Journal of Accounting,Auditing & Finance

We find that analysts exhibit strong herding behavior in their earnings forecasts following an employment change—possibly as a response to the unfamiliarity of their new workplace. Overall, this has no significant effect on forecast accuracy but an adverse effect on the market impact of their forecasts. This research adds to the literature by showing that analysts’ herding behavior can arise simply from having to adjust to a new work environment. Yet, it appears to be a strategic adaptation as the moving analysts only choose to herd when the consensus serves as a reliable benchmark to maintain performance standards.

Measuring nonprofit performance has been a perennial challenge. While current mandated reports require financial information about dollars received and spent, donors and regulators encourage voluntary disclosures of mission activities. Because there are few common measures across different types of nonprofit organizations and no designated reporting mechanism, studying the information value of mission performance has been difficult. We use a database of nonprofit impact-based performance indicators recently made available through GuideStar to investigate the usefulness of information contained in measures we call “mission metrics.” Examining two distinct stakeholders—donors and directors—and controlling for financial and governance factors, we find that donations and executive bonus compensation are positively associated with any improvement in mission metrics. Bonuses, but not donations, are lower in years after all reported metrics decline. These results confirm the value relevance of nonprofit mission metrics.

This study investigates the impact of happiness on corporate innovation around the world. Using novel data from the World Happiness Report, we document that happiness is positively associated with firm innovation. The effect is more pronounced for R&D intensive firms. Further, we find that happiness promotes innovation through channels of collaboration, productivity, and risk tolerance. Our results are robust to including a range of controls and to using an instrumental variable approach and quasi-natural experiment. Overall, our results suggest that happiness can foster corporate innovation around the world.

This paper presents a model of auditor-client relationship-building (RB). We find that the relation between RB and audit effort is nonmonotonic, that is, it can improve or impair audit effort. On the one hand, RB improves the usefulness of exerting effort and the auditor is then motivated to work harder. On the other hand, RB improves the precision of the signal received by the auditor and reduces her expected liability, which reduces her incentive to exert effort. Moreover, existing literature suggests that quasirents arising from long auditor tenure compromise auditor independence. In contrast to this conventional wisdom, this paper shows a positive effect of quasirents resulting from relationship-building on auditor independence under certain conditions. This is the first study modeling client relationship-building initiated by auditors. It enhances our understanding of the relationship between RB and audit effort as well as auditor-client negotiations.

In accounting and auditing, critical monetary estimation applications based on sampling often rely on stratified mean-per-unit (SMPU) sampling due to the technique’s unique ability to produce trustworthy confidence intervals when applied to low-error populations. Although reliable, SMPU yields less precise confidence intervals than other estimation techniques. To address this weakness, we present and test a data transformation procedure for use with SMPU-Intrastratum Counterbalancing. After strata boundaries are finalized but prior to sample selection, this procedure creates new sampling units in each stratum by counterbalancing original stratum population elements one or more times. As a result, the number of strata sampling units and strata standard deviations are reduced. These changes reduce the SMPU estimator standard deviation thereby improving precision. In simulations using real accounting populations, counterbalancing produced large improvements in precision. Compared to SMPU without counterbalancing, one application of counterbalancing produced a 52% improvement in mean precision while a second application produced a 73% improvement in mean precision. These improvements were achieved with no change in the number of original population elements examined and suggest that use of Intrastratum Counterbalancing would be beneficial in many SMPU estimation applications. Equations are provided for planning Intrastratum Counterbalancing applications.

The Tax Cut and Jobs Act of 2017 generated a spurt in tax-deductible contributions to corporate defined benefit pension plans. We examine how pension risk altered as a result. We document that sponsors making large voluntary contributions before lower tax rates take effect also (i) make economically significant shifts in asset allocation toward safer investments and (ii) transfer obligations to insurance companies or beneficiaries. We identify the TCJA as a driver of pension derisking, with long-term implications for sponsors, employees, and the PBGC; and particularly of the propensity to transfer pensions to insurance companies or beneficiaries, permanently changing the regulatory status and guaranties associated with them.

This paper investigates whether initial-year audit fee discounting occurs in U.S.-traded foreign companies. Using a sample of 5,568 company-years from 2007 to 2018, we find evidence of fee discounting after accounting for measurement bias identified by Barua et al. (2020). Our analysis also suggests that the extent of discounting varies based on regulatory environments and the economic significance of these companies to their auditors, including both audit and nonaudit services. However, we find mixed evidence on whether fee discounting impacts audit quality.

We study the real effects of the first nationwide mandatory CSR disclosure regulation in the U.S., the Greenhouse Gas Reporting Program (GHGRP). Starting in 2010, the Environmental Protection Agency (EPA) requires the disclosure of greenhouse gas emissions by facilities emitting more than 25,000 metric tons of CO₂ per year. We construct a novel set of emission data on power plants around the regulation to examine the causal effects of GHGRP in the utility industry. Using a difference-in-difference research design, we find that while as intended by the policy power plants that are subject to the GHGRP reduced carbon dioxide emission rates by 7%, the reduction in emission no longer holds at the firm level. Specifically, we detect evidence of strategic behavior by firms that own both GHGRP plants and non-GHGRP plants. Presumably unintended by the policy, such firms strategically reallocate emissions between plants to reduce GHGRP-disclosed emissions. This evidence suggests that the reporting program is costly to the affected firms which reacted both positively towards the policy objectives and also somewhat negatively at the same time, not as intended by the policymakers. We also provide evidence of a stronger reduction in plant emissions by publicly traded firms, which is consistent with prior literature supporting shareholder pressure as a primary channel through which mandatory Corporate Social Responsibility (CSR) reporting programs affect firm behavior.

This study investigates the effect of information acquisition costs on regulator’s review process over financial reporting. Using hand-collected comment letter (CL) data from the Shanghai Stock Exchange, we find that firms located farther away from the regulator are more likely to receive CLs and the review outcomes are more substantive. Additional analyses using propensity score-matched sample, first-tier city sample and misreported sample are consistent with our main findings. More importantly, our empirical results show that the effect of information acquisition cost not only manifest in geographical distance, transportation infrastructure development and economic linkage are also important dimensions through which information acquisition cost would affect regulator’s monitoring activities. In contrast to the findings of prior literature, our results suggest that the regulator uses the review process to mitigate the constraint in monitoring firms with high information acquisition costs.

This study examines how changes in state corporate tax rates affect corporate social responsibility (CSR) performance among U.S. firms. Using staggered state-level tax reforms and a difference-in-differences (DiD) design, we identify an asymmetric causal effect: tax cuts significantly enhance CSR performance by reducing concerns, whereas tax increases only marginally weaken CSR strengths. Drawing primarily on signaling theory, complemented by slack resource and stakeholder perspectives, we argue that tax cuts expand financial slack, enabling firms to use CSR as a positive signal of financial strength, long-term orientation, and responsible use of tax savings. In contrast, firms avoid cutting CSR significantly after tax hikes to prevent negative signaling. In support of the theories, our heterogeneity analyses show that these effects are stronger among financially constrained firms and are concentrated in material CSR issues that are financially relevant to investors. A domain-level analysis further reveals that tax increases reduce environmental strengths, while tax cuts lower concerns related to employee relations, diversity, and environmental practices. These findings highlight how tax policy shapes CSR through its impact on financial flexibility and stakeholder expectation, offering implications for corporate strategy and public policy.

This study investigates the association between the balance sheet approach, where financial reporting focuses on asset and liability valuation, and the usefulness of the capital adequacy ratio in the evaluation of bank default risk by credit rating agencies. We examine Japanese banks, which play the central role in the Japanese economy, whose capital adequacy ratios are affected by fair value measurement under the balance sheet approach. We adopt Demerjian’s approach to develop a bank-level measure of balance sheet focus. Although we find a significant positive correlation between the slack of the regulatory capital adequacy ratio and issuer rating, this positive correlation weakens significantly as a bank’s dependence on the balance sheet approach increases. Our results suggest the balance sheet approach makes financial reporting less useful for measuring bank risk.

When establishing an overall audit strategy, auditors must assess the risk of material misstatement and determine the nature, timing and extent of further audit procedures. Among other things, the nature, timing and extent of further audit procedures is affected by the nature and extent of misstatements identified in previous audits and thereby the auditor’s expectations in relation to misstatements in the current audit. Deciding and justifying the extent to which these historical data should be considered is challenging. Consequently, auditors often incorporate these data in a nonstatistical manner. However, there are practical benefits to doing this statistically, such as increased transparency and justifiability. In this article, we introduce a statistical approach to incorporate historical data into the current audit based on the normalized power prior. This approach eliminates the need for auditors to decide how much to discount the historical data and enables them to learn this using the current data. We demonstrate that the normalized power prior improves audit efficiency over time.

Estimating outlier-robust regression models is challenging because model specification and outlier definition are interdependent, yet empirical research typically treat them separately. We propose a framework that jointly aligns a well-defined research question with appropriate model specification and robust estimation. Reexamining the relationship between CEO equity incentives and innovation, we show that conventional least-squares estimates produce unstable results: vega effects vary with functional forms, while delta effects are highly sensitive to influential observations. Our framework reconciles these inconsistencies, producing consistently positive and significant vega effects alongside generally insignificant delta effects, thereby highlighting the importance of a holistic approach.

Audit planning is a critical phase of the audit process, yet remains largely unobservable in archival research. This paper examines whether new audit partners make different planning decisions, focusing specifically on the use of component auditors in multinational audits. For U.S. multinationals, audit partners must determine whether and to what extent audit procedures, and therefore component auditors, are needed in foreign locations. While audit firms strive for continuity during transitions, incoming partners may provide a “fresh look” at prior audit plans or face resource constraints and learning curves as they acquire client and component auditor-specific knowledge. We find that partners significantly decrease the number of component auditors used in their first year on an engagement. This decrease is magnified when the audit partner faces fee pressure and reverses over the partner’s tenure on the engagement, which is consistent with resource constraints and the gradual acquisition of client knowledge. The result is concentrated among small component auditors, where the partner has greater discretion. While prior literature demonstrates increased hours following audit partner changes, we provide insight into a specific, important, and complex planning decision made by new audit partners.

Large public accounting firms routinely tout national office rotational experience; however, there is little empirical evidence on the costs and benefits of national office experience for audit partners and their firms. We examine the implications of this experience using both qualitative and quantitative approaches. We begin by conducting 18 (4) semistructured interviews with audit partners with (without) national office experience. These interviewees share their perceptions of why auditors gain this experience, the benefits and challenges it entails, and how it influences subsequent audit work. Then, among a sample of audit partners, we empirically examine how national office experience affects their promotion timing, leadership opportunities, client assignments, and audit outcomes. We find that national office experience enables partners to secure certain leadership positions and, for those from less visible offices, to obtain promotions to partner more quickly. We also find that such experience improves audit quality when clients have issues that often involve national office consultations (i.e., material weaknesses). Finally, we find that partners with national office experience produce more timely audits, but only when their experience is recent. Overall, our study provides an initial analysis of the perceived and actual benefits of auditor national office experience.

We examine how passive institutional ownership affects the informational efficiency of stock prices. Because passive institutional investors prefer greater transparency, their presence encourages managers to enhance firm disclosure (Boone & White, 2015; Schoenfeld, 2017). Increased disclosure improves the information environment and reduces information uncertainty, leading to lower post-earnings announcement drift (PEAD) and greater price efficiency (Hung et al., 2015; Zhang, 2006). Accordingly, we predict that higher passive institutional ownership strengthens the contemporaneous market response to earnings announcements while mitigating PEAD. Using firm additions to the S&P 500 index as an exogenous shock, we document that increases in passive institutional ownership lead to greater firm disclosure. Consistent with our prediction, we find higher earnings response coefficients (ERC) and weaker PEAD among firms with greater passive institutional ownership. Decomposing earnings into firm-specific and systematic components, we further show that the higher ERC and weaker PEAD arise from the timely incorporation of both components into prices. Our findings contribute to the ongoing debate on whether the rise of passive investing enhances or impairs price efficiency.

This study examines whether auditors’ task-specific expertise acquired during the initial recognition and valuation of goodwill influences clients’ subsequent goodwill accounting. Given the complexity of goodwill valuation, the high degree of managerial discretion involved, and the potential for auditor bias, we hypothesize that auditors-in-charge who serve during a client’s acquisition year and thereby acquire client-specific expertise affect the timeliness and magnitude of subsequent goodwill impairments during their remaining tenure. Using data on Swedish auditors and their publicly-listed clients, we find that both the likelihood and magnitude of goodwill impairments increase with the client-level task-specific expertise of the auditor-in-charge. In contrast, evidence for portfolio-level or audit firm-level expertise is weaker and less consistent. However, portfolio-level and audit firm-level expertise are more relevant in homogeneous industries, within the largest audit firm, and among auditors with pre-IFRS regulatory experience. Overall, our findings suggest that audit quality in goodwill accounting is primarily driven by client-level skill acquisition of the individual auditor, whereas the transferability of task-specific knowledge across engagements depends on the industry structure, audit firm scale, and auditors’ regulatory training.

This paper examines whether and how in-person communication influences the quality of information available to market participants. We utilize the lockdown periods during the COVID-19 pandemic as a proxy for an exogenous reduction in in-person communication, and analyst forecast accuracy as a proxy for information quality. We document that when firms’ headquarter states undergo lockdowns, analyst forecasts for these firms issued in the lockdown periods are significantly less accurate than for other firms or other periods, with an average difference of about 8% of the mean value of absolute forecast errors. The difference is also greater when analysts have less firm-specific experience or cover more industries, or when firms are smaller or younger. Supplemental analyses show greater differences when companies convert from in-person to virtual events despite holding more of the latter. In addition, analysts input more effort and display more divergent opinions during the lockdown periods. The collective results indicate that when there is less in-person communication, forecast quality is lower despite more effort and similar or higher frequency of virtual communication.

Earnings announcement returns tend to be volatile when a significant amount of information remains unknown to investors prior to the announcement. The informativeness of earnings announcements—measured by the return volatility during the announcement period relative to the pre-announcement period—reflects the extent of information not publicly disclosed ex ante. Consistent with the view that information plays a crucial role in stock pricing, we find a positive correlation between the informativeness of earnings announcements and expected stock returns in the U.S. market from 1977 to 2022. This effect is more pronounced among younger firms, firms with higher return volatility, and during periods of heightened investor risk aversion. Additionally, we find supporting evidence that reductions in information supply, driven by Regulation FD, lead to higher expected stock returns.

Using China’s unique corporate governance structure, which mandates independent directors to publish opinion reports for approving specific transactions, we investigate how the tone of these reports affects market reactions to consentient votes. Our findings reveal that investors respond negatively to a conservative tone, highlighting the information-dissemination role of independent directors. The negative market reaction is stronger when: (1) independent directors face a lower cost of acquiring information, (2) they have a greater incentive and ability to communicate relevant information to minority shareholders, and (3) the opinion report is longer, readable, and more forward-looking. Moreover, a conservative tone is associated with poor future performance at both the firm and transaction levels, suggesting that the informational role of independent directors may outweigh their monitoring role in the context of opinion reports. Our study enhances the existing literature by demonstrating that, in a weak institutional environment, independent directors can serve as a protective mechanism for investors by providing value-relevant information through their conservative-toned opinions on management proposals.