Knowledge that Transforms

This paper examines how a change in disclosure regulation influences investors' information acquisition and trading across multiple markets. We leverage the 2007 elimination of the Form 20‐F reconciliation requirement for cross‐listed firms that prepare financial statements under IFRS. Using a difference‐in‐differences research design, we show that investors acquire fewer Form 20‐Fs of IFRS‐reporting cross‐listed firms when these forms are not filed in a timely manner relative to the home‐country earnings announcement. We also find an increased acquisition of earnings‐specific 6‐Ks, indicating a shift in investor attention from delayed and unreconciled 20‐Fs to more timely earnings releases in the home country. Furthermore, we find that American Depositary Receipt (ADR) market reactions to local earnings announcements increase after the deregulation, especially for firms with strong home‐country institutions. In addition, we find that the deregulation increases return co‐movement between the US ADR market and the home‐country stock market for IFRS filers' shares. Our results bring novel insights regarding the cross‐market impact of the disclosure regulation change.

We examine whether audit partner individualism reduces earnings comparability in the United States. We argue that individualistic audit partners are more likely to deviate from internal working rules and allow clients more flexibility in making accounting choices, consequently decreasing their clients' earnings comparability. Using a novel partner‐level measure of individualism, we find that within individual Big 4 audit firms, earnings are less comparable between a company audited by an individualistic partner and a company audited by a non‐individualistic partner, relative to a pair of companies that are each audited by a non‐individualistic partner. Our inferences are robust to a changes analysis, a falsification test, and a propensity score matching procedure. We also find that the effect of partner individualism is less salient when the audit firm is under more stringent regulatory monitoring and when clients are more important, but more salient when individualistic partners are more confident about being different. Further analyses suggest that our main inferences are robust to controlling for differences in partners' cultural backgrounds and using client‐pairs audited by the same audit partner. Collectively, our study provides novel evidence on the role of auditor individualism in earnings comparability.

Using industry restatement contagion as an external negative shock, we study the effectiveness of enterprise risk management (ERM) in mitigating downside risk and enhancing investor confidence. We find that ERM curbs overinvestment and earnings misstatement among firms when other firms in their industry engage in undisclosed misstatements that are subsequently restated. Following the announcements of these industry restatements, peers with ERM experience a smaller increase in implied volatility skewness. These effects are driven by peers with young CEOs, complex segment structures, low prior earnings performance, and in competitive industries. Overall, our findings highlight ERM's role in bolstering investor confidence by effectively managing firms' underlying risks.

In this paper, I examine the effects of failed mergers and acquisitions (M&A) deals on firms' disclosure decisions. As a firm's detailed proprietary information is shared with the counterparty during an M&A deal, the value of the information is expected to decrease if the deal fails. As a result, it may become less costly for the firm to publicly disclose the information. Consistent with this reasoning, I find increased disclosure of proprietary information in the year after firms experience failed deals. Evidence from cross‐sectional tests and a quasi‐natural experiment strengthens this inference. I also show that investor information demand contributes to the increased disclosure of proprietary information after failed deals. In addition, consistent with an increase in proprietary information provided to investors, I find reduced information asymmetry after failed deals. Finally, I document diminished future performance among firms that increase the disclosure of proprietary information after failed deals. Overall, my study sheds light on how failed deals impact firms' disclosure decisions, information environment, and future performance.

The Sarbanes‐Oxley Act of 2002 mandates the PCAOB to enforce compliance with its audit standards fairly. However, the enforcement process is not sufficiently transparent for public evaluation of its fairness, prompting a call by a former Board member for transparency of the process and for improvement suggestions from the public. Further, academic evidence on the PCAOB enforcement is limited. We address this call and the gap in the literature by interviewing 33 difficult‐to‐access participants about the enforcement process: 20 sanctioned auditors and 13 former PCAOB enforcement staff members. Using procedural justice theory as a lens in evaluating our data, we conclude the enforcement process lacks fairness in key components. Both auditors and former enforcement staff express concerns that staff use overly damning one‐sided language in public orders, do not assess investor harm, and face incentives to sanction auditors, particularly small firms that cannot afford costly defense. We contribute to the literature on PCAOB enforcement by offering new insights into the enforcement process from firsthand perspectives of sanctioned auditors and former enforcement staff, deepening understanding of how enforcement practices align with the PCAOB's mandate for fair procedures. We also discuss process improvement suggestions from our participants and important future research opportunities.

We examine the implications of the PCAOB international inspection program for US companies' exports. Our difference‐in‐differences analyses suggest that, following the release of the initial PCAOB inspection report in a country abroad, (1) US companies' exports to that country increased, and (2) US companies' major customers in that country reported higher accounts payable. Probing further, the effect on US exports is stronger for companies requiring more relationship‐specific investments and for foreign countries with less transparency, weak auditor oversight, and low social trust. Our findings suggest that the release of the initial PCAOB inspection report in a country abroad serves as a public signal of oversight that increases trust in financial reporting integrity abroad, thereby facilitating growth in trade credit and an increase in US exports to companies in that country. Our findings suggest that stakeholders other than investors benefit from PCAOB international inspection reports and highlight a novel externality of the PCAOB international inspection regime benefiting US companies.

Reciprocity plays a critical role in the way employees respond to managerial control decisions. The current consensus is that employees punish managers for implementing unkind controls (negative reciprocity) more than they reward managers for implementing kind controls (positive reciprocity). We challenge this consensus. Prior research focuses on settings that emphasize employees' immediate reciprocal responses. However, in the workplace, employees often respond over long periods of time to sticky control decisions (e.g., budgets, pay, decision rights). Focusing on these long‐term settings, we predict and find that, while negative reciprocity is initially stronger than positive reciprocity, it also fades more over time than positive reciprocity. This differential fading is so pronounced in our setting that positive reciprocity is stronger overall in the long run. Thus, in long‐term settings, positive responses to kind controls may play a more important role than negative responses to unkind controls. Our results inform managerial decisions about the use of kind versus unkind controls and suggest potential long‐term benefits of pay disparity and other policies that treat employees differentially.

We examine whether auditor political connections are associated with the SEC's oversight of audit clients . Specifically, we test whether auditors' political action committee contributions are associated with three SEC oversight actions: comment letters, investigations, and Accounting and Auditing Enforcement Releases (AAERs). Consistent with higher political connections inducing heightened scrutiny from the SEC, we find that the clients of auditors with higher political connections are more likely to receive comment letters and face SEC investigations. However, conditional on SEC investigation, we find no association between auditor political connections and the issuance of AAERs. We consider heightened attention from investors and analysts toward audit clients as one possible mechanism leading to increased SEC scrutiny because auditor political connections could be perceived as a red flag. Using EDGAR downloads and the number of earnings forecast revisions, we document evidence consistent with the existence of this mechanism. These findings add to our understanding of how auditor political connections could influence SEC oversight over audit clients.

Financial reporting fraud continues to cost companies millions of dollars annually and is a major source of concern for regulators, stakeholders, and auditors. While academic research has largely focused on external auditors' fraud detection efforts, we analyze whether auditors can help prevent occurrences of fraud through low‐cost reputational signals of higher “strategic reasoning”; strategic reasoning refers to strategies that individuals take in light of the anticipated actions of others (see van der Hoek et al., 2005, A logic for strategic reasoning, AAMAS '05, 157−164). Specifically, we consider the potential impact on manager behavior of signaling whether audit professionals use zero‐, first‐, and second‐order audit approaches. Zero‐order audit approaches involve making decisions based mostly on the auditor's incentives, first‐order approaches involve decisions based mostly on the client's incentives, and second‐ or higher‐order audit approaches involve decisions based on the client's incentives while recognizing that the client will respond to the auditor's decisions (see Wilks & Zimbelman, 2004, Accounting Horizons , 18 (3), 173–184). Using a context‐rich experiment in which manager participants have no history of interacting with the auditor, we find that the likelihood of fraud occurring is lower when it is signaled that audit partners and their teams use a first‐ or second‐order strategic audit approach compared to a zero‐order approach, due to an increase in the perceived likelihood of the auditor detecting fraud. We also consider whether signaling an auditor's level of strategic reasoning influences the level of effort used to conceal fraud and find an increase in the expected level of fraud effort for managers in the first‐ and second‐order audit conditions.