[The antitrust laws of the United States prohibit monopolies or attempts to create a monopoly in any unregulated line of business. In the past, the two agencies that enforce these laws, the Department of Justice and the Federal Trade Commission, have relied on accounting profits in prosecuting such antitrust violations. The agencies argued that high accounting rates of return were "excessive" and indicative of monopolistic power on the part of the firm. Thus, to reduce the possibility of an unfavorable ruling and the costs associated with it, managers in firms investigated for monopoly-related violations would have incentive to use accounting procedures (e.g., accounting methods, accruals) that produce abnormally low levels of income. Because the incentive to reduce income will increase as the threat of an unfavorable ruling becomes more imminent, it is expected that managers will take additional steps to lower income while being actively investigated, compared with periods of non-investigation. The differences in political costs caused by the antitrust investigation are used to provide a refined test of the political-cost hypothesis. In particular, the study examines, on a longitudinal basis, whether managers respond to these investigations by adjusting their discretionary accruals. The discretionary accruals for 48 firms that were investigated for monopoly-related violations were estimated over a 15-year period by using the residuals of a fixed effects covariance model that regressed total accruals on the change in sales, the fixed asset balance, and dummy variables representing each firm and year. The specific hypothesis tested is whether the estimated discretionary accruals over the period of investigation (typically more than one year) were lower, or more income-reducing, than those in other years. The hypothesis was tested by using a nested design with a dummy variable, coded 1 for the years of investigation, included in the accrual model. This variable was significant and negatively signed, which indicates that discretionary accruals were lower while the firm was being investigated, as expected. The discretionary accruals for a control group of firms that were not investigated were also estimated, and these were found to remain the same during the periods of investigation and non-investigation for the matched sample firms. The results from these tests support the political-cost hypothesis and are consistent with the view that managers adjust earnings in response to monopoly-related antitrust investigations.]

Examines the effect of monopoly-related antitrust investigations on firms' reported earnings. Managers' adjustment of their discretionary accruals in response to changes in potential political costs; Limitations of the results; Areas of future research suggested by the limitations.

Reviews the book `Handbook of Business Valuation,' edited by Thomas L. West and Jeffrey D. Jones.

This study examines whether after Arthur Andersen's demise, successor auditors required more conservative accounting for their ex-Andersen clients in order to minimize litigation risk. We use unadjusted and performance-adjusted measures of abnormal accruals, and we examine the level of and changes in the abnormal accruals of ex-Andersen clients in 2002 relative to a control sample of clients that were audited by a Big 4 auditor in 2001 and 2002. We conduct univariate and multivariate tests. In our multivariate tests, we control for other factors that may affect litigation risk crosssectionally. Our results indicate that the ex-Andersen clients had lower levels of and larger decreases in abnormal accruals in 2002. This is consistent with auditor conservatism and suggests the successor auditors viewed an Andersen audit as a unique source of litigation risk.

This paper examines whether the relationship between future firm performance and chief executive officer (CEO) stock option grants is affected by the quality of the compensation committee. Compensation committee quality is measured using six committee characteristics – the proportion of directors appointed during the tenure of the incumbent CEO, the proportion of directors with at least ten years’ board service, the proportion of directors who are CEOs at other companies, the aggregate shareholding of directors on the compensation committee, the proportion of directors with three or more additional board seats, and compensation committee size. We find that future firm performance is more positively associated with stock option grants as compensation committee quality increases.

ABSTRACT: A report issued by the U.S. General Accounting Office (GAO) in 2003 identified auditors’ industry expertise as a critical factor for firms choosing an auditor, and highlighted the extreme levels of auditor concentration in some industries. We posit that the investment opportunity set (IOS) plays a fundamental role in determining whether an industry is an attractive target for auditor specialization. When industry-specific IOS is high, specialist auditors make costly investments in industry-specific knowledge, allowing them to offer a differentiated product and to create entry barriers for other audit firms. When the IOS of firms within an industry is relatively homogeneous, auditors can transfer such knowledge across clients in the industry more easily, resulting in cost savings and scale economies. However, greater homogeneity of IOS in an industry can also increase a client’s aversion to sharing an auditor with its competitors because of concerns about transfers of proprietary information, suggesting that industries with relatively homogeneous IOS are less likely to be dominated by a single auditor. We show that auditor concentration in an industry relates positively to both the level and homogeneity of IOS in the industry, while auditor dominance relates negatively to industry IOS homogeneity. Further, we find that audit fees are positively associated with both levels and homogeneity of industry IOS.

ABSTRACT How prior trust moderates investor responses to restatements is unknown. We examine how societal trust affects the changes in institutional investors’ shareholdings around a restatement. We consider two competing hypotheses based on the erosion of trust and confirmatory bias. We find the change in institutional investors’ shareholdings around a restatement is more negative for investors from high trust areas compared to low trust areas, consistent with an erosion of trust where high trust institutional investors view the restatement as a violation of trust. Further analyses show that our findings vary with the regulatory or economic environment, type of institution, and type of restatement. Our results are also robust to different tests that address endogeneity and use alternative societal trust measures. Overall, we contribute to the literature by examining the role of societal trust in a dynamic setting where investors’ trust-based beliefs about the credibility of accounting information are not realized. Data Availability: GSS Sensitive Data Files are not available from the authors. Persons interested in obtaining these data should contact the GSS at [email protected]. Other data are available from the public sources cited in the text. JEL Classifications: G11; G23; G41.

ABSTRACT We examine how the extent and distribution of industry knowledge within an audit team affect audit outcomes. While prior research examining the role of auditors' industry knowledge focuses mainly on audit firms, audit offices, and audit partners, audits are conducted by audit teams. Using an audit framework and proprietary data from a Big 4 firm that includes audit hours for each team member, we find that Big 4 audit teams with higher average industry knowledge are associated with more audit effort. In contrast, we find mixed evidence on the relation between the average hourly internal cost rate and team knowledge. Furthermore, we find that balanced teams, which have at least one team member who qualifies as an industry specialist at both the senior rank and junior rank, produce higher‐quality audits than teams that have no specialists. In contrast, the audit quality of unbalanced teams, which have a specialist at the senior rank but not the junior rank or vice versa, is not statistically different than teams with no specialists. Overall, our evidence suggests that both the extent and distribution of industry knowledge within a team matter for audit production and that industry knowledge is utilized more effectively when it is spread throughout the team. The findings have useful implications for audit firms and regulators regarding how team composition and industry knowledge affect audit outcomes.

In this study, we examine whether firms that act more socially responsible receive more favorable media coverage, and we consider whether firms use CSR to actively manage their media image. We focus on all news stories about a firm, not just those that report on specific CSR initiatives, and find that more socially responsible firms receive more favorable news reportage overall, i.e., they have a more positive media image. These findings are robust after controlling for potential endogeneity. Further, consistent with firms actively managing their media image, we find a stronger relation between CSR and media favorability when incentives to improve a firm’s media image are high, e.g., among firms in sin industries, during periods of low investor sentiment, and prior to seasoned equity offerings. Finally, we find that for firms that demonstrate superior social responsibility and receive more favorable news reporting, there is a significant interaction between social responsibility and media favorability that increases (decreases) a firm’s equity valuation (cost of capital). Our results are consistent with the media slanting their reporting in favor of good performing CSR firms. Overall, we contribute to the literature by showing that firms can influence their media coverage through a relatively subtle channel, CSR performance.