This study examines whether the term of the auditor–client relationship (i.e., auditor tenure) is associated with future stock price crash risk measured both ex ante and ex post. Using a large sample of U.S. public firms with Big 4 auditors, we find robust evidence that auditor tenure is negatively related to one†year†ahead stock price crash risk. The evidence is consistent with monitoring†by†learning where development of client†specific knowledge over the term of the auditor–client relationship enhances auditors’ ability to detect and deter bad news hoarding activities by clients, thereby reducing future crash risk. This result holds even after controlling for endogeneity of the tenure/crash risk relation. We further provide evidence indicating that option market investors do not fully incorporate the information contained in the term of auditor–client relationship in predicting future stock price crash risk. Our empirical results have important policy implications for regulators concerned with ensuring auditor independence.Les auteurs se demandent si la durée de la relation auditeur†client (soit la durée du mandat de l'auditeur) est en relation avec le risque d'effondrement futur du cours des actions, évalué ex ante et ex post. En étudiant un vaste échantillon de sociétés des États†Unis faisant appel public à l’épargne qui ont recours aux services des Quatre Grands cabinets d'audit, ils recueillent des preuves convaincantes que la durée du mandat de l'auditeur est en relation négative avec le risque d'effondrement du cours des actions une année à l'avance. Ces preuves sont conformes à la pratique de la « surveillance par l'apprentissage », le perfectionnement des connaissances relatives au client pendant la durée de la relation auditeur†client améliorant l'aptitude des auditeurs à déceler et prévenir chez les clients le comportement de thésaurisation des mauvaises nouvelles, ce qui a pour effet de réduire le risque d'effondrement futur. Ces résultats persistent même une fois contrôlée l'endogénéité de la relation entre la durée du mandat et le risque d'effondrement. Les auteurs produisent d'autres preuves que les investisseurs sur le marché des options n'incorporent pas entièrement l'information que recèle la durée de la relation auditeur†client dans la prévision du risque d'effondrement futur du cours des actions. Les résultats empiriques de l’étude ont d'importantes conséquences au chapitre des politiques pour les autorités de réglementation soucieuses de l'indépendance des auditeurs.

ABSTRACT Prior research documents that information transmitted via director networks affects firms' policies and real economic activities. Given a manager's potential monopoly over firm information, it is important to analyze whether information transmission through director social networks undermines the manager's control. Specifically, we explore whether information flow through director networks influences managers' ability to hoard bad news. We predict and find that the extent of external connections of the board of directors is negatively associated with future stock price crash risk. Additional analysis implies that this evidence is driven by firms with more powerful executives, with weaker auditor monitoring, or subject to strong investor protection, and by directors with greater monitoring incentives or responsibilities and directors with less firm‐specific knowledge. Collectively, our research lends empirical support for the monitoring view under which better‐informed directors narrow the scope for bad news hoarding evident in stock price crash risk. In another series of tests, we fail to find evidence consistent with the information leakage view under which directors pass sensitive firm‐specific information to connections that trade on the information before its public release. Other analysis helps dispel the concern that the endogenous match between directors and companies is spuriously responsible for our core results. Our empirical findings have important implications on how social networks affect the proper functioning of capital markets.

Abstract This paper compares the value of political ties and market credibility in China by examining the consequence of corporate scandals. We categorize Chinese corporate scandals by whether the scandal is primarily associated with the destruction of (i) the firm's political networks (political scandals), (ii) the firm's market credibility (market scandals), or (iii) both (mixed scandals). Consistent with our hypothesis that scandals signaling the destruction of political ties are associated with greater losses in firm value than scandals signaling the destruction of market credibility, we find that the stock market reacts more negatively to political and mixed scandals than to market scandals. In addition, the greater negative market reactions associated with political and mixed scandals are primarily driven by firms that rely more on political networks. We also find that, compared to market scandals, political and mixed scandals lead to larger decreases in operating performance, greater reduction in loans from state‐owned banks, and higher departure of political directors.

Abstract In this study, we examine how achievement‐related tendencies are expressed in the professional auditing context, particularly through the interplay between the CEO and the audit partner. We use the facial width‐to‐height ratio (fWHR), a stable morphological trait widely applied in prior research, as a proxy for achievement drive. Using a sample of US audit partners from 2016 to 2019, we find that higher achievement drive is associated with enhanced audit quality, evidenced by fewer restatements and lower abnormal accruals. Auditors with higher achievement drive are also more likely to become industry experts, attain leadership positions, and achieve partnership status more quickly. Importantly, we find that high‐achievement‐drive audit partners are more inclined to assert dominance in negotiations, particularly when working with equally driven CEOs, leading to improved audit quality. Overall, our findings suggest that, when activated in auditing contexts, achievement‐oriented tendencies, as proxied by fWHR, are linked to higher audit quality.

ABSTRACT This paper examines whether ties to politicians by corporate boards of directors weaken the effectiveness of tax authorities in constraining tax avoidance in China. We use a unique data set to measure geographic time‐variant tax enforcement, including the probability of income tax audit, the expertise of tax officers, and the consequences of underreporting tax liabilities. Based on a sample of 11,121 firm‐years from 2003 to 2013, we find that the deterrent effect of the probability that a firm's taxable income understatement will be detected and lead to heavy penalties is significantly undermined if the board is politically connected. To enhance our analysis, we use opportunities for income shifting, the most likely mechanism through which Chinese firms avoid taxes on an ongoing basis, to illustrate how connected boards exert power to unwind the constraining effect of tax enforcement. Overall, our results suggest that a board's ties to politicians can be a significant challenge to the effective enforcement of tax compliance in a politically controlled economy.

We examine which of two opposing financial reporting incentives that group†affiliated firms experience shapes their accounting transparency evident in auditor choice. In one direction, complex group structure and intragroup transactions enable controlling shareholders to pursue diversionary activities that they later hide by distorting reported earnings. In the other direction, as outside investors price†protect against potential expropriation, controlling shareholders may be eager to improve financial reporting quality in order to alleviate agency costs. To empirically clarify whether group affiliation affects company insiders' incentives to address minority shareholders' concerns over agency costs, we examine auditor selection of group firms relative to stand†alone firms. In comparison to nongroup firms, our evidence implies that group firms are more likely to appoint Top 10 audit firms in China, especially when their controlling shareholders have stronger incentives to improve external monitoring of the financial reporting process. After isolating group firms, we find that the presence of a Top 10 auditor translates into higher earnings and disclosure quality, higher valuation implications for related†party transactions, and cheaper equity financing, implying that these firms benefit from engaging a high†quality auditor. In additional analysis consistent with our predictions, we find that group firms that are Top 10 clients pay higher audit fees and their controlling shareholders are more constrained against meeting earnings benchmarks through intragroup transactions and siphoning corporate resources at the expense of minority investors. Collectively, our evidence supports the narrative that insiders in firms belonging to business groups weigh the costs and benefits stemming from auditor choice.Les auteurs se demandent laquelle de deux motivations opposées liées à l'information financière animant les groupes d'entreprises affiliées détermine leur transparence comptable, telle qu'elle se manifeste dans le choix de l'auditeur. D'une part, la complexité de la structure du groupe et des opérations intragroupe permet aux actionnaires détenant le contrôle de se livrer à des activités de détournement qu'ils dissimulent par la suite en manipulant les résultats publiés. D'autre part, comme les investisseurs externes se protègent d'une éviction potentielle en tenant compte de ce risque dans les cours, les actionnaires détenant le contrôle peuvent avoir tendance à vouloir améliorer la qualité de l'information financière afin d'alléger les coûts de délégation. Pour déterminer empiriquement si le groupement d'entreprises affiliées influe sur les motivations des initiés à s'intéresser aux préoccupations des actionnaires minoritaires quant aux coûts de délégation, les auteurs étudient le choix de l'auditeur des groupes d'entreprises par rapport au choix de l'auditeur d'entreprises individuelles. Comparativement aux entreprises individuelles, il appert qu'en Chine, les entreprises appartenant à un groupe sont davantage susceptibles de retenir les services de cabinets d'audit appartenant aux Dix Grands, en particulier lorsque les actionnaires détenant le contrôle sont plus fortement motivés à améliorer le contrôle externe du processus d'information financière. Après avoir isolé les groupes d'entreprises, les auteurs observent que la présence d'un auditeur appartenant aux Dix Grands se traduit par une qualité accrue des résultats et de l'information publiée, l'attribution de valeurs plus élevées aux opérations entre parties liées, et des coûts inférieurs de financement par capitaux propres, ce qui donne à penser que ces entreprises tirent profit du choix d'un auditeur de calibre supérieur. Dans une analyse supplémentaire, conformément à leurs prédictions, les auteurs constatent que les groupes d'entreprises clientes des Dix Grands paient des honoraires d'audit plus élevés et que leurs actionnaires détenant le contrôle ont moins de latitude dans le recours aux opérations intragroupe et au drainage des ressources de l'entreprise aux dépens des actionnaires minoritaires en vue d'atteindre les résultats visés. Dans leur ensemble, les données qu'ils colligent confirment les allégations selon lesquelles les initiés des entreprises appartenant à des groupes soupèsent les coûts et les avantages du choix de l'auditeur.

ABSTRACT In measuring tunneling with intercorporate loans disclosed by Chinese listed companies, we analyze the underlying channels through which aggressive tax planning facilitates the diversion of corporate resources by firm insiders. Using path analysis, we document that the path from tax aggressiveness to related loans is mediated by both the additional cash flows from tax savings and the increased financial opacity from tax planning, and that additional cash flows plays a much more important role than opacity in helping controlling shareholders to divert corporate resources under the guise of tax aggressiveness. Beyond the two mediated paths, we also detect a residual, direct path from tax aggressiveness to related loans. After an exogenous shock from the government crackdown on diversionary related loans, we find the direct path is fully mediated by the two indirect paths, suggesting that tunneling via related loans only occurs at firms where insiders can mask tunneling under the cover of opacity or can justify related loans on grounds of abnormal cash flows from tax savings. Our evidence supports the notion that greater outside scrutiny increases the hurdle for, but does not entirely eradicate, diversion facilitated by tax aggressiveness. Collectively, our research lends some support to recent theory on the importance of taxes to corporate governance by demonstrating how the agency costs of tax planning allow certain shareholders to benefit from firm activities at the expense of others.