Knowledge that Transforms

We investigate the effects of mandatory private Country-by-Country Reporting (CbCR) to European tax authorities on multinational firms' capital and labor investments, as well as their organizational structures. We exploit the threshold-based application of this 2016 disclosure rule to conduct difference-in-differences and regression discontinuity tests. We document increases in capital and labor expenditures in Europe, but these effects are more pronounced in countries with preferential tax regimes. Cross-sectional tests and analysis using consolidated financial data provide evidence consistent with multinational firms reallocating capital across Europe to mitigate increased tax enforcement risk, as well as with CbCR hindering capital investment efficiency. We also find evidence consistent with firms responding to CbCR by reducing organizational complexity. Collectively, our results support the conclusion that mandatory private CbCR causes firms to change real investment activities to substantiate their tax avoidance activities in Europe while reducing the appearance of aggressive tax practices.

We examine whether income smoothing via R&D management is associated with more informative earnings. While the literature finds earnings smoothing through accruals improves earnings informativeness, it is unclear whether smoothing through R&D management is used to inform investors because R&D management is relatively more difficult to detect and curb. We find that R&D management, which represents a subset of real activities management, is associated with more informative earnings, but the association is weaker relative to smoothing through accruals. We also document that R&D-based smoothing is associated with more accurate and less disperse analyst forecasts of earnings, but the association is weaker relative to smoothing through accruals. Overall, we provide novel evidence suggesting that managers use R&D management to smooth temporary shocks to earnings and inform investors. Data Availability: All data are available from the public sources cited in the text.

We examine financing outcomes for small businesses seeking to sell public securities in a setting characterized by high information asymmetry, weak requirements for auditor participation, and a complete absence of Big N auditors. Issuers that raise capital from small, unsophisticated investors through crowdfunding, under the Securities and Exchange Commission's Regulation Crowdfunding (RegCF), often need no auditor attestation or need only weak attestation in the form of reviews, not audits, of their financial statements. We find that auditor reviews are positively associated with both the probability of crowdfunding success and the total amount raised. Further, we compare outcomes for issuers that procure auditor reviews voluntarily and mandatorily, and document that issuers with voluntary reviews have better outcomes. We conjecture that for issuers that voluntarily procure reviews, the reviews serve as signals of high future prospects. Finally, the positive effect of reviews is concentrated in PCAOB-registered auditors.

Using a sample of firms from 51 countries and a difference-in-differences approach that exploits corporate governance shocks induced by cross-listing in the U.S., we find that firms tend to engage in less tax avoidance after cross-listing. This effect is more pronounced for firms that experience significant improvements in corporate governance, and for firms from countries with weaker shareholder protection and disclosure requirements. Taken together, the results indicate that cross-listing in the U.S. helps align the interests of managers and shareholders and reduces managerial diversion. Data Availability: All data are publicly available from sources indicated in the text.

Despite the rising use of environmental, social, and governance (ESG) ratings, there is substantial disagreement across rating agencies regarding what rating to give to individual firms. As what drives this disagreement is unclear, we examine whether a firm's ESG disclosure helps explain some of this disagreement. We predict and find that greater ESG disclosure actually leads to greater ESG rating disagreement. These findings hold using firm fixed effects and using a difference-in-differences design with mandatory ESG disclosure shocks. We also find that raters disagree more about ESG outcome metrics than input metrics (policies), and that disclosure appears to amplify disagreement more for outcomes. Last, we examine consequences of ESG disagreement and find that greater ESG disagreement is associated with higher return volatility, larger absolute price movements, and a lower likelihood of issuing external financing. Overall, our findings highlight that ESG disclosure generally exacerbates ESG rating disagreement rather than resolves it. Data Availability: The data used in this study are publicly available from the sources cited in the text.

We document that managers stockpile excess inventory to mitigate the operational risk posed by labor unions and to maintain bargaining power in labor negotiations. Inventory levels are higher for union firms and are incrementally higher preceding the renegotiation of collective bargaining agreements with unions. Inventory stockpiling at union firms is more salient when capital market pressure for transparency or information spillover from peers constrains managers from using disclosure strategies. We further show that managers weigh the costs and benefits of inventory stockpiling, as holding excess inventory due to the presence of a union is negatively associated with future profitability, but provides the benefits of avoiding a stockout and mitigating negative outcomes from a strike. Our findings highlight the importance of a major stakeholder, i.e., labor, in managers' investment decision making. Data Availability: All data are available from the public/private sources cited in the text.

This paper discusses the role of process evidence in accounting research. We define process evidence broadly as data providing insight into how and why cause-effect relationships occur, and we provide a framework to guide the provision and evaluation of process evidence in accounting studies. Our definition allows for an expanded understanding of techniques for gathering process evidence. The framework highlights the importance of the study's goals and theory in choosing how to provide process evidence, as well as how much process evidence to provide. The paper also outlines the strengths and limitations of three approaches to providing process evidence: mediation, moderation, and multiple-study-based designs. We provide recommendations for best practices for each approach to minimize threats to validity and maximize the value of process evidence.

Auditors often face situations in which acting on their professional obligations comes with potential personal costs. Drawing upon the Theory of Reputation in Organizations, we predict that perceived costs associated with these actions are lower for auditors with positive reputations, which, in turn, influences their actions. In our first experiment, participants perceive that auditors with negative reputations face a more constrained choice set when anticipating a budget overage. Further, participants perceive that those with positive reputations are more likely to proactively report the overage and less likely to underreport hours worked, a result mediated by the anticipated impact on evaluations for “speaking up.” In a second experiment, we manipulate reputation in a live simulation and demonstrate a causal link between reputation and auditors' skeptical action. Taken together, our experiments provide evidence that an auditor's perceived reputation influences their choice to engage in audit quality enhancing behaviors.

Despite the considerable participation of Big 4 accounting firms in accounting standard setting, there is no systematic evidence on what factors shape Big 4 support or opposition toward proposed accounting standards or whether their lobbying positions materially influence standards. Using textual features of Big 4 comment letters on FASB proposals, I find that Big 4 firms' lobbying positions reflect profit motives through support for standards that will generate more fees or are supported by their clients. Big 4 lobbying support is concentrated in proposals exhibiting both characteristics, with some evidence suggesting client agreement dominates fee-generating incentives. Big 4 lobbying positions are significantly associated with standard setting outcomes, both in isolation and relative to other FASB constituents, including financial statement users. Although I primarily focus on Big 4 accounting firms, results indicate the tone of comment letters submitted by users is unassociated with the standard setting outcomes measured in this study. Data Availability: All data are publicly available from the sources indicated.

We investigate whether prior collaboration experience affects a focal partner's response to the precision of monitoring controls adopted by a new partner, with consequences for their goodwill trust in, and subsequent cooperation with, the new partner. We expect the partner to interpret their new partner's adoption of precise monitoring controls as either an effort to limit their autonomy or to reduce information asymmetry. The partner's experience with past partners is posited to determine which interpretation is salient, with negative (positive) experiences favoring the former (latter). We find that partners with an uncooperative (cooperative) experience exhibit lower (higher) goodwill trust in the new partner when controls are more precise. Further, prior experience moderates the indirect relation between the precision of monitoring controls and partner cooperation acting through goodwill trust. The results demonstrate the importance of prior experiences in the design of interfirm controls for current partner relationships. Data Availability: Contact the authors.