In this article I analyze the role of cooperation between firm divisions in the budgeting process. I study a setting in which cooperation is a necessary condition for information sharing among division managers, which in turn benefits the principal. The results in this article can help reconcile the differing views between practitioners and academic researchers on the desirability of cooperation in the budgeting process. The results also have implications for some common budgeting processes observed in practice, including bundling budgeting and bottom‐up budgeting.

Policy makers and researchers are concerned that the expected credit loss (ECL) approach may exacerbate procyclicality. Using administrative loan‐level and firm‐level data in China, we find that banks adopting the ECL model reduced their credit supply and became more prudent in lending decisions after the onset of the COVID‐19 pandemic, compared to banks using the incurred credit loss (ICL) approach. Our findings are more pronounced for banks that experienced greater loan loss provisions induced by ECL and for firms with higher credit risk. The credit contraction persisted throughout our sample period. We further document that firms more exposed to ECL banks experienced larger reductions in loans, assets, liabilities, and revenue after the pandemic began than those more exposed to ICL banks. These findings support the conjecture that the ECL approach may exacerbate procyclicality.

I examine whether employee‐initiated lawsuits against an audit office adversely affect its ability to attract high‐quality talent and deliver quality audits. I posit that employee lawsuits erode prospective employees’ perceptions of an office, diminishing their willingness to join. Using a comprehensive data set of individual auditor profiles, I find a decline in the quality of newly hired auditors following an employee lawsuit. Cross‐sectionally, the adverse effect of employee lawsuits on talent acquisition is more pronounced when an office is undergoing higher growth and when a case receives greater media attention. Conversely, this adverse effect is less pronounced when an audit office is larger or offers more competitive wages within the local area. When an audit office is unable to recruit high‐quality talent, its audit quality is likely to suffer. Consistent with this, I find a deterioration in audit quality provided by an office following an employee lawsuit. Overall, this study underscores the importance of human capital management and employer reputation for audit offices that operate in competitive labor markets.

This study examines whether requiring the disclosure of audited financial statements disciplines managers’ mergers and acquisitions (M&As) decisions. When an M&A transaction meets certain disclosure thresholds, the Securities and Exchange Commission (SEC) requires the public acquirer to disclose the target's audited financial statements after the merger is completed. Using hand‐collected data, I find that the disclosure of private targets’ financial statements is associated with better acquisition decisions. Furthermore, I find that this disciplining effect of disclosure is more pronounced when monitoring by outside capital providers is more difficult and costly, and when other disciplining mechanisms are weaker. Finally, these findings are robust to several alternative explanations, such as monitoring from blockholders and voluntary disclosures. In sum, the evidence suggests that the ex post mandatory disclosure of private targets’ accounting information disciplines managers’ acquisition decisions and improves acquisition efficiency.

We examine the voluntary disclosure practices of family firms. We find that, compared to nonfamily firms, family firms provide fewer earnings forecasts and conference calls, but more earnings warnings. Whereas the former is consistent with family owners having a longer investment horizon, better monitoring of management, and lower information asymmetry between owners and managers, the higher likelihood of earnings warnings is consistent with family owners having greater litigation and reputation cost concerns. We also document that family ownership dominates nonfamily insider ownership and concentrated institutional ownership in explaining the likelihood of voluntary disclosure. Using alternative proxies for the founding family's presence in the firm leads to similar results.

This paper investigates the effects of regulatory interventions on contracting relationships within firms by examining the impacts of the Sarbanes–Oxley (SOX) Act on CEO compensation. Using panel data of the S&P 1500 firms, it quantifies welfare gains from a principal–agent model with hidden information and hidden actions. It finds that SOX: (1) reduced the conflict of interest between shareholders and their CEOs, mainly by reducing shareholder loss from CEOs deviating from their goal of expected value maximization; (2) increased the cost of agency, or the risk premium CEOs are paid to align their interests with those of shareholders; (3) increased administrative costs in the primary sector (which includes utilities and energy) but the effect in the other two broadly defined sectors, services and consumer goods, was more nuanced; and (4) had no effect on the attitude of CEOs toward risk.

This paper examines whether and how individual auditors are disciplined for audit errors. Taking advantage of the long history of auditor identity data from China, we find that signing auditors with client restatements are likely to lose the privilege of signing the audit reports of public clients. However, auditors can avoid this consequence by issuing a modified audit opinion to warn of the potential misstatement. We show that auditors are more likely to be disciplined when their firms operate in less concentrated audit markets. Finally, we find positive outcomes from the disciplinary action of the audit firms. Firms that discipline their auditors for restatements have a larger decrease in the rate of client restatements and a larger increase in market share, compared to nondisciplining firms. Their clients have a higher earnings response coefficient after the disciplinary action. In summary, our results suggest that individual auditors in China can face career setbacks when they produce poor quality audits.

This paper examines how increased competition among environmental, social, and governance (ESG) rating agencies relates to ESG rating quality. We exploit the entry of Sustainalytics as a new ESG rating agency in 2010. We conduct a difference‐in‐differences analysis and provide three main findings. First, we find that higher competition decreases incumbents' ESG rating disagreements of the same scope. The negative relation between competition and ESG rating disagreement persists for same‐scope rating metrics not covered by Sustainalytics, suggesting that neither learning nor herding drive the results. The relationship between competition and rating disagreement strengthens for firms with more ESG disclosures, which generally require more effort to analyze. Second, we find that incumbents' ratings of ESG concerns are more strongly associated with future negative ESG news for firms additionally covered by Sustainalytics. This finding is consistent with competition improving ratings' ability to predict future negative ESG incidents. Third, we find that incumbents evaluate more difficult‐to‐measure outcome metrics for firms covered by Sustainalytics, consistent with competition inducing more effort. Overall, our findings suggest that competition serves as an implicit disciplining mechanism of ESG rating agencies' quality.

Kevin C. W. Chen, Michael P. Schoderbek, The 1993 Tax Rate Increase and Deferred Tax Adjustments: A Test of Functional Fixation, Journal of Accounting Research, Vol. 38, No. 1 (Spring, 2000), pp. 23-44

Using influenza epidemic data, we examine how constraints on corporate information production affect disclosure policies. We find that firms in areas with higher flu activity are less likely to issue short‐run earnings forecasts and more likely to issue long‐run earnings forecasts. These results are more pronounced when the information production process is more complex, when managers face a greater reputational loss for issuing low‐quality short‐run forecasts, and when firms’ costs of switching the forecast horizon are lower. Further analysis implies that the effect of flu activity on these forecast issuance decisions is not driven by firm performance or information uncertainty. Our results suggest that managers do not simply avoid issuing forecasts in response to information production constraints. Instead, they shift the forecast horizon from short‐run to long‐run, appearing to balance the costs of issuing low‐quality forecasts with those of not issuing forecasts at all.