Knowledge that Transforms

We examine the implications of the PCAOB international inspection program for US companies' exports. Our difference‐in‐differences analyses suggest that, following the release of the initial PCAOB inspection report in a country abroad, (1) US companies' exports to that country increased, and (2) US companies' major customers in that country reported higher accounts payable. Probing further, the effect on US exports is stronger for companies requiring more relationship‐specific investments and for foreign countries with less transparency, weak auditor oversight, and low social trust. Our findings suggest that the release of the initial PCAOB inspection report in a country abroad serves as a public signal of oversight that increases trust in financial reporting integrity abroad, thereby facilitating growth in trade credit and an increase in US exports to companies in that country. Our findings suggest that stakeholders other than investors benefit from PCAOB international inspection reports and highlight a novel externality of the PCAOB international inspection regime benefiting US companies.

Reciprocity plays a critical role in the way employees respond to managerial control decisions. The current consensus is that employees punish managers for implementing unkind controls (negative reciprocity) more than they reward managers for implementing kind controls (positive reciprocity). We challenge this consensus. Prior research focuses on settings that emphasize employees' immediate reciprocal responses. However, in the workplace, employees often respond over long periods of time to sticky control decisions (e.g., budgets, pay, decision rights). Focusing on these long‐term settings, we predict and find that, while negative reciprocity is initially stronger than positive reciprocity, it also fades more over time than positive reciprocity. This differential fading is so pronounced in our setting that positive reciprocity is stronger overall in the long run. Thus, in long‐term settings, positive responses to kind controls may play a more important role than negative responses to unkind controls. Our results inform managerial decisions about the use of kind versus unkind controls and suggest potential long‐term benefits of pay disparity and other policies that treat employees differentially.

We examine whether auditor political connections are associated with the SEC's oversight of audit clients . Specifically, we test whether auditors' political action committee contributions are associated with three SEC oversight actions: comment letters, investigations, and Accounting and Auditing Enforcement Releases (AAERs). Consistent with higher political connections inducing heightened scrutiny from the SEC, we find that the clients of auditors with higher political connections are more likely to receive comment letters and face SEC investigations. However, conditional on SEC investigation, we find no association between auditor political connections and the issuance of AAERs. We consider heightened attention from investors and analysts toward audit clients as one possible mechanism leading to increased SEC scrutiny because auditor political connections could be perceived as a red flag. Using EDGAR downloads and the number of earnings forecast revisions, we document evidence consistent with the existence of this mechanism. These findings add to our understanding of how auditor political connections could influence SEC oversight over audit clients.

Financial reporting fraud continues to cost companies millions of dollars annually and is a major source of concern for regulators, stakeholders, and auditors. While academic research has largely focused on external auditors' fraud detection efforts, we analyze whether auditors can help prevent occurrences of fraud through low‐cost reputational signals of higher “strategic reasoning”; strategic reasoning refers to strategies that individuals take in light of the anticipated actions of others (see van der Hoek et al., 2005, A logic for strategic reasoning, AAMAS '05, 157−164). Specifically, we consider the potential impact on manager behavior of signaling whether audit professionals use zero‐, first‐, and second‐order audit approaches. Zero‐order audit approaches involve making decisions based mostly on the auditor's incentives, first‐order approaches involve decisions based mostly on the client's incentives, and second‐ or higher‐order audit approaches involve decisions based on the client's incentives while recognizing that the client will respond to the auditor's decisions (see Wilks & Zimbelman, 2004, Accounting Horizons , 18 (3), 173–184). Using a context‐rich experiment in which manager participants have no history of interacting with the auditor, we find that the likelihood of fraud occurring is lower when it is signaled that audit partners and their teams use a first‐ or second‐order strategic audit approach compared to a zero‐order approach, due to an increase in the perceived likelihood of the auditor detecting fraud. We also consider whether signaling an auditor's level of strategic reasoning influences the level of effort used to conceal fraud and find an increase in the expected level of fraud effort for managers in the first‐ and second‐order audit conditions.

This paper shows that creditors' horizon interests impact the design of CEO compensation contracts. Using a regression discontinuity design, we find that borrowing firms provide shorter incentives to their CEO following a loan covenant violation. They do so by decreasing the horizon of pay and tilting the choice of performance metrics toward accounting goals, in particular short‐term ones. This effect is stronger when creditors' interests are more immediate, such as among loans with short remaining maturity and when borrowers have lower cash reserves. This effect is weaker when the cost to shareholders is higher, such as among firms with high growth opportunities. Together these results are consistent with boards intending to facilitate renegotiation and mitigate repayment risk while balancing shareholder interests. Overall, our evidence supports a novel reason for the use of short‐term incentives, namely to reduce the agency cost of debt.

International standards encourage auditors to consider regulatory factors and external parties during the risk assessment process. One such external party is the taxation authority, which monitors corporate conduct and uses the threat of tax audits to constrain managerial opportunism. This study examines whether tax enforcement influences auditors' perception of the risk of material misstatement on their engagements. Using a sample of companies listed on European exchanges, we assess the strength of tax enforcement at the country level based on the number of full‐time equivalent (FTE) employees in the tax audit and verification function relative to the size of the economy. Since auditors of these European listed companies must publicly disclose key audit matters (KAMs), we use the number of KAMs to capture auditors' perceptions of client‐level misstatement risk. Our results indicate that auditors report fewer KAMs in the presence of more FTEs in the tax audit and verification function. In cross‐sectional tests, we find that this negative association is stronger in settings where auditors are more inclined to incorporate the monitoring potential of the tax authority into their risk assessment, such as in countries with high book‐tax conformity and for auditors with greater exposure to complex tax issues. These findings offer new insights into the role of tax enforcement in auditors' decision‐making and have timely implications for accounting regulators and academics studying the determinants of KAMs.

I present a new theory of oligopoly and markups in general equilibrium, based on an innovative, scalable hedonic demand system, which I take to the data for the universe of US public firms. In my model, firms compete in a network of product market rivalries that emerge endogenously out of the characteristics of the products they supply. I estimate that consumer surplus is almost three times as large as profits; decompose firm-level markups into metrics of quality-adjusted productivity and market centrality; and analyze the extent, evolution, and drivers of monopoly power in the United States between 1995 and 2021.

In additive instrumental variables models, the robustness to some failure of instrumental validity or additive separability depends on the strength of a priori restrictions on the structural relationship between outcomes and treatments. I provide theoretical analysis of the problem, discuss the implications for empirical practice, and demonstrate with a numerical study calibrated on real-world data.

This paper leverages nationally representative surveys across 60 countries and 64,000 respondents to present novel stylized facts about the relationship-specific nature of altruism. Across individuals, universalist preferences systematically vary with demographics such as age and religiosity and are predictive of many left-wing political views, albeit in culturally highly heterogeneous ways. Across countries, universalism is strongly linked to a broader radius of trust. Looking at origins, universalism varies with the economic, political, and religious organization of societies in ways that are consistent with the idea that the scope of altruism is partly shaped by economic incentives and democracy.