Knowledge that Transforms

The PCAOB posits that audit partner and manager involvement, primarily through greater supervision and review (“oversight”) of audit engagements, is an important determinant and indicator of audit quality. We test this notion by empirically examining the link between staffing leverage, as measured by an office's ratio of audit partners and managers to audit employees, and audit outcomes from 2008 to 2022. We find staffing leverage is associated with lower rates of client misstatements, comment letters, and PCAOB inspection deficiencies, suggesting higher audit quality. When disaggregated, the association pertains to both partners and nonpartner managers. This relation is stronger for more complex clients and for offices with better management. We also find that staffing leverage measured at the firm level predicts audit quality, and that both office‐ and firm‐level staffing leverage are incrementally informative of audit quality, suggesting disclosing audit oversight metrics at multiple levels could be beneficial. However, the association between firm‐level staffing leverage and audit quality is statistically detected only within Big 4 audits. These findings suggest that audit committees, investors, and regulators can use audit‐office partner‐staffing and manager‐staffing leverage as an informative indicator of audit quality, particularly for complex engagements.

Firms increasingly support employee‐led startups by providing funding in exchange for equity. These investments create a dual role for employees, who pursue their entrepreneurial ventures as shared residual claimants while continuing to work on core tasks under incomplete fixed‐pay contracts. Although the investments align incentives within the startup, their effects on employees' effort in their core roles remain unclear. Using an experimental economics approach, I examine how a firm's investment decision affects employees' effort on core tasks. To isolate what is unique about equity investments, I use a non‐equity gift of equal monetary value as the baseline. The results show that employees reduce effort more when the firm denies a non‐equity gift than when it denies an equity investment. This difference arises because employees view a denied equity investment as the firm's business judgment based on risk and expected return, rather than as a failure to act generously. When funding in either form is provided, employees reciprocate positively, resulting in similarly high effort. Overall, the findings suggest that equity‐based entrepreneurship programs can help motivate effort on both startups and core tasks while mitigating the harm of rejecting employees' proposals.

This study examines whether weakening employee non‐disclosure agreements (NDAs) affects the flow of information to capital markets via the business press. After state laws weakened NDAs related to misconduct, treated firms exhibit a significant increase in corporate news relative to control firms. The increase is driven by non‐financial news, particularly about legal issues and corporate social responsibility. Articles become significantly more negative in tone and generate stronger market reactions, indicating that employees increasingly share informative negative information with journalists. Further, we document increased interactions between employees and journalists, with more articles citing employees as sources. Our evidence suggests that employees are an important source of corporate information for journalists and that blanket NDAs can impede this channel. Overall, the study highlights an important trade‐off between protecting firms' confidential information and preserving transparency. Our findings suggest that boards, executives, and regulators should design employment confidentiality policies that protect legitimate proprietary information without suppressing the disclosure of misconduct that is important for market discipline and governance.

We find that banking relationships built through institutional cross‐ownership influence the granting of loans as well as loan contract terms. Firms that are newly added to institutional cross‐owners' portfolios are more likely to borrow from banks that previously issued loans to other firms within the same portfolio. These related banks charge lower loan interest spreads and offer greater loan amounts than other banks issuing loans to the same borrower. However, such loans also are more likely to include capital covenants in the presence of high shareholder–debtholder conflicts. Thus, lenders appear to value the benefits of common institutional ownership while still protecting themselves against potential risk shifting. The interest spread effect is stronger for borrowers with high information asymmetry, low accounting quality, more financial distress risk, and dedicated institutional common owners. These results are consistent with either direct information flows or indirect signaling effects and are robust to different fixed effects specifications as well as to an identification strategy that exploits common ownership stemming from financial institution mergers. Overall, our study provides evidence that investor networks play a beneficial role in the production and dissemination of contracting‐relevant information and highlights cross‐ownership as a favorable determinant for contracting efficiency beyond traditional accounting measures.

Whereas prior studies primarily examine how environmental shocks affect manufacturing, distribution, and supply chains, we examine a distinct and understudied channel: the effect of wildfire smoke on human capital operating from firm headquarters. Using satellite‐based smoke plume measures, we show that wildfire smoke exposure in a firm's headquarters county is associated with lower operating income, with effects strengthening as smoke becomes more frequent and severe. Exposure is associated with increased employee health concerns, higher employee turnover, and shorter tenure. The negative association is stronger for firms that rely more heavily on skilled employees, and it is concentrated in higher operating costs. Collectively, these findings are consistent with wildfire smoke impairing workforce stability and productivity. Our study points to the need for enhanced climate‐risk and human‐capital disclosures. It also informs HR managers' planning for absenteeism and employee well‐being, and helps investors, audit committees, and auditors better assess smoke‐related operating risks.

We examine the adoption of expanded audit reports that include key audit matters (KAMs) in Hong Kong (2016) and mainland China (2017). These jurisdictions are highly integrated and together constitute one of the largest economies to adopt the IAASB's reporting standards in a staggered fashion, while also differing in investor protection and legal enforcement. Using matched samples, pre‐post tests, and staggered difference‐in‐differences analyses with company fixed effects, we do not find compelling evidence that expanded audit reports affect market reactions or audit quality. These findings suggest a substantial gap between regulatory intent and implementation—on average, in these markets, KAMs do not appear to meet investors' demand for incremental information or to improve audit quality substantially. At the same time, our cross‐sectional evidence on KAM characteristics is more nuanced. A higher number of KAMs and the presence of novel or transaction‐specific KAMs are associated with stronger pricing of fundamentals, consistent with investors perceiving the related financial statements as better vetted. Yet a higher number of KAMs and novel KAMs are also associated with lower profitability persistence, consistent with these disclosures reflecting company risk and volatility. In contrast, industry‐common KAMs appear less relevant for valuation, consistent with investors discounting routine disclosures, even though they are associated with more persistent performance likely reflecting more stable industry conditions. Overall, our evidence suggests that mandating expanded audit reports alone may be of limited value, whereas better tailored KAM disclosures may still serve as signals of firm fundamentals and future performance.

We examine the impact of abortion restrictions on the geographic mobility of college‐educated skilled women. Exploiting the staggered adoption of Targeted Regulation of Abortion Providers (TRAP) laws across US states that restrict women's access to abortion, we find that skilled women who relocate exhibit a greater propensity to move to states without TRAP laws (non‐TRAP states) than they did prior to the TRAP law adoption. This pattern is stronger among women in more liberal and less religious areas than among women in more conservative and more religious areas. These findings are consistent with the view that relocation decisions are often driven by the alignment between personal values and the local policy environment. We use the audit industry as a specific setting to address the implications for employer performance. We find that TRAP law adoption increases female auditor turnover at local offices relative to same‐firm offices in non‐TRAP states, and the resulting loss of human capital lowers audit quality.

This study evaluates the auditing profession's diversity outcomes by comparing diversity along the university to job pipeline for auditing and other comparison disciplines. My tests show consistently anomalous outcomes for Black people in the audit labor pipeline, and therefore, I focus the study on them. I find that, among college freshmen planning to major in accounting, Black college freshmen are significantly overrepresented relative to freshmen planning to major in other business disciplines or nonbusiness disciplines. I find evidence of Black underrepresentation in the audit labor pipeline at every subsequent point: among accounting bachelor's and master's degree recipients, in the audit firm recruiting process, and among young professional auditors. My evidence of especially sharp Black attrition from accounting degree programs is, to my knowledge, novel. Although I lack sufficient data to pinpoint the mechanisms causing this sharp Black attrition from accounting degree programs, my findings are inconsistent with the popular theory that Black college students are distinctively uninterested in pursuing accounting education. It is not yet possible to make well‐targeted and data‐driven policy prescriptions to counter Black attrition from accounting degree programs because its causes are not well understood. Universities could contribute to the diagnosis process by systematically collecting and distributing data characterizing when and why students select away from accounting. My findings on audit firm recruiting are inconsistent with popular theories that Black underrepresentation in audit firms is attributable to overtly racially biased recruiters or lower interest among Black accounting graduates in pursuing careers in audit firms. Rather, my findings conform best with unintentionally biased recruiting by audit firms, which appear to make recruiting investments using outdated definitions of school quality. My evidence suggests that campus‐recruiting leaders within audit firms have the opportunity to hire more Black auditors without reducing the quality of the schools from which they recruit.

RÉSUMÉ L'étude publiée par Ball et Brown en 1968 (ci‐après « BB68 ») est principalement reconnue pour son affirmation selon laquelle la comptabilité de l'époque était utile pour les investisseurs, s'inscrivant alors en contradiction avec la littérature comptable normative faisant office d'autorité. Or, une telle affirmation n'allait pas de soi. Notre manuscrit vise à mieux comprendre comment l'affirmation initialement proposée dans BB68 en est venue à s'imposer au sein d'une branche importante de la littérature académique en comptabilité, à savoir la recherche comptable « empirique » en économie financière. Ainsi, nous réalisons une étude historique mobilisant certains concepts issus de la « sociologie de la traduction » pour examiner l'envolée de la recherche comptable en économie financière qui s'est déployée au fil des différentes réinterprétations de la notion d'utilité, où l'on est passé de l'évaluation boursière à l'encadrement de clauses contractuelles, en passant par la découverte des anomalies de marché. Nos analyses mettent en exergue, d'une part, le processus social entourant la naissance et le développement de la recherche comptable en économie financière et, d'autre part, la fragilité et le flou des prémisses sur lesquelles ce type de recherche s'est construit. Contrairement à la prétention selon laquelle la recherche comptable en économie financière s'est naturellement imposée en raison de sa supériorité sur le plan des connaissances, nous proposons que cette fragilité et ce flou, plutôt que de miner la crédibilité de ladite perspective, ont pu favoriser l'établissement d'un climat d'ambiguïté conceptuelle propice à sa prolifération. Cette ambiguïté s'articule sur deux plans : la mobilisation ambiguë de l'hypothèse de l'efficience des marchés et l'ambiguïté sémantique quant à la conception de l'utilité de l'information comptable. De façon plus générale, notre manuscrit alimente la discussion sur le cheminement des idées et le contrôle des frontières entourant certaines idées établies.

We empirically investigate the impact of financial analysts' integrity on their information outputs and career success. Using analysts' off‐the‐job behavior, specifically their legal records, to proxy for analyst integrity, we predict and find that weak‐integrity analysts engage more in opportunistic behaviors, including “speaking in two tongues” and earnings forecast walk‐down. These analysts obtain favorable management access and make more accurate earnings forecasts. Further analyses indicate that while the market as a whole does not distinguish weak‐integrity analysts from others, sophisticated investors discount their information outputs. Weak‐integrity analysts also experience less favorable career outcomes. Our results have important implications for investors, professional bodies, employers, and regulators.