with the IRS. Overall, we provide novel evidence on the association between tax-related disclosure costs and firms’ disclosures of general business information.

We examine the spillover effect of the Public Company Accounting Oversight Board (PCAOB) international inspection program on improving the contracting role of accounting numbers in executive compensations in an international setting. For a sample of non-U.S.-listed foreign public firms with PCAOB-inspected foreign auditors, we find a significant increase in the sensitivity of their executive cash compensations to earnings after the release of the first inspection reports on their auditors by the PCAOB, relative to those without PCAOB-inspected foreign auditors. Such a result suggests that the compensation committees of firms with PCAOB-inspected auditors infer that the quality of earnings as a performance measure for determining executive compensations improves due to the PCAOB's inspections of their auditors. We also find that a clean inspection report issued to the firm's auditor has an incremental effect on increasing earnings pay-for-performance sensitivity. Our findings provide novel evidence on the effectiveness of U.S. regulatory oversight in foreign markets and should interest the PCAOB and local audit regulators around the world.

Using a large sample of U.S. firms, we study the role of divisional managers in corporate disclosure quality. We find that when a company’s divisional managers have previously worked with the CEO or CFO at other companies, in other words, they have co-working experience, the company produces more accurate management earnings forecasts, experiences lower future stock price crash risks, and engages in less accrual-based earnings management, consistent with the notion that co-working experience facilitates internal communication, which in turn improves external disclosure quality. Moreover, the information-enhancing role of the co-working experience is more pronounced for firms with greater organizational complexity, more opaque internal information environments, and CEOs or CFOs who are relatively new to their positions. Overall, our results provide new insight into the role of divisional managers in shaping corporate disclosure and transparency.

Customer referencing refers to the phenomenon whereby a firm discloses its connections with reputable customers in order to improve its own reputation. Consistent with this disclosure increasing investor attention and providing customer certification, we find that supplier firms enjoy a lower cost of equity when they engage in customer referencing. In cross-sectional tests, we find that the benefits of customer referencing are more pronounced for supplier firms: i) without reputable major customers, ii) whose referenced customer’s reputation greatly exceeds their own, iii) facing higher competition, or (iv) that supply a larger proportion of the referenced customer’s products. Overall, our study provides evidence that communicating inter-organizational connections to investors can bring capital market benefits to the disclosing firms.

The Securities and Exchange Commission (SEC) allows firms to redact information from material contracts by submitting confidential treatment requests, if redacted information is not material and would cause competitive harm upon public disclosure. This study examines whether managers use confidential treatment requests to conceal bad news. We show that confidential treatment requests are positively associated with residual short interest, a proxy for managers’ private negative information. This positive association is more pronounced for firms with lower litigation risk, higher executive equity incentives, and lower external monitoring. Confidential treatment requests filed by firms with higher residual short interests are associated with higher stock price crash risk and poorer future performance. Collectively, our results suggest that managers redact information from material contracts to conceal bad news.

The 2006 SEC rule, by changing the definition of Named Executive Officers, mandates CFO compensation disclosure. Using this setting and a difference-in-differences research design, we study the real effects of CFO compensation disclosure regulation on CFO job performance. We hypothesize that the disclosure of CFO compensation information, by facilitating shareholder monitoring of the board in providing appropriate incentives to CFOs, leads to better CFO job performance in providing high-quality financial reports. The analyses support our prediction: the treatment firms, which start disclosing CFO compensation information under the 2006 rule, compared to the control firms, which already disclose CFO compensation before 2006, experience an improvement in CFO performance, as exhibited in decreases in accounting misstatements and unexplained audit fees. The results are more pronounced for firms with concentrated ownership, smaller compensation committees, and CFOs subject to weaker monitoring by audit committees. Overall, we provide evidence of a real effect resulting from mandatory CFO compensation disclosure.

Disaster-affected clients demand significant additional effort from their audit office, and hence strain the audit office's resources available to other non-disaster-affected clients. We consider audit offices with disaster-affected clients to be strained offices and find that, compared with clients audited by non-strained audit offices, non-disaster-affected clients audited by strained audit offices are more likely to have their financial statements restated. This result suggests the financial reporting quality of companies not directly exposed to disasters could also be negatively affected by the disasters, due to their auditors' strained-resource issue. We further find such a negative effect is more pronounced when the degree of resource constraints is greater and when the audit office lacks client experience or industry expertise. We offer novel evidence of financial reporting consequences of natural disasters, focusing on the externality of disasters on companies not directly affected by disasters. The findings have important implications for regulators in making disaster-related policies, for auditors in managing their client portfolios, and for companies in making auditor choice decisions.

This study investigates how a financial market mechanism, auditing, shapes a firm's engagement in global value chains and product choice. We examine the effect of the Public Company Accounting Oversight Board's (PCAOB) inspections on non-U.S. auditors, which induce higher reporting quality of the global exporters audited by these auditors. Using a unique data set of U.S. waterway imports from global suppliers from 36 countries and adopting a Difference-in-Differences design, we find that the PCAOB inspections not only lead to more exports to U.S. buyers among treated global suppliers particularly for intermediate goods and capital goods, treated firms also upgrade their product complexity and attract more large buyers. The positive effect of PCAOB inspections is stronger for firms with ex-ante lower reporting quality, firms with lower market share, firms operating in more competitive product markets, and firms located in countries with weaker institutions and lower political stability. PCAOB inspections also benefit exporters more when tariff reductions occur over time. Our findings suggest that regulatory oversight on auditing facilitates firms' participation in global value chains by lifting professional service quality that reduces search and contractual frictions in cross-border transactions.