Using firms’ online job postings, we identify economically related peer firms in the labor market. Firms’ labor peers are vastly different from their industry peers, where the overlap is about 20%. Returns of labor-linked firms strongly comove, suggesting common responses to labor market shocks on average. However, industry shocks can affect firms outside the industry through the labor network, leading to substitution effects between labor peers. Last, we show that investors do not promptly incorporate news about labor-linked firms, leading to predictable subsequent returns. A long-short strategy exploiting this delay generates an average annualized excess return of 9%.

This paper examines the effect of shareholder governance on firms' cost of borrowing using the voting outcomes of shareholder-sponsored anti-takeover governance proposals. Implementing a regression discontinuity design centered around the proposals' passing thresholds, we show that firms' public debt prices fall significantly upon the proposals' passage, and that banks demand higher interest rates and more general covenants on new loans issued to those firms. We find that these effects are more pronounced for riskier firms where shareholder-debtholder conflicts are more severe. Moreover, firms with passed shareholder-sponsored proposals become more volatile, reflecting an increase in their risk-shifting incentives. Collectively, our findings suggest that shareholder governance exacerbates shareholder-debtholder conflicts and raises firms’ cost of borrowing.

Public accounting firms are owned by all equity partners, but day-to-day management is generally delegated to a team of leaders. Using data from China, this study examines which equity partners are selected to the firm's national leadership team, and whether firmwide audit quality is related to leadership attributes. We find that a partner is more likely to be selected as a leader if the partner is more experienced in public company auditing and has attracted more new clients to the firm. Firmwide audit quality is higher when leaders are more experienced in public company audits or have a past record of larger audit adjustments, and is lower when leaders have attracted more high-risk new clients to the firm. Leadership attributes exhibit a relatively strong (weak) association with audit quality at the headquarters (branch offices). Moreover, audit quality is higher when a firm has more leaders in an audit-quality role.

ABSTRACT Audit firms need to provide high‐quality audits but they also need to please their clients. We argue that these conflicting incentives become manifest when comparing the incentive effects of equity ownership on engagement quality (EQ) reviewers and audit engagement partners. We predict that EQ reviewers monitor audit quality more closely when they hold greater ownership. In contrast, we expect that equity ownership has conflicting effects on the incentives of engagement partners because they need to please their clients as well as provide high‐quality audits. Consistent with these predictions, we find that the associations between audit adjustments and partner equity ownership are (1) significantly positive for EQ reviewers, (2) significantly negative or insignificant for audit engagement partners, and (3) significantly more positive for EQ reviewers than engagement partners. Our findings suggest that larger ownership stakes motivate EQ reviewers to monitor audit quality more closely, whereas larger ownership stakes do not motivate engagement partners to deliver higher quality audits.

We examine how adjustments to earnings during year-end audits affect measures of earnings quality. There are four key findings. First, audit adjustments cause earnings to become smoother and more persistent. Second, the adjustments result in higher accrual quality. Third, audit adjustments have a larger negative effect on signed accruals than absolute accruals. Fourth, the adjustments do not reduce the discontinuity in the earnings distribution around zero. These findings are of interest to researchers who use earnings properties as proxies for earnings quality and audit quality. However, we caution that our findings for China may not generalize to other countries.

ABSTRACT Mergers and acquisitions (M&As) are an important way for non-Big 4 accounting firms to grow their businesses. Non-Big 4 firms also account for the vast majority of PCAOB inspections. Consistent with negative inspection reports signaling low quality at inspected firms, we find that non-Big 4 accounting firms conduct fewer M&A deals after they receive negative inspection reports. Additional analyses support our hypothesized signaling mechanism: (1) the chilling effect of inspection reports on M&A activity is stronger when the inspected firm’s business is focused on public company audits, (2) the effect is stronger when stakeholders at the target firm know less about the acquirer because the acquirer is located in a different city, and (3) clients at the target firm switch to new firms rather than move over to the acquirer if the acquirer received a negative inspection report prior to the M&A date. JEL Classifications: D82; G34; G38; M42; M48.

Acquirers are motivated to overstate earnings prior to stock-financed acquisitions. We hypothesize that audits help to detect and correct such overstatements. We test this using a difference-in-differences design, which compares audit adjustments to earnings for stock-financed and cash-financed acquirers before versus after the acquisitions. Consistent with our hypothesis, we find larger downward adjustments in the audits immediately before stock-financed acquisitions. Further analysis of regulatory sanctions suggests the downward adjustments are in fact warranted, rather than auditors being overly conservative. Moreover, modifications in audit reports suggest that downward adjustments do not correct all of the reporting irregularities in audited financial statements.

ABSTRACT This study examines whether audit adjustments are a mechanism that links the effect of mandatory internal control audits (MICAs) on financial reporting quality. We argue that the requirement for auditors to publicly disclose internal control weaknesses exacerbated auditor-client conflicts and that this resulted in auditors being less likely to detect (and correct) misstatements in their clients' pre-audit financial statements. Consistent with this argument, we find significant reductions in audit adjustments following the staggered introduction of MICAs using data from China. We find the reductions in audit adjustments are associated with significant increases in material misstatements following the introduction of MICAs. In contrast, we find that the introduction of MICAs led to a significant reduction in material misstatements among clients that did not experience reductions in audit adjustments. Overall, the two effects offset each other, which explains why financial reporting quality did not improve, on average, following the introduction of MICAs.

ABSTRACT We find that three factors—cryptocurrency market, size, and momentum—capture the cross‐sectional expected cryptocurrency returns. We consider a comprehensive list of price‐ and market‐related return predictors in the stock market and construct their cryptocurrency counterparts. Ten cryptocurrency characteristics form successful long‐short strategies that generate sizable and statistically significant excess returns, and we show that all of these strategies are accounted for by the cryptocurrency three‐factor model. Lastly, we examine potential underlying mechanisms of the cryptocurrency size and momentum effects.

ABSTRACT Opponents of mandatory rotation argue that a change of partner is bad for audit quality, as it results in a loss of client-specific knowledge. On the other hand, proponents argue that a change of partner is beneficial, as it results in a positive peer review effect and a fresh perspective on the audit. We test the impact of mandatory partner rotation on audit quality using a unique dataset of audit adjustments in China. Our results suggest that mandatory rotation of engagement partners results in higher quality audits in the years immediately surrounding rotation. Specifically, we find a significantly higher frequency of audit adjustments during the departing partner's final year of tenure prior to mandatory rotation and during the incoming partner's first year of tenure following mandatory rotation.