This study examines whether the audit quality of Big 4 audit firms is affected by an audit office's proximity to more target universities for appointing staff auditors. We identify these target universities using a recruitment map of a Big 4 audit firm and unique office-level hiring data hand-collected from LinkedIn. Our findings suggest that audit offices closer to more of their key feeder schools and universities with accredited business schools are associated with higher audit quality, as observed by a lower likelihood of financial accounting misstatements. Our results are robust across alternative measures of labor market proximity and audit quality, and to a battery of sensitivity tests, including controlling for client firms' proximity to universities. Overall, our results suggest that audit offices benefit from being proximate to more key suppliers of staff auditors.

We use the staggered adoption of the Universal Demand Laws (UD Laws) to examine the effect of an exogenous reduction in shareholders' ability to litigate on the extent of accounting conservatism. On average, we find an increase in reporting conservatism post-UD. The increased conservatism is concentrated in firms that contemplate equity issuance, with a high proportion of monitoring investors, and high corporate governance quality. In contrast, firms with specific short-term incentives for aggressive accounting—such as those narrowly beating benchmarks, those with abnormal insider trading, and those likely to violate debt covenants—weakly governed firms, and firms with high ex ante litigation risk decrease reporting conservatism after UD. Our results suggest that the relation between the litigation environment and reporting conservatism is complex and dependent on specific characteristics and unique circumstances of the firms.

This study investigates the influence of managerial incentives to meet or beat the zero earnings benchmark on labor cost behavior of private Belgian firms. We posit that relative to managers of firms reporting healthy profits, managers meeting or beating the zero earnings benchmark will increase labor costs to a smaller extent when activity increases and decrease labor costs to a larger extent when activity decreases. This should take the form of more symmetric labor cost behavior for firms that report a small profit. Our findings are consistent with this prediction. Using detailed employee data, we show that managers of firms reporting a small profit focus on firing employees who are relatively low cost to fire. To protect their reputation in the labor market, managers of other firms, particularly those reporting healthy profits, limit the numbers of dismissals and react to activity changes by changing the number of hours that employees work. Data Availability: Data are available from the sources referred to in the text.

We investigate the economic forces that influence noncompliance with mandatory compensation disclosures and the effect of a subsequent focused enforcement action. We utilize SEC evaluations of compensation disclosures mandated by rules adopted in 2006 to examine whether noncompliance is associated with excess CEO compensation, proprietary costs, or previous media attention. We further test whether subsequent CEO compensation declines after the SEC publicly identifies noncompliance. We construct measures of defective disclosures from SEC critiques and find that disclosure defects are positively associated with excess CEO compensation and media criticism of CEO compensation during the previous year. We find no evidence supporting the contention that compensation disclosure defects are associated with proprietary costs. Furthermore, we are unable to document that the level of disclosure defects identified by the SEC is associated with a reduction in excess CEO compensation in the subsequent year. Data Availability: Data are available from public sources identified in the paper.

We examine the association between cost of equity and internal control weakness (ICW) for firms that filed first-time Section 404 reports with the SEC. Using several proxies, we find higher implied cost of equity associated with ICW firms than for a control sample of firms that disclosed no ICW. However, the higher cost of equity associated with ICW disappears after controlling for primitive firm characteristics and for analyst forecast bias. Overall, we find that, on average, ICWs are not directly associated with higher cost of equity.

The pricing of Big 5 industry leadership in the U.S. audit market is investigated using audit fee disclosures for the 2000–2001 fiscal years and the joint nationalcity framework in Ferguson et al. (2003). There is a significant fee premium of 19 percent on those engagements where Big 5 auditors are both the nationally top-ranked auditor and the city-level industry leader in the city where the client is headquartered, indicating that national and city-specific industry leadership jointly affect auditor reputation and pricing. However, there is never a premium in any tests for auditors that are national industry leaders alone without also being city-specific industry leaders, indicating that national leadership by itself does not result in a premium. The evidence is mixed with respect to city-specific industry leaders alone that are not also national industry leaders. While there is a premium of 8 percent in the primary tests, this result is inconclusive as it does not hold in all sensitivity analyses.

On October 23, 2000, the SEC implemented Regulation FD (Fair Disclosure), which prohibits firms from privately disclosing value-relevant information to select securities markets professionals without simultaneously disclosing the same information to the public. We examine whether Regulation FD's prohibition of selective disclosure impairs the flow of financial information to the capital markets prior to earnings announcements. After implementation of FD, we find (1) improved informational efficiency of stock prices prior to earnings announcements, as evidenced by smaller deviations between pre-and post-announcement stock prices; (2) no reliable evidence of change in analysts' earnings forecast errors or dispersion; and (3) a substantial increase in the volume of firms' voluntary, forward-looking, earnings-related disclosures. Overall, we find no evidence Regulation FD impaired the information available to investors prior to earnings announcements, and some of our evidence is consistent with improvement.

When a student enrolls in one of our classes we feel, as we are sure you do if you are a teacher, that we have an obligation to give him everything, accounting- wise, that one can during the time in which he is with others. In fact we feel that this obligation or responsibility encompasses not only the student but also his parents, the accounting department, the university, the state and last but not least the accounting profession. People feel sure that in many instances the use of visual aids helps in fulfilling this obligation. Not only are such aids frequently time-saving in the presentation of a given amount of information, but also they often permit one to present a greater quantity of information and, at the same time, more up-to-date information. Transparency projection, although one of the newest types of projection, is, in many instances, rapidly becoming one of the most popular. This type of projection, which is basically the same as that frequently used in bowling alleys whereby scores are grease-pencilled on transparent sheets and projected upon a screen, often provides an instructor with many opportunities for imparting more information in less time.

This paper examines two behavioral factors that diminish people's ability to value a lifetime income stream or annuity, drawing on a randomized experiment with about 4,000 adults in a U.S. nationally representative sample. We find that increasing the complexity of the annuity choice reduces respondents' ability to value the annuity, measured by the difference between the sell and buy values they assign to the annuity. When we limit narrow choice bracketing by inducing people to think first about how quickly or slowly to spend down assets in retirement, their ability to value an annuity increases.

Does monitoring corrupt activities induce a sustained reduction in corruption? Using longitudinal data on audits of municipal governments in Puerto Rico, we show corruption is considerably lower in municipalities with timely audits—before elections. However, these municipalities do not exhibit decreased levels of corruption in subsequent audits, even while mayors in these benefit from higher reelection rates. Our results suggest that audits enable voters to select responsive but corruptible politicians to office. Audit programs must disseminate results when they are most relevant for voters—shortly before an election—and ensure that these programs are sustained, long-term commitments.