This paper examines two behavioral factors that diminish people's ability to value a lifetime income stream or annuity, drawing on a randomized experiment with about 4,000 adults in a U.S. nationally representative sample. We find that increasing the complexity of the annuity choice reduces respondents' ability to value the annuity, measured by the difference between the sell and buy values they assign to the annuity. When we limit narrow choice bracketing by inducing people to think first about how quickly or slowly to spend down assets in retirement, their ability to value an annuity increases.

We examine a comprehensive set of investigations by the SEC’s Division of Enforcement offices to provide evidence on the consequences of these office’s busyness on the formal investigation process. We find that higher office case backlog decreases the likelihood of an investigation into a restating firm. Our results show no evidence that higher backlogs affect the SEC’s ability to pursue cases involving revenue recognition issues and high insider trading, which is consistent with the agency’s stated priorities. But our findings indicate that busy SEC offices are less likely to pursue cases with the largest shareholder losses, which is inconsistent with SEC priorities. Backlog also impacts pursued investigations, leading to more prolonged investigations, a lower Accounting and Auditing Enforcement Releases likelihood, and smaller SEC penalties. Our evidence suggests that busyness undermines the SEC’s investigation process.

During the interactive process of issue resolution, client managers may develop expectations about the auditor’s position. We examine the effect that negative expectancy violations have on managers’ pre-negotiation positions and how relational familiarity can moderate this effect. Through a series of experiments, we find that, when the partner’s proposed adjustment is within the client’s original expectations, managers offer greater concessions to a more familiar partner than to a less familiar partner. However, depending on relational familiarity, client managers react to expectancy violations very differently. Managers react more severely when a more familiar partner violates expectations, offering lower negotiation concessions than when no violation occurs. In contrast, managers tend to ignore violations committed by a less familiar partner, offering similar negotiation concessions whether or not a violation has occurred. Furthermore, we find support for a practical intervention to repair damage from expectancy violations committed by more familiar partners.

A longstanding literature suggests that earnings provide the market with relevant information about firm performance, but one often overlooked benefit is their role in disciplining market expectations. This study examines the role of earnings announcements in constraining potential mispricing associated with firm-specific media sentiment. We show that media sentiment-driven quarterly returns (orthogonal to risk factors and fundamental news) largely reverse when public earnings are released. Our results suggest that quarterly earnings announcements play an important role in reducing media sentiment-related mispricing. Data Availability: Data are available from the public sources cited in the text.

Using a difference-in-differences approach, we examine the effect of industry-specific knowledge transfer on audit performance after a merger of two Chinese audit firms with different levels of expertise in an industry. For clients in an industry audited by both merging audit firms, those audited by the audit firm less specialized in that industry belong to the treatment group, while all other clients belong to the control group. We find an economically significant improvement in audit quality (as reflected in a reduction in financial misstatements) for the treatment group relative to the control group in the same merged audit firm. We show the treatment effect is not driven by changes in auditor incentives or personnel movement and is more pronounced when we expect stronger communication between the less and more specialized auditors after the merger. We caution that our findings are specific to China and may not generalize to other countries. Data Availability: Data used in this study are available from public sources identified in the text.

Informed by Perceptual Deterrence Theory, we conduct multiple experiments to investigate when and how auditor actions can help deter manager opportunism. In Study 1A, we find that managers are less likely to use real earnings management (REM) when they expect auditors to both increase scrutiny and communicate their observations to the board. However, this effect occurs only when managers' operational decisions are inconsistent (versus consistent) with peer behavior. Study 1B findings suggest that increased auditor scrutiny alone (without auditor-board communication) is not likely to deter REM. In Study 2, we find that increased auditor scrutiny with communication to the board effectively deters both accruals-based earnings management (AEM) and REM, reducing the total level of manager opportunism. However, without communication, increased auditor scrutiny deters AEM, but also induces more REM. Our findings highlight the importance of auditor-board communication and demonstrate how auditor actions can contribute to the deterrence of manager opportunism. Data Availability: Contact the authors.

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.

Contrast analysis has become prevalent in experimental accounting research since Buckless and Ravenscroft (1990) introduced it to the accounting literature over 25 years ago. Since its initial introduction, the scope of contrast testing has expanded, yet guidance as to the most appropriate methods of specifying, conducting, interpreting, and exhibiting these tests has not. We survey the use of contrast analysis in the recent literature and propose a three-part testing approach that provides a more comprehensive picture of contrast results. Our approach considers three pieces of complementary evidence: the visual evaluation of fit, traditional significance testing, and quantitative evaluation of the contrast variance residual. Our measure of the contrast variance residual, q2, is proposed for the first time in this work. After proposing our approach, we walk through six common contrast testing scenarios where current practices may fall short and our approach may guide researchers. We extend Buckless and Ravenscroft (1990) and contribute to the accounting research methods literature by documenting current contrast analysis practices that result in elevated Type I error and by proposing a potential solution to mitigate these concerns.

We find that economic conditions at the time an auditor enters the labor market have a long-term impact on her judgment and decision making. Specifically, engagement partners who started their career during economic downturns issue audit adjustments more frequently. For the subsample of company-years with no audit adjustments, downturn auditors are more likely to issue a modified audit opinion. In addition, companies audited by downturn auditors are less likely to violate financial reporting and disclosure regulations. Together, our findings suggest that the early career stage is a critical formative period for auditors.

We find that the likelihood of forced turnover in the CEO and CFO positions is significantly higher for firms in the aftermath of option backdating than in propensity-score matched control firms. Forced turnover occurs in about 36 percent of the accused firms. The forced turnover rates for CEOs and CFOs are similar and several times higher than normal. The displaced managers are further punished by the managerial labor market, as they are much less likely than control firm managers to be rehired at comparable positions. We also find that backdating firms restructure CEO compensation to rely less on stock options. Finally, we learn the higher turnover extends to the General Counsel. While boards are often viewed as unresponsive to criticisms involving executive compensation, they did respond quite decisively to option backdating allegations and the accompanying adverse publicity. Data Availability: All data used in this study are publicly available from the sources indicated.