Using archival data from the U.S. passenger airline industry, this study examines whether management control mechanisms aimed at mitigating moral hazard explain outsourcing decisions over and above transaction cost economics (TCE) determinants documented in prior research. Consistent with TCE theory, we find that in‐house production efficiencies and our proxy for transaction risk (i.e., deriving from transaction infrequency, transaction complexity, and relationship‐specific investments) significantly explain the extent of outsourcing of aircraft maintenance. We extend TCE insights to show that incentive delta (i.e., the sensitivity of CEO portfolio holdings to stock price changes) strengthens the negative association between production efficiencies and outsourcing while incentive vega (i.e., the sensitivity of CEO holdings to stock return volatility) weakens the negative association between transaction risk and outsourcing. Monitoring strengthens the negative association between in‐house production efficiencies and outsourcing, but has no effect on the transaction risk–outsourcing relation. The results suggest that the use of outsourcing to achieve cost savings is promoted through both incentive contracts and monitoring, but outsourcing to achieve the desired risk level is promoted only through incentive contracts.

We test the assertion that a consequence of voluntarily adopting International Accounting Standards (IAS) is the enhanced ability to attract foreign capital. Using a unique database that reports firm‐level holdings of over 25,000 mutual funds from around the world, our multivariate tests find that average foreign mutual fund ownership is significantly higher among IAS adopters. We also find that IAS adopters in poorer information environments and with lower visibility have higher levels of foreign investment, consistent with firms using IAS adoption to provide more information and/or information in a more familiar form to foreign investors. Taken together, our findings are consistent with voluntary IAS adoption reducing home bias among foreign investors and thereby improving capital allocation efficiency.

We examine three‐day cumulative abnormal returns around the announcement of 702 newly appointed outside directors assigned to audit committees during a period before implementation of the Sarbanes‐Oxley Act (SOX). Motivated by the SOX requirement that public companies disclose whether they have a financial expert on their audit committee, we test whether the market reacts favorably to the appointment of directors with financial expertise to the audit committee. In addition, because it is controversial whether SOX should define financial experts narrowly to include primarily accounting financial experts (as initially proposed) or more broadly to include nonaccounting financial experts (as ultimately passed), we separately examine appointments of each type of expert. We find a positive market reaction to the appointment of accounting financial experts assigned to audit committees but no reaction to nonaccounting financial experts assigned to audit committees, consistent with accounting‐based financial skills, but not broader financial skills, improving the audit committee's ability to ensure high‐quality financial reporting. In addition, we find that this positive reaction is concentrated among firms with relatively strong corporate governance, consistent with accounting financial expertise complementing strong governance, possibly because strong governance helps channel the expertise toward enhancing shareholder value. Together, these findings are consistent with financial expertise on audit committees improving corporate governance but only when both the expert and the appointing firm possess characteristics that facilitate the effective use of the expertise.

Individual investors have an incentive to defer selling appreciated stock until it qualifies for tax‐favored, long‐term capital gains treatment. Shackelford and Verrecchia [2002] show that these incentives can affect equity trading around public disclosures. This article provides some empirical support for their theory with evidence of price increases and equity constrictions around announcements of quarterly earnings and additions to the S&P 500 index. We find share returns rise and trading volume falls with the incremental taxes saved by deferring the sale of appreciated property. The price increases, however, are temporary, reversing in subsequent trading days. The results are consistent with buyers believing the compensation to sell before long‐term qualification (through higher prices) is less costly than holding an inappropriately weighted portfolio. This finding—that personal capital gains taxes affect equity trading—adds to a growing literature that challenges longstanding assumptions that firm value is independent of shareholders and their taxes.

Information, Learning Patterns, Decision making, Value of information

Using an experiment to rule out reverse causality, we examine whether a small investment in a company's stock leads investors to purchase more of the company's products and adopt other views and preferences that benefit the company. We preregister our research methods, hypotheses, and supplemental analyses via the Journal of Accounting Research ’s registration‐based editorial process. We find little evidence consistent with these hypotheses for the average investor in our sample using our planned univariate hypothesis tests, and planned Bayesian parameter estimation shows substantial downward belief revision for more optimistic ex ante expectations of the treatment effects. In planned supplemental analyses, however, we do find that the effects of ownership on product purchase behavior and on regulatory preferences are intuitively stronger for certain subgroups of investors—namely, for investors who are most likely to purchase the types of products offered by the company and for investors who are most likely to vote on political matters. The results contribute to our understanding of the benefits of direct stock ownership and are informative to public company managers and directors.

We compare executive equity incentives of firms accused of accounting fraud by the Securities and Exchange Commission (SEC) during the period 1996–2003 with two samples of firms not accused of fraud. We measure equity incentives in a variety of ways and employ a battery of empirical tests. We find no consistent evidence that executive equity incentives are associated with fraud. These results stand in contrast to assertions by policy makers that incentives from stock-based compensation and the resulting equity holdings increase the likelihood of accounting fraud.

We explore whether municipalities with public sector unions exploit aspects of governmental (or “fund”) accounting to obscure the availability of discretionary resources in fund balance accounts, relative to municipalities without public sector unions. We first investigate whether governments with unions report higher proportions of discretionary resources outside of the general fund, a primary measure of financial health, and instead within less prominent fund types. Second, we explore whether governments with unions report lower ratios within accessible general fund balance account categories – that is, report lower proportions of unreserved fund balance. Primary findings are consistent with both hypotheses. Although somewhat mixed, cross‐sectional analyses reveal that effects are magnified when unions have more bargaining power, as proxied by the ability to strike or the absence of state right‐to‐work laws. Further analysis corroborates cross‐sectional findings by examining difference‐in‐differences specifications surrounding the quasi‐exogenous shock of Wisconsin's 2011 weakening of state public sector union laws and Ohio's time‐varying union contract negotiations. Overall, the evidence suggests that governments with unions shelter resources to avoid the appearance of large discretionary amounts available.

We examine whether vocal markers of cognitive dissonance are useful for detecting financial misreporting. We use speech samples of CEOs during earnings conference calls, and generate vocal dissonance markers using automated vocal emotion analysis software. We begin by assessing construct validity for the software‐generated dissonance markers by correlating them with four dissonance‐from‐misreporting proxies obtained in a laboratory setting. We find a positive association between these proxies and vocal dissonance markers generated by the software, suggesting the software's dissonance markers have construct validity. Applying the software to CEO speech, we find that vocal dissonance markers are positively associated with the likelihood of irregularity restatements. The diagnostic accuracy levels are 11% better than chance and of similar magnitude to models based solely on financial accounting information. Moreover, the association between vocal dissonance markers and irregularity restatements holds even after controlling for financial accounting and linguistic‐based predictors. Our results provide new evidence on the role of vocal cues in detecting financial misreporting.