We extend recent research on the links between political connections and financial reporting by examining the role of auditor choice. Our evidence that public firms with political connections are more likely to appoint a Big 4 auditor supports the intuition that insiders in these firms are eager to improve accounting transparency to convince outside investors that they refrain from exploiting their connections to divert corporate resources. In evidence consistent with another prediction, we find that this link is stronger for connected firms with ownership structures conducive to insiders seizing private benefits at the expense of minority investors. We also find that the relation between political connections and auditor choice is stronger for firms operating in countries with relatively poor institutional infrastructure, implying that tough external monitoring by Big 4 auditors becomes more valuable for preventing diversion in these situations. Finally, we report that connected firms with Big 4 auditors exhibit less earnings management and enjoy greater transparency, higher valuations, and cheaper equity financing.

Exploiting a quasi‐natural experiment in China in which some firms become investible to foreign investors across different times (i.e., pilot firms), we explore the role that stock market liberalization plays in shaping firms' earnings management activities. In one direction, the national‐level liberalization reform may elicit public attention from various stakeholders, piling pressure on managers to refrain from distorting their firms' earnings. In the other direction, the various restrictions that the government imposes on foreign investors cast doubt on whether China's capital control reform will materially affect pilot firms' incentives and scope to manipulate their earnings. To gauge which force is more dominant, we rely on a staggered difference‐in‐differences research design and find that pilot firms significantly reduce the magnitude of their discretionary accruals and the incidence of financial reporting irregularities from the pre‐ to the post‐liberalization period, compared to non‐pilot firms during the same time frame. Additional analysis implies that externalities in the form of stricter external monitoring from the media, institutional investors, and auditors is the major mechanism that helps market liberalization curb firms' earnings management. Our research provides insight on the importance of financial global integration to firms' earnings management practices.

Relying on the size of partner signatures in audit reports in Taiwan to measure their narcissism, we find that audit quality rises with partner narcissism. Our analysis also implies that changes in audit quality are positively associated with changes in partner narcissism stemming from mandatory partner rotation. We also find that the impact of partner narcissism on audit quality only manifests when auditor independence is more likely to be compromised, although it does not vary with engagement complexity. These results suggest that partner narcissism improves audit quality mainly through increased auditor independence, rather than auditor competence. Additionally, we document that although partner narcissism has no perceptible impact on the incidence of Type I going concern reporting errors, it is negatively associated with the probability of making a Type II error, implying that more narcissistic partners are less likely to succumb to client pressure to issue opportunistic reports. Data Availability: Data are available from public sources as identified in the text.

We document that firms held by mutual fund managers who have public accounting experience earlier in their careers exhibit higher‐quality financial reporting, as evidenced by a lower likelihood of financial statement restatements. Additional evidence shows that fund managers with public accounting experience are more likely to conduct site visits to their portfolio firms and discuss accounting policy–related topics during those visits. Moreover, the restatement likelihood falls after fund managers' site visits, particularly when they raise accounting policy–related issues during their visits. In cross‐sectional results consistent with expectations, we find that the role that fund manager public accounting experience plays is amplified when the firm suffers more severe agency problems, firm information asymmetry is worse, fund managers are more risk averse, fund managers have prior work experience at larger accounting firms, fund managers hold a larger proportion of the firm's shares, or there is coordination among mutual funds. Collectively, our evidence suggests that fund managers with public accounting experience impose stricter external monitoring on their portfolio firms' financial reporting choices.

Exploiting mergers between lenders and shareholders of the same firm as an exogenous shock to shareholder–creditor conflicts, we examine the causal effect of these conflicts on firms' ex ante expected stock price crash risk evident in the options implied volatility smirk. The decrease in conflicts of interest between lenders and shareholders induces dual holders to encourage the disclosure of more information to alleviate costly information asymmetry with other investors and better execute their oversight role in constraining managers' bad news suppression. Consistent with expectations, we find that a firm's ex ante expected crash risk declines after a shareholder–creditor merger. We also report strong, robust evidence that the negative impact of mergers on firms' expected crash risk increases when institutional investors or lenders have a greater stake in the treatment firms or when shareholder–creditor conflicts are apt to be exacerbated. Additionally, we document that firms issue management earnings forecasts (especially bad news forecasts) more frequently after these mergers. Finally, we find that expected crash risk decreases more after mergers in firms suffering worse information asymmetry and with weak monitoring mechanisms. Our evidence suggests that option market participants value the dual holder's role in deterring managers' bad news hoarding.

We exploit the staggered introduction of the PCAOB's international inspection program to examine the role that the stringency of public audit oversight plays in shaping US institutional investors' home bias. Analyzing a sample of foreign firms listed in the United States, we evaluate whether US institutional investors hold larger equity stakes in these firms—a longstanding issue that reflects investor portfolio decisions—if their auditors are exposed to the threat of a PCAOB inspection. In a differences‐in‐differences framework, we find that US‐listed foreign firms enjoy an increase in US institutional investors' equity positions after their auditors become subject to PCAOB inspection access. Cross‐sectional analysis implies that the benefit of the PCAOB inspection threat in mitigating US institutional investors' home bias is concentrated in foreign countries without a strict local audit oversight system; active US institutional investors that are known to value accounting transparency; and firms from countries that grant PCAOB access later (after the onset of its international inspection program in 2005). Our evidence suggests that foreign firms become better known in the capital markets under the PCAOB inspection program, which induces US institutional investors to acquire larger equity stakes in US‐listed foreign firms given the lower information asymmetry that ensues under the PCAOB inspection threat.

We examine which of two opposing financial reporting incentives that group†affiliated firms experience shapes their accounting transparency evident in auditor choice. In one direction, complex group structure and intragroup transactions enable controlling shareholders to pursue diversionary activities that they later hide by distorting reported earnings. In the other direction, as outside investors price†protect against potential expropriation, controlling shareholders may be eager to improve financial reporting quality in order to alleviate agency costs. To empirically clarify whether group affiliation affects company insiders' incentives to address minority shareholders' concerns over agency costs, we examine auditor selection of group firms relative to stand†alone firms. In comparison to nongroup firms, our evidence implies that group firms are more likely to appoint Top 10 audit firms in China, especially when their controlling shareholders have stronger incentives to improve external monitoring of the financial reporting process. After isolating group firms, we find that the presence of a Top 10 auditor translates into higher earnings and disclosure quality, higher valuation implications for related†party transactions, and cheaper equity financing, implying that these firms benefit from engaging a high†quality auditor. In additional analysis consistent with our predictions, we find that group firms that are Top 10 clients pay higher audit fees and their controlling shareholders are more constrained against meeting earnings benchmarks through intragroup transactions and siphoning corporate resources at the expense of minority investors. Collectively, our evidence supports the narrative that insiders in firms belonging to business groups weigh the costs and benefits stemming from auditor choice.Les auteurs se demandent laquelle de deux motivations opposées liées à l'information financière animant les groupes d'entreprises affiliées détermine leur transparence comptable, telle qu'elle se manifeste dans le choix de l'auditeur. D'une part, la complexité de la structure du groupe et des opérations intragroupe permet aux actionnaires détenant le contrôle de se livrer à des activités de détournement qu'ils dissimulent par la suite en manipulant les résultats publiés. D'autre part, comme les investisseurs externes se protègent d'une éviction potentielle en tenant compte de ce risque dans les cours, les actionnaires détenant le contrôle peuvent avoir tendance à vouloir améliorer la qualité de l'information financière afin d'alléger les coûts de délégation. Pour déterminer empiriquement si le groupement d'entreprises affiliées influe sur les motivations des initiés à s'intéresser aux préoccupations des actionnaires minoritaires quant aux coûts de délégation, les auteurs étudient le choix de l'auditeur des groupes d'entreprises par rapport au choix de l'auditeur d'entreprises individuelles. Comparativement aux entreprises individuelles, il appert qu'en Chine, les entreprises appartenant à un groupe sont davantage susceptibles de retenir les services de cabinets d'audit appartenant aux Dix Grands, en particulier lorsque les actionnaires détenant le contrôle sont plus fortement motivés à améliorer le contrôle externe du processus d'information financière. Après avoir isolé les groupes d'entreprises, les auteurs observent que la présence d'un auditeur appartenant aux Dix Grands se traduit par une qualité accrue des résultats et de l'information publiée, l'attribution de valeurs plus élevées aux opérations entre parties liées, et des coûts inférieurs de financement par capitaux propres, ce qui donne à penser que ces entreprises tirent profit du choix d'un auditeur de calibre supérieur. Dans une analyse supplémentaire, conformément à leurs prédictions, les auteurs constatent que les groupes d'entreprises clientes des Dix Grands paient des honoraires d'audit plus élevés et que leurs actionnaires détenant le contrôle ont moins de latitude dans le recours aux opérations intragroupe et au drainage des ressources de l'entreprise aux dépens des actionnaires minoritaires en vue d'atteindre les résultats visés. Dans leur ensemble, les données qu'ils colligent confirment les allégations selon lesquelles les initiés des entreprises appartenant à des groupes soupèsent les coûts et les avantages du choix de l'auditeur.

In examining the loan contracting implications of SEC investigations, we document that banks charge higher loan spreads when borrowers are under investigation, with the rise in interest rates varying predictably with lender characteristics. Further, our evidence implies that the debt pricing impact of SEC investigations is amplified for borrowers suffering worse credit quality and information asymmetry as well as those relying more on bank loans. These findings suggest that banks perceive increased risk for borrowers under SEC scrutiny while also leveraging their knowledge of the investigations to extract rents. Supplemental analyses reveal tighter nonspread loan terms and a higher likelihood of amending existing loan contracts during SEC investigations. Additionally, the tightening of loan terms reverses for investigations that conclude without enforcement actions. Overall, our research identifies an economic cost of SEC investigations and alerts regulators to these costs when deciding whether to launch an investigation. Data Availability: All data used are available from the sources indicated in the paper.