This study reports on an experiment conducted to assess the influence of different affective mood states on auditors’ ability to resist obedience pressure to commit or overlook unethical acts in six audit contexts. Obedience pressure from superiors to comply with unethical directives is of particular concern in public accounting, given the hierarchical structure of audit teams and the power imbalance in superior–subordinate relationships. One hundred and seventy audit seniors from two large international public accounting firms participated in an experiment. Three different moods were induced in participants through work‐related trigger events: one positive active mood state (arousal) and two negative passive mood states (fear and insignificance). These mood states were anticipated to influence auditors’ expressed willingness to comply with their superiors’ unethical directives as set forth in our ethical scenarios. Our results indicate that low levels of arousal and high levels of fear and insignificance influenced compliance intentions. Our results also indicate overall high levels of expressed willingness to comply with superiors’ unethical directives. Implications of our findings for understanding the antecedents of unethical conduct within the accounting profession and for future research are discussed.

We use a shock to the public scrutiny of firm subsidiary locations to investigate whether that scrutiny leads to changes in firms’ disclosure and corporate tax avoidance behavior. ActionAid International, a nonprofit activist group, levied public pressure on noncompliant U.K. firms in the FTSE 100 to comply with a rule requiring U.K. firms to disclose the location of all of their subsidiaries. We use this setting to examine whether the public pressure led scrutinized firms to increase their subsidiary disclosure, decrease tax avoidance, and reduce the use of subsidiaries in tax haven countries compared to other firms in the FTSE 100 not affected by the public pressure. The evidence suggests that the public scrutiny sufficiently changed the costs and benefits of tax avoidance such that tax expense increased for scrutinized firms. The results suggest that public pressure from outside activist groups can exert a significant influence on the behavior of large, publicly traded firms. Our findings extend prior research that has had little success documenting an empirical relation between public scrutiny of tax avoidance and firm behavior.

This paper examines the approaches accounting researchers adopt to draw causal inferences using observational (or nonexperimental) data. The vast majority of accounting research papers draw causal inferences notwithstanding the well‐known difficulties in doing so. While some recent papers seek to use quasi‐experimental methods to improve causal inferences, these methods also make strong assumptions that are not always fully appreciated. We believe that accounting research would benefit from more in‐depth descriptive research, including a greater focus on the study of causal mechanisms (or causal pathways) and increased emphasis on the structural modeling of the phenomena of interest. We argue these changes offer a practical path forward for rigorous accounting research.

This paper investigates whether greater competition increases or decreases individual bank and banking system risk. Using a new text‐based measure of competition, and an instrumental variables analysis that exploits exogenous variation in bank deregulation, we provide robust evidence that greater competition increases both individual bank risk and a bank's contribution to system‐wide risk. Specifically, we find that higher competition is associated with lower underwriting standards, less timely loan loss recognition, and a shift toward noninterest revenue. Further, we find that higher competition is associated with higher stand‐alone risk of individual banks, greater sensitivity of a bank's downside equity risk to system‐wide distress, and a greater contribution by individual banks to downside risk of the banking sector.

Efficient contracting predicts that ex ante severance pay contracts are offered to chief executive officers (CEOs) as protection against downside risk and to encourage investment in risky projects with a positive net present value (NPV). Consistent with this prediction, we find that ex ante contracted severance pay is positively associated with proxies for a CEO’s risk of dismissal and costs the CEO would incur from dismissal. Additionally, we show that the contracted severance payment amount is positively associated with CEO risk taking and the extent to which a CEO invests in projects that have a positive NPV. Overall, our findings imply that ex ante severance pay contracts are consistent with efficient contracting.

We use a data set of sell-side analysts' scenario-based equity valuation estimates to examine whether analysts can assess the state-contingent risk surrounding a firm's fundamental value. We find that the spread in analysts’ scenario-based valuations captures the riskiness of operations and predicts the absolute magnitude of long-run valuation errors and future changes in firm fundamentals.We also show that analysts’ assessment of fundamental risk and its predictive ability systematically improved after the financial crisis, consistent with the macroeconomic shock raising analysts’ awareness of firms’ systematic risk exposures.

Most analyses treat global warning as a single-agent problem. The present study presents the Regional Integrated model of Climate and the Economy (RICE) model. By disaggregating into countries, the model analyzes different national strategies in climate-change policy: pure market solutions, efficient cooperative outcomes, and noncooperative equilibria. This study finds that cooperative policies show much higher levels of emissions reductions than do noncooperative strategies; that there are substantial differences in the levels of controls in both the cooperative and the noncooperative policies among different countries; and that high-income countries may be the major losers from cooperation.

In our paper with Daigee Shaw (Mendelsohn et al., 1994), henceforth MNS, we developed a new approach to measuring the impact of global warming on agriculture. We call this approach because it relies upon standard rent theory as a way of identifying the impact of changes on net economic welfare. We compared the Ricardian approach with the traditional production-function approach, which uses agricultural production functions but has great difficulty identifying all the other adjustments that farmers make in response to changing external conditions. The Ricardian approach is particularly well-suited to a tremendously heterogeneous sector because it can rely upon reduced-form estimation and does not require the impossible task of constructing structural models of hundreds of crops in thousands of locations. Estimating the model using cross-sectional data on climate, farm-land prices, and other economic and geophysical data for almost 3,000 counties in the United States, the Ricardian approach shows a significantly lower estimated impact of global warming than the traditional productionfunction approach. Indeed, our preferred statistical approach showed modest benefits of climate change. In his comment on MNS in this issue of the Review, William R. Cline (1996) raises three concerns. First, he notes that the analysis assumes that output prices remain constant. Second, he asserts that the analysis assumes that the supply of water for irrigation is perfectly elastic. Third, he calls for testing the results of the model on alternative climate scenarios from general circulation models (GCM's). His first and third points are useful additions, while the second is incorrect. Our Ricardian approach assumes that the existing pattern of agricultural land rents and land prices reflects the long-run equilibrium economic effect of climate and other geophysical and economic variables. Standard economic reasoning shows that, by calculating the estimated effects of perturbing the climatic variables, we can project the impact of climate change on economic welfare. We do so in a partial-equilibrium approach which assumes that output prices are invariant to the climate, and Cline is correct to point out that this might lead to biased estimates because the partialequilibrium estimates tend to underestimate damages and overestimate benefits. In fact, the bias is small given standard parameters for agricultural demand and supply functions. We illustrate this point using linear supply and demand functions for agricultural crops. Let demand be given by Qd = ao - a1P while supply is Q. = Po + PI P, where Q and P are output and price and ai and [,i are parameters. In equilibrium at the old climate, market outcomes are Qo and PO. Now suppose that global warming contracts supply so that

We investigate in a sample of 53 emerging markets over 1980-2014 whether countries with open capital accounts are necessarily at the mercy of global events, or are able to take policy actions when receiving inflows to mitigate the impact of a subsequent reversal. Our analysis suggests that, while changes in global conditions have an important bearing on crisis susceptibility, countries that allow the buildup of macroeconomic and financial vulnerabilities during boom times, and which receive mostly debt flows, are significantly more likely to see capital inflow surge episodes end in a financial crisis.

We study a variant of the one-sector neoclassical growth model of Diamond in which capital investment must be credit financed, and an adverse selection problem appears in loan markets. The result is that the unfettered operation of credit markets leads to a one-dimensional indeterminacy of equilibrium. Many equilibria display economic fluctuations which do not vanish asymptotically; such equilibria are characterized by transitions between a Walrasian regime in which the adverse selection problem does not matter, and a regime of credit rationing in which it does. Moreover, for some configurations of parameters, all equilibria display such transitions for two reasons. One, the banking system imposes ceilings on credit when the economy expands and floors when it contracts because the quality of public information about the applicant pool of potential borrowers is negatively correlated with the demand for credit. Two, depositors believe that returns on bank deposits will be low (or high): these beliefs lead them to transfer savings out of (into) the banking system and into less (more) productive uses. The associated disintermediation (or its opposite) causes banks to contract (expand) credit. The result is a set of equilibrium