Structural transformation in most currently developing countries takes the form of a rapid rise in services but limited industrialization. In this paper, we propose a new methodology to structurally estimate productivity growth in service industries that circumvents the notorious difficulties in measuring quality improvements. In our theory, the expansion of the service sector is both a consequence—due to income effects—and a cause—due to productivity growth—of the development process. We estimate the model using Indian household data. We find that productivity growth in nontradable consumer services such as retail, restaurants, or residential real estate was an important driver of structural transformation and rising living standards between 1987 and 2011. However, the welfare gains were heavily skewed toward high‐income urban dwellers.

We provide evidence that analysts' stock-price judgments depend on (1) the method of accounting for a business combination and (2) the number of years that have elapsed since the business combination. Consistent with business-press reports of managers' concerns, analysts' stock-price judgments are lowest when a company applies the purchase method of accounting and ratably amortizes the acquisition premium. The number of years since the business combination affects analysts' price estimates only when the company applies the purchase method and ratably amortizes goodwill—analysts' price estimates are lower when the business-combination transaction is further in the past. However, this joint effect of accounting method and timing is mitigated by the Financial Accounting Standards Board's proposed income-statement format requiring companies to report separate line items for after-tax income before goodwill charges and net-of-tax goodwill charges. When a company uses the purchase method of accounting and writes off the acquisition premium as in-process research and development, analysts' stockprice judgments are not statistically different from their judgments when a company applies pooling-of-interest accounting.

Differentiating real earnings management (REM) from normal business decisions poses a unique challenge for auditors, researchers, and investors. The ambiguity associated with REM, and the fact that REM does not violate GAAP, may explain why its use is on the rise. While some assert that auditors are not, and should not be, concerned with REM, recent research suggests that REM may influence some auditor judgments. Using Correspondent Inference Theory (CIT) as our theoretical framework, we extend REM research by investigating the ways in which auditors respond to REM and how auditors deal with the intrinsic ambiguity associated with REM. We administer a 3×2 between‐subjects experiment to 113 highly‐experienced auditors, manipulating the level of ambiguity surrounding the observed REM (Explicit REM, Potential REM, or No REM) and the earnings context in which the client engages in REM (the client beat or missed the consensus earnings forecast). We find that auditors respond to REM by lowering assessments of management tone (i.e., management's commitment to a culture of high ethical standards), being more likely to discuss the issue with the audit committee, and being less likely to retain the client. Auditors respond to Explicit REM regardless of the earnings context, but respond to Potential (i.e., ambiguous) REM only when the client beats the forecast. Finally, we find that management tone mediates the relation between REM and auditor responses, even after controlling for various audit‐related risks. Thus, for auditors, REM appears to be primarily a “people” issue, as REM provides a negative signal about management.

Delegating managerial tasks is essential for firm growth. Most firms in developing countries, however, do not hire outside managers but instead rely on family members. In this paper, we ask if this lack of managerial delegation can explain why firms in poor countries are small and whether it has important aggregate consequences. We construct a model of firm growth where entrepreneurs have a fixed time endowment to run their daily operations. As firms grow large, the need to hire outside managers increases. Firms’ willingness to expand therefore depends on the ease with which delegation can take place. We calibrate the model to plant-level data from the United States and India. We identify the key parameters of our theory by targeting the experimental evidence on the effect of managerial practices on firm performance from Bloom et al. (2013). We find that inefficiencies in the delegation environment account for 11 percent of the income per capita difference between the United States and India. They also contribute to the small size of Indian producers, but would cause substantially more harm for US firms. The reason is that US firms are larger on average and managerial delegation is especially valuable for large firms, thus making delegation efficiency and other factors affecting firm growth complements.