ABSTRACT Experts have long conjectured that pension accounting rules, by which pension expense depends on a managerial estimate that is directly tied to the riskiness of plan assets (i.e., the expected rate of return, or ERR, on plan assets), encourage risk-taking with pension investments. The recent passage of IAS 19, Employee Benefits (Revised) (hereafter, IAS 19R) eliminates the ERR and replaces it with a managerial estimate unrelated to plan asset riskiness (the discount rate). We demonstrate that a sample of Canadian firms affected by IAS 19R reduces risk-taking in pension investments post-IAS 19R, compared to a control sample of U.S. firms unaffected by IAS 19R. Therefore, removing firms' ability to recognize immediately in net income the expected higher returns from risk-taking (via a higher ERR) reduces their propensity for that risk-taking—providing some of the first empirical evidence on the economic consequences of eliminating the ERR-based pension accounting model.

We examine whether the compensation incentives of top management affect the extent of risk shifting versus risk management behavior in pension plans. We find that risk shifting through pension underfunding (and, to a lesser extent, through pension asset allocation to risky securities) is stronger with compensation structures that create high wealth-risk sensitivity (vega) and weaker with high wealth-price sensitivity (delta). These findings are stronger for chief financial officers (CFOs) than for chief executive officers (CEOs), suggesting that pension policy falls within the CFO’s domain. Risk shifting through pension underfunding is also lower when the CFO’s personal stake in the pension plan is larger. Overall, these findings show that top managers’ compensation structure is an important driver of corporate pension policy. They also highlight firms within which the moral hazard concerns fueled by Pension Benefit Guaranty Corporation insurance are most relevant.

ABSTRACT We measure two dimensions of SOX 404 audit quality: (1) whether auditors identify and report material weaknesses (MWs) in a timely fashion, and (2) on identifying MWs, whether auditors identify misstatements arising from MWs in a timely fashion. We find that audit practice-offices with a large base of SOX 404(b) clients and those with a long history of conducting control evaluations for that client are more likely (1) to identify and report MWs in a timely manner (i.e., before resulting restatements come to light), and conditional on identifying MWs, (2) to detect MW-related misstatements in a timely manner (i.e., before the misstatements become restatements). Audit office industry expertise also matters, but only to timely MW reporting. Our results inform on the drivers of variation in SOX 404 audit quality, and highlight the key role that auditors play in identifying internal control weaknesses and assessing their impact on financial statement reliability.

ABSTRACT We show that managers increase the volume of public financial guidance in response to decreases in analyst coverage of their firms, particularly to decreases that are driven by exogenous reduction in brokerage firm size. Managers do not respond to increases in analyst coverage. The managerial guidance response to decreases in coverage reflects the trade-off between the marginal benefits from analyst coverage and the marginal costs of providing guidance. Specifically, the response is concentrated within firms engaging in equity issuance activities, firms with low stock liquidity, and firms with low current guidance levels. The response is also concentrated within firms whose remaining analyst pool is smaller in number and/or has a lower percentage of analysts who are positive about the firm or who belong to a large brokerage house. Overall, our results shed insights on the interaction between managers and analysts and on how the value of analysts, as perceived by managers, varies in the cross-section with underlying firm and analyst characteristics. Data Availability: All data used in this study are publicly available from sources identified in the text.

ABSTRACT We examine how state liability regimes within the United States affect auditor reporting decisions. We exploit variation across state-level common law in two aspects of auditor liability: the extent to which auditors can be held liable by third parties for negligence, and rules for apportioning liability across multiple defendants. We find that auditors are more likely to issue a modified going-concern (GC) report to financially distressed clients from high-liability states than to those from low-liability states. We sharpen inferences using a natural experiment that examines the causal effects of two exogenous shocks to auditor third-party liability standards, which dramatically restricted auditors' liability in New Jersey in 1995 and in California in 1992. Results from difference-in-differences tests imply that auditors' propensity to issue a modified opinion for client firms in New Jersey and California decreases significantly after the decline in auditors' litigation exposure, relative to control firms from other jurisdictions. These findings add to our understanding of how litigation risk affects auditor behavior and highlight an important source of variation in litigation risk within the U.S. that has seldom been studied to date.