Knowledge that Transforms

This is an accepted manuscript published by Wiley in Contemporary Accounting Research.

Due to a lack of an information history, IPO firms' information precision is not only generally low but also likely to be estimated initially with considerable error. I hypothesize and find that the deviation between expected and realized information precision is predictably associated with the magnitude and the persistence of long‐run abnormal returns after an IPO . Specifically, an upward (downward) revision of information precision results in positive (negative) abnormal returns over the period in which investors update their beliefs. In addition, the positive abnormal returns of firms with unexpectedly high realized information precision are less persistent than the negative abnormal returns of firms with unexpectedly low realized information precision, which can extend up to 18 months after the IPO . The findings imply that long‐term investors in IPO stocks do not necessarily behave irrationally, but that both positive and negative post‐ IPO abnormal performance is also consistent with rational investors gradually updating the perceived information precision parameter of these stocks.

Extant literature on professional services firms in general, and on the Big Four accounting firms in particular, consistently shows that these firms are in a state of institutional flux.In turn, it has been argued that new types of professionals are emerging within this context.Adopting a sociological perspective inspired by the work of Pierre Bourdieu (1930Bourdieu ( -2002) ) this article unpicks the meaning of success within the Big Four via an exploration of who makes partner.Specifically, the paper reports upon a qualitative study undertaken with partners and other senior accountants in three Big Four firms between December 2010 and September 2012.The findings of the study are four-fold: firstly, it is shown that, although Big Four partners might be thought of as belonging to the upper echelons of society, making partner is open to individuals from modest family backgrounds; secondly, partners draw sharp distinctions between themselves and those just below partner level in terms of what each is capable of, implying that different types of professional exist at different levels within the Big Four; thirdly, partners embody entrepreneurialism and a concern for revenue generation more than they embody technical expertise; and, fourthly, the requirements for making partner today are different from the criteria that previous generations of partners were subject to.Finally, a key insight of this paper is that the central distinguishing features of successful professionals in the Big Four are tied to commercialism.

Appendix S1. Instructions: Part I Appendix S2. Instructions: Part 2 Please note: The publisher is not responsible for the content or functionality of any supporting information supplied by the authors. Any queries (other than missing content) should be directed to the corresponding author for the article.

Table S9. Alternate control groups. Table S10. Different time horizons. Table S11. Subsample analyses. Please note: The publisher is not responsible for the content or functionality of any supporting information supplied by the authors. Any queries (other than missing content) should be directed to the corresponding author for the article.

We evaluate whether, and under what circumstances, corporate tax aggressiveness influences audit pricing. Using a compound measure of two long-run effective tax rates, we find that tax-aggressive firms pay higher fees for external audit services after controlling for factors related to earnings management. The fee premium increases with management’s uncertainty about the sustainability of tax positions if audited by tax authorities (i.e., disclosed tax reserves). Further, the provision of auditor-provided tax services may create knowledge spillovers that alleviate the fee premium for tax aggressiveness, unless tax uncertainty is high. Finally, an accounting firm’s industry expertise in auditing is associated with higher audit fees independent of tax aggressiveness, whereas industry expertise in taxation leads to a fee premium only for tax-aggressive clients. Overall, the evidence implies firms’ aggressive tax behavior, tax services provider, and auditor expertise interact to influence the pricing of audit engagements.

Prior studies find that CEOs receive higher pay if the enterprise is more complex because more complex enterprises are, in theory, matched with the managerial skills of higher-ability CEOs. While multinational diversification is typically a characteristic of enterprise complexity, we argue that multinational diversification also introduces a risk that executives will divert an enterprise’s resources to obtain private benefits. We first establish that CEO pay is, on average, increasing in the extent of multinational diversification, consistent with intuition that more complex enterprises are matched to higher‐ability CEOs. We then demonstrate that the CEO pay‐for‐complexity premium is lower if the multinational diversification reflects a relatively high risk of managerial diversion. For sufficiently high levels of multinational diversification accompanied by a high risk of managerial diversion, we find that CEOs receive a relative reduction in pay rather than a pay premium for multinational diversification. We also find evidence that this pay effect occurs in part through adjustments to a CEO’s pay‐for‐performance sensitivity.

Please note: The publisher is not responsible for the content or functionality of any supporting information supplied by the authors. Any queries (other than missing content) should be directed to the corresponding author for the article.