ABSTRACT We examine whether the complexity of mandatory accounting disclosures prompts managers to voluntarily disclose adjusted measures of actual earnings performance, and whether this practice reflects attempts to obfuscate or mitigate the informational opacity accounting complexity creates for investors. Using the metadata in XBRL filings, we construct measures of accounting complexity that map directly to the mandated standards applied in financial statement filings. We find a positive and economically significant association between accounting complexity and managers’ propensity to disclose non-GAAP earnings information. This relation is robust and incremental to common measures of business and linguistic complexity, and the transitory nature of firms’ economic activities. We also find that the quality and informativeness of adjusted earnings information increases with accounting complexity, consistent with motives to better inform investors when accounting disclosures are complex. Overall, our results suggest that managers use non-GAAP earnings disclosure to mitigate the adverse informational effects of accounting complexity. Data Availability: All data are available from sources identified in the paper. JEL Classifications: M41; M43.

ABSTRACT Prior evidence shows a reduction in leverage after covenant violations, but we do not know whether covenants affect leverage before they are violated. In this study, we use an exogenous accounting-based shock to debt covenants that relaxed covenant tightness (SFAS 160) and examine whether covenants constrain leverage for borrowers that are close to violation, even when the borrower is financially healthy. We find that SFAS 160 increased debt levels in firms that were close to violation. This increase in debt was driven by financially healthy firms, suggesting the likelihood of future covenant violations could impede borrowing by firms. We also find an increase in investment sensitivity to Q after SFAS 160 in firms close to violation, suggesting the additional debt was used to make legitimate investments. Because SFAS 160 was passed in the midst of the financial crisis, it is difficult to generalize our findings to more normal financial periods. JEL Classifications: G01; G30; G31; G33; M21; M41.

ABSTRACT Calls from practice suggest that audit committee members with industry expertise can improve audit committee effectiveness. Nevertheless, regulators and the extant literature have focused on the financial expertise of the audit committee. We posit that audit committee industry knowledge is valuable because accounting guidance, estimates, and oversight of the external auditor are often linked to a company's operations within a particular industry. Taking a holistic view, we examine two measures of financial reporting quality (financial restatements and discretionary accruals) and two measures of external auditor oversight (audit and nonaudit fees). As predicted, we find that audit committee members who are both accounting and industry experts perform better than those with only accounting expertise. We also find that in certain instances, supervisory experts who are also industry experts perform better than supervisory experts alone. Overall, these results suggest that industry expertise, when combined with accounting expertise, can improve the effectiveness of the audit committee in monitoring the financial reporting process. Data Availability: All data are gathered from publicly available sources.

This paper examines the implications of microstructure theory for empirical research on stock price behavior

ABSTRACT While current audit standards explicitly state engagement partner tenure requirements, firms have flexibility in managing the rotation process. We conduct semi-structured interviews with 20 U.S. audit firm partners who share their experiences on topics including how they identify appropriate candidate partners and what efforts they undertake to manage relationships with clients post-rotation. We investigate firms' motivation to manage the auditor-client relationship through the lens of Social Exchange Theory (SET), and we consider how likely outcomes of this rotation process map onto regulators' intent that a newly rotated partner provides a fresh perspective to the audit. Our study informs regulators and investors about the process by which engagement partners are selected for rotation, documenting that partner assignment is typically not random. Further, our finding that partner rotation is an extended process (rather than a single discrete event) has implications for audit researchers investigating the effects of partner rotation.

ABSTRACT We examine how firms’ contractual relationships with their employees affect the design of their debt contracts, and the use of financial covenants in particular. Viewing the firm as the nexus of both explicit and implicit contractual relationships, we argue that managers cater to their employees’ preferences when negotiating contractual terms with creditors. We argue that an increase in unemployment-insurance benefits reduces employees’ cost of job loss, which, in turn, allows managers to take more risk. First, we show that more generous benefits are associated with a higher operating leverage, operating cash flow volatility, and product-development frequency. We then find that loans initiated following an increase in unemployment-insurance benefits include a higher proportion of performance, rather than capital covenants. Overall, our study demonstrates how the design of debt contracts changes in response to arguably exogenous changes in employees’ collective tolerance—and, in turn, managers’ preferences—for risk. JEL Classifications: M41; G32; J60.

ABSTRACT: We examine the information role of accounting disclosures on warranties, utilizing a database that became available due to the requirements of FIN 45. First, because firms use warranty policies as a business strategy to promote their products, a warranty reserve can serve two roles: an information signal regarding product quality, as well as a contingent liability. Consistent with this view, we find that the stock market recognizes that: (1) the warranty reserve contains information about firms’ future performance, and (2) the reserve is a liability. Second, because warranty accruals require estimation of future claims, they can be used as a tool of earnings management. Our evidence indicates that managers use warranty accruals to manage earnings opportunistically to meet earnings targets. Finally, we find that the stock market recognizes the understatement of warranty liabilities of firms that managed earnings.