Knowledge that Transforms

Audit teams may consult with their firm’s national office to obtain specialized expertise, satisfy regulatory and quality control requirements, and demonstrate due professional care. We describe the consultation process based on PCAOB standards, firm methodologies, and auditor interviews. We explain different types of consultations and highlight differences in the determinants and usefulness of mandatory versus voluntary consultations. Using PCAOB inspection data, we show that formal consultations are largely predictable based on engagement characteristics and, on average, are not associated with audit quality. However, two subsets of formal consultations that focus on accounting issues and occur earlier in the engagement process are associated with greater regulatory compliance and higher audit quality. Hence, an increasing reliance on all types of consultations does not automatically translate into higher audit quality. Collectively, our findings deepen our understanding of auditors’ use of national office consultations and their implications for audit practice. Data Availability: Audit engagement data from the PCAOB are proprietary; other data are from public sources.

This paper asks about the existence, determinants, and implications of toxic content in financial social media. Using machine learning algorithms to measure toxicity in Seeking Alpha articles and comments, we find measurable toxicity concentrated primarily in user-generated comments rather than articles. Comment toxicity is greater for firms with more investor attention or uncertainty. We document three key results about toxicity in capital markets. First, toxicity displays a feedback loop in platform participation: past toxicity is associated with more future toxic contributors for a given firm. Second, firms receiving more toxic comments have greater retail trading volume but less informative retail trades, especially when comments disagree. Third, toxicity is associated with slower price discovery around earnings announcements. Our findings suggest that financial social media toxicity relates to both user behavior and market outcomes and raise important considerations for platform governance in financial markets. Data Availability: The Seeking Alpha articles and comments used in this study were obtained directly from Seeking Alpha under a data-sharing arrangement and are proprietary; we are not permitted to redistribute them. These data may be requested from Seeking Alpha. Compustat, Execucomp, CRSP, and New York Stock Exchange (NYSE) Trade and Quote (TAQ) data are available through Wharton Research Data Services (WRDS) to subscribing institutions.

We assess how firms use spending on reporting infrastructure to improve managerial reporting quality (MRQ) and whether doing so improves investment efficiency. Using the Sarbanes-Oxley Act’s internal control provisions (SOX 404) as a shock to MRQ demand, we find that treated firms increase reporting infrastructure spending, including for information technology and communications. We next examine variation across segments in the benefits and costs of improving reporting infrastructure. Segments increase spending more when facing larger internal moral hazard frictions and when they are less likely to have voluntarily improved MRQ before SOX (including segments insulated from competition, facing difficulty obtaining enterprise resource planning (ERP) systems, or lacking internal control personnel). Finally, we find that treated firms improve investment efficiency post-SOX 404, with larger gains among firms with higher spending on reporting infrastructure. Our findings indicate that regulatory mandates can improve investment efficiency by inducing reporting infrastructure improvements that enhance MRQ.

Using news text from The Wall Street Journal and macroeconomic disclosures in 10-K filings, we address the challenge of characterizing both time-varying aggregate risks and firm-level risk exposures. We develop a disclosure-based measure of systematic risk that (1) reveals salient macro risks in each period, (2) provides a text-based estimate of earnings exposure to these risks, and (3) explains the cross-section of stock returns. We also show that macro disclosures are pervasive across the annual report, grow over time, vary with the business cycle, and exhibit within-firm variation, consistent with the time-varying nature of systematic risk exposure. Overall, disclosures yield transparent and economically interpretable estimates of firm-level systematic risk. Data Availability: Data are obtained from SEC filings, Bureau of Economic Analysis, The Wall Street Journal, Compustat, CRSP, I/B/E/S.

Key audit matters (KAMs) increase the salience of uncertainty surrounding the underlying accounts. We examine KAMs related to uncertain tax positions (UTPs), which highlight potential concerns to external stakeholders about uncertain tax planning activities such as multinational income shifting. Increased scrutiny may reduce the expected benefits of these strategies and discourage firms from pursuing them. Using KAM disclosures in the expanded audit reports, we find that group-level KAM disclosures are associated with a decline in multinational income shifting when the KAMs relate to UTPs. This relation is stronger when firms are financially unconstrained, when the institutional environment features strong tax enforcement, and when KAMs highlight specific risk statements and auditors provide explicit assurance. Overall, our findings reveal a novel and potentially unintended real effect of expanded audit reports: the salience of tax-related KAM disclosures influences multinational tax planning, highlighting broader consequences of this regulatory intervention. Data Availability: Data are available from the public sources cited in the text.

The Global Intangible Low-Taxed Income (GILTI) provision, enacted under the 2017 U.S. tax reform, aimed to deter profit shifting by U.S. multinational corporations (MNCs) but has raised concerns about unintended incentives to shift tangible investments abroad. Using an ex ante identification strategy based on public financial statements, we document that an average MNC increases foreign tangible investment by approximately $256.2 million relative to 2017 levels to minimize GILTI tax. Although this finding could raise concerns that firms are reducing domestic tangible investment for foreign expansion, we find no significant decline in domestic tangible investment. Furthermore, we find GILTI firms increase both foreign and domestic innovation, including capital-intensive technologies. The positive domestic innovation spillovers support the intended effect of the U.S. tax reform in boosting domestic economic growth. Our evidence reveals how international tax provisions, though aimed at curbing profit shifting, can simultaneously create unintended incentives.

Do commercial property taxes affect business microlocation decisions? Using precise geolocations for 2.8 million U.S. establishments, we employ a spatial discontinuity density design, comparing for-profit establishments to nonprofits, which are generally exempt from property taxes. Relative to nonprofit establishments, for-profit establishments disproportionately locate on the low-tax side of county borders. This effect strengthens with the size of the tax differential. At borders with differentials in the top decile (quartile), we estimate a 6–7 (5–6) percent shift in establishment location toward the low-tax side over a 10-km band. Businesses move from as far as 10 km away on the high-tax side but concentrate within 1 km on the low-tax side. Firms trade off tax savings with customer access: low-foot-traffic establishments respond more to tax differentials than high-foot-traffic ones. A survey of U.S. mayors finds that perceptions of property taxes’ importance for business location rise with cross-border tax differentials. Data Availability: Survey data are available upon request. All other data were obtained from publicly and commercially available sources described in the manuscript.

We examine the impact of loan officer changes on debt contract design. Loan officers face pressure to originate new loans, incentivizing them to offer loan terms that are more favorable than warranted by borrowers’ creditworthiness. Because a loan officer who replaces the originating loan officer is not subject to this loan prospecting pressure, we predict that she reverses the favorable discretion exercised at loan origination. Consistent with this prediction, we find that the first renegotiation following the replacement of the originating loan officer is associated with more unfavorable renegotiation outcomes. This effect is more pronounced when loan prospecting pressure at loan origination is greater—when the originating loan officer is less experienced, when the lead arranger faces tight performance benchmarks or lower income growth, and when credit market competition is more intense. Overall, we provide novel insights into how loan officer changes restore contracting efficiency through renegotiations. Data Availability: Syndicated loan data are from DealScan; borrower financial data are from Compustat and CRSP; bank financial data are from the Call Report and Compustat; loan agreements are from Morningstar, FactSet, and SEC filings; analyst data are from I/B/E/S; credit rating data are from S&P Global Ratings and the Mergent Fixed Income Securities Database (FISD); media coverage data are from RavenPack; covenant violation data are from Nini, Smith, and Sufi (2012); and loan officer employment histories were hand collected from LinkedIn.

We examine the work of the International Accounting Standards Board (IASB) on accounting for carbon emission allowances. Despite commencing work in 2002, no accounting standard or guidance has been put in place to date. To understand how a standard-setter defends its legitimacy while not settling this important financial accounting issue, we conduct a qualitative case study of over two decades of archival materials. We investigate nonproduction of a standard as a means for the IASB to protect legitimacy in circumstances where standardization would leave it open to controversy and resistance. Building on institutional research on communication, we show how nonproduction unfolds through four communicative patterns: commitment signaling, equivocal messaging, conveying complexity, and downplaying urgency. Our study provides new insights into how standard-setters navigate difficult-to-settle accounting issues of wide public concern. It also shows how communication shields standard-setters’ legitimacy by prolonging stakeholder engagement and postponing closure on a contentious accounting issue.

We study how CEOs’ personal tax incentives shape their share pledging decisions and firms’ restrictions on the practice. Pledging shares entails using company stock as collateral for personal loans, enabling executives to obtain liquidity without making a taxable sale of appreciated shares. Using pledging data from 2006 to 2024, we find a robust positive relation between CEOs’ unrealized capital gains tax liabilities, or tax burdens, and share pledging. This relation is weaker when interest rates are high, consistent with CEOs’ trading off tax benefits against borrowing costs. After Institutional Shareholder Services discouraged share pledging in 2012, firms with high-tax-burden CEOs were slower to adopt antipledging policies and, when they did adopt, chose less restrictive policies. Firms that adopted strong antipledging policies subsequently increased CEO cash pay and stock awards. Our evidence suggests that share pledging helps executives manage personal tax lock-in and that firms consider this benefit when restricting pledging. Data Availability: Data are available from the public and subscription sources identified in the text, subject to applicable data-use restrictions.