Knowledge that Transforms

Disclosure rules in many countries require public companies to report fees paid to the principal audit firm and its affiliates, but not to unaffiliated component auditors (UCAs). Reported fees thus depend on component auditor affiliation. We show that UCA involvement is significant in many countries. Using Italian private companies’ public filings, we find that UCA involvement is a statistically and economically significant source of bias in audit fee models. This bias is particularly relevant around principal auditor changes, when some subsidiaries temporarily retain UCAs before switching to auditors affiliated with the new principal auditor. The exclusion of fees paid to temporary UCAs explains the initial-year audit fee discount (lowballing) previously documented, which disappears once these omitted fees are accounted for. Our results suggest that lowballing reflects measurement bias rather than systematic strategic pricing. Because UCAs are common internationally and disclosure rules similarly exclude these fees, this bias extends beyond Italy.

Once a good idea comes to mind, it is hard to avoid wondering why no one else has already taken advantage of it. Is it because the idea is not as good as it initially appears? This concern gives rise to a dilemma over whether to pursue the idea or abandon it despite its apparent promise, a dilemma we call “the good idea dilemma”. Paradoxically, the more compelling an idea appears, the more puzzling it becomes that others have not exploited it, thereby deepening the dilemma. We study this dilemma in a continuous-time game with multiple players, analyzing idea adoption dynamics and their economic implications. The dilemma yields both under-implementation of good ideas and over-implementation of bad ideas. Its adverse consequences equally affect trivial ideas that arise frequently and creative ideas that rarely do, but intensify for ideas accessible to larger audiences or with riskier outcomes, even under risk neutrality.

Based on a comprehensive visual deception score constructed from China’s mandatorily disclosed IPO roadshow videos using computer vision and machine learning, we find that visual cues embedded in these videos predict IPO financial fraud. The predictive power is incremental to financial, textual, and audio indicators. Further analyses show that these cues are well grounded in psychology research and focusing on the psychology-based deception-cue-area features improves fraud predicting performance. Furthermore, decomposing each video into five topics, we find that only the deception score of the topic on financial performance is positively associated with financial fraud. We further show that insiders of firms with higher visual deception scores are more likely to sell shares shortly after lock-up periods expire, and these firms experience significantly lower subsequent stock returns. Our study demonstrates the feasibility and potential value of using video information for fraud detection in accounting and finance.

This paper examines whether and how the peer information environment – generated by peer firms’ disclosures and by the information intermediaries covering them – affects the CEO’s delegation of decision rights to division managers (DMs). Using an international survey dataset, I measure within-firm delegation of decision-making over capital investment, human capital investment, investment in new products, and sales. I find that CEOs delegate more to managers of divisions in country-industries with richer peer information environments. Cross-sectional tests highlight three underlying channels. Specifically, the results suggest that peer information (i) helps the CEO acquire information to reduce potential information disadvantages relative to DMs (CEO learning), (ii) mitigates CEO-DM agency frictions (agency mitigation), and (iii) provides DMs with relevant information to make better decisions (DM learning). While CEO learning reduces delegation, agency mitigation and DM learning increase it. These findings provide evidence that information about peers influences the internal organization of firms.

We examine the direct and indirect effects of transparency regulation on economic activity. Using two distinct sources of regulatory variation—the varying extent of financial-reporting requirements and the staggered introduction of electronic business registers in Europe—, we find that direct exposure to transparency regulation tends to hurt focal firms’ economic activity (e.g., production and employment). By contrast, we find that indirect exposure to transparency regulation imposed on other related firms tends to help focal firms’ economic activity. In terms of relative magnitudes, we find that the negative direct and positive indirect effects tend to be of similar size, almost perfectly offsetting each other. Collectively, our evidence suggests that transparency regulation appears to primarily reallocate economic activity from more toward less regulated markets rather than help or hurt aggregate economic activity.