Policies and procedures that centralize decision making within an audit firm create auditor style effects. Prior research suggests this style increases financial-statement comparability, implicitly making financial statements more useful. However, a potential hazard of auditor style is the propagation of decision errors. We examine the association between auditor style and common disclosure issues among audit clients. We measure auditor style as the presence of a common auditor and use comments given in the Securities and Exchange Commission’s (SEC’s) filing-review process to measure the occurrence of common disclosure issues. We find that auditor style is associated with common disclosure issues among Big 4 clientele. We also find that clients with the same auditor converge in issues as tenure increases and some evidence that clients assume the issues of a subsequent auditor. These results provide the first evidence that auditor style has potential costs in the form of common disclosure issues. Data Availability: All data are publicly available.

Complex disclosures have long been a major source of borrowers’ poor understanding of mortgages. We examine the effect of simplifying mortgage disclosures in a difference-in-differences design around a significant disclosure rule mandated by the Consumer Financial Protection Bureau in 2015. We find that inexperienced borrowers (first-time home buyers) pay significantly lower interest rates after the disclosure regulation than experienced borrowers (repeat buyers), suggesting that simplifying these disclosures reduces mortgage interest costs. Additional tests show that the reduction in interest costs is not accompanied with more upfront noninterest costs paid by borrowers. Our cross-sectional analyses reveal two mechanisms through which simplifying disclosures lowers interest costs: curbing predatory lending and facilitating borrower shopping. We further find that disadvantaged borrowers (Black, Hispanic, and single female) benefit more from simplified disclosures. Last, we do not find that simplifying disclosures affects mortgage loan performance.

We examine whether cost structure influences tax-motivated income shifting. We predict and find that U.S. multinational corporations (MNCs) with a less rigid cost structure engage in greater levels of tax-motivated income shifting relative to MNCs with a more rigid cost structure. This result is consistent with a less rigid cost structure providing greater flexibility to enable MNCs to take advantage of income-shifting opportunities. Further, we find that this relation is more pronounced when firms face greater costs in adjusting their operations, have less transfer pricing flexibility, and operate in a more uncertain environment. These results suggest that firms with less rigid cost structures possess the strategic operating and accounting flexibility necessary to take advantage of income-shifting opportunities. We provide evidence suggesting that a firm’s cost structure, a fundamental attribute of a firm’s business model, is a distinct and incrementally important determinant of tax-motivated income shifting. Data Availability: All data used in this study are publicly available.

We provide evidence from the first short-window event study of consumers’ perceptual responses to earnings announcements using daily consumer perception data. We document a positive association between the change in consumers’ overall perceptions of a brand at the time of the earnings announcement and the earnings surprise—that is, a positive consumer earnings response coefficient (CERC). CERC is larger when there is greater traditional news or social media activity, indicating that news dissemination is an important channel for consumers to respond to earnings news. Moreover, CERC varies based on brand and consumer characteristics. Changes in consumer perceptions at the time of the earnings announcement are positively associated with changes in purchase consideration and intent and with changes in realized future sales growth. To maximize identification, we document a positive and statistically significant CERC in a controlled experiment. Our findings demonstrate the importance of earnings to an important stakeholder. Data Availability: Data are available from the sources cited in the text.

Regulation is often proposed, developed, and finalized over a lengthy rule-making period prior to its adoption. We examine the period over which banking authorities discussed, adopted, and implemented Basel III to understand how firms respond to proposed regulation. We find evidence to suggest that affected banks not only lobbied rule-makers against it but also made strategic financial reporting changes and altered their business models in ways that reduced their exposure to the proposed rule prior to rule-makers finalizing the regulation. Further, our results indicate a sequential response, with banks responding through lobbying and strategic financial reporting prior to making business model changes. These findings highlight the interplay among firms’ financial reporting, business model, and political choices in response to proposed regulation and indicate that the appropriate date for an event study may be the regulation’s announcement date rather than its adoption or implementation dates.

This study examines the incremental predictive power of aggregate measures of financial misreporting for recession and real gross domestic product (GDP) growth. We draw on prior research suggesting that misreporting has real economic effects because it represents misinformation on which firms base their investment, hiring, and production decisions. We find that aggregate M-Score incrementally predicts recessions at forecast horizons of five to eight quarters ahead. We also find that aggregate M-Score is significantly associated with lower future growth in real GDP, real investment, consumption, and industrial production. Additionally, our result that aggregate M-Score predicts lower real investment one to four quarters ahead partially accounts for why misreporting predicts recessions five to eight quarters ahead. Our findings are weaker when we use aggregate F-Score as a proxy for misreporting. Overall, this study provides novel evidence that aggregate misreporting measures can aid forecasters and regulators in predicting recessions and real GDP growth.