Climate Change Social Norms and Conditional Conservatism

Using data from Yale Climate Opinion Maps over the period 2014-2020, we find that managers of U.S. firms headquartered in counties with higher climate change social norms (CCSN) engage in more conditional conservatism. This result is consistent with the notion that CCSN influences managers’ behavioral intentions towards climate change and thereby shapes their financial reporting choices. Cross-sectional analyses demonstrate that the positive relation between CCSN and conditional conservatism is more pronounced for climate-non-vulnerable industries and during times with greater media coverage of climate change. Given the substitution between accrual-based earnings management (AEM) and real earnings management (REM) as well as managers’ preference to REM, we perform path analysis and find that CCSN directly influences firms’ REM activities and indirectly via conditional conservatism in response to market pressure arising from climate change. Overall, our findings have implications for various financial report users, including standard setters and regulators who are contemplating new climate-related disclosures

The Impact of Social Value Orientation and Risk Attitudes on Trust and Reciprocity

Prior experimental studies provide evidence that the levels of trust and reciprocity are highly susceptible to individuals’ preferences towards payoffs, prior experience, capacity to learn more about personal characteristics of each other and social distance. The objective of this study is to examine whether social value orientation as developed by Griesinger and Livingstone (1973) and Liebrand (1984) and risk preferences can help to account for the variability of trust and trustworthiness. We use the Berg et al. (1995) investment game to generate indices of trust and reciprocity. Prior to their participation in the investment game, all subjects participated in two other games. One is used to measure their social value orientation (a measure of other regarding behavior) and the second to measure risk attitudes. These variables are introduced as treatments in the analysis of the trust and reciprocity data. In addition to these preference related variables, gender is introduced to capture any differences between men and women which may not be encompassed by value orientation and risk attitudes. The statistical analysis indicates that the social value orientation measure significantly accounts for variation in trust and reciprocity. As well, the level of trust exhibited by an investor significantly affects the reciprocity of the responders and this measure of trust interacts with social value orientation. Individuals who are highly pro-social reciprocate more as the sender’s trust increases, while those who are highly pro-self reciprocate less as the sender’s trust increases. For this sample of participants, the gender variable does not capture any differences in the behavior of men and women that is not already reflected by the differences captured by their value orientations. Risk attitudes do not significantly account for variation in trusting behavior, except for the case where individuals have neither strongly pro-social nor pro-self social value orientations. In this case, more riskseeking individuals are more trusting.Trust, Reciprocity, Social Value Orientation, Risk Attitudes, Gender

The Impact of Empowering Investors on Trust and Trustworthiness

This paper uses laboratory mechanism design in an investment environment to examine the impact of empowering investors with the right to veto the investee’s profit distribution decision on the level of trust and trustworthiness. One of the key findings is that the empowerment of investors through both costless and costly vetoes significantly increases trust by over 30% in both cases. Interestingly, we observe a comparable pattern when the power to veto is removed. Analyses of veto decisions indicate that empowering investors increases both trust and trustworthiness without an undue abuse of the power to veto and that the veto decisions are largely driven by unfair responses, consistent with the theory on inequity aversion.Empowerment; Veto; Investment; Trust; Trustworthiness; Reciprocity

Trust and Reciprocity with Transparency and Repeated Interactions

This paper uses data from a controlled laboratory environment to study the impact of transparency (i.e., complete information versus incomplete information) and repeated interactions on the level of trust and trustworthiness in an investment game setting. The key findings of the study are that transparency (complete information) significantly increases trusting behavior in one-shot interactions. This result persists in repeated interactions. Further, transparency appears important for trustworthiness in one-shot interactions. In addition, repeated interaction increases trust and reciprocity with or without transparency. These results suggest transparency is important in building trust in business environments such as alliances and joint-ventures which are loosely connected organizational forms that bring together otherwise independent firms. It also provides support for the Sarbanes-Oxley Act of 2002 (SOX) and similar legislation elsewhere which attempt to regain investors’ trust in corporate management and financial markets by stipulating enhanced disclosures.Transparency; Trust; Reciprocity; Repeated interaction; Business Alliances; SOX

Does Disaster Risk Relate to Banks’ Loan Loss Provisions?

We examine the relation between disaster risk and banks’ loan loss provisions (LLP). We propose a disaster risk measure based on the natural disasters declared as major disasters by the Federal Emergency Management Agency over a 15-year span. We theoretically support and empirically validate our measure using three different approaches, including the UN Sendai Framework for disaster risk reduction, which relates disaster risk to natural hazard exposure, vulnerability and capacity, and hazard characteristics. Using more than 445,000 bank-quarter observations, we document that banks located in U.S. counties with higher disaster risk recognize larger LLP after controlling for other bank-level factors related to LLP. We employ several techniques to ensure the robustness of our findings, including difference-in-differences estimation and matched samples. In additional analysis, we explore the characteristics that better enable banks to recognize disaster risk in their LLP, and investigate the consequences of managing disaster risk through LLP. Our results are important, especially because of the increasing concern about disaster risk and because they inform the growing debate on the economic consequences of disaster risk and the ability of the banking system to proactively manage the resulting credit risk through LLP

Relation between auditor quality and corporate tax aggressiveness: Implications of cross-country institutional differences

SUMMARY Using an international sample of firms from 31 countries, we study the relation between auditor quality and corporate tax aggressiveness. Employing an indicator variable for tax aggressiveness when the firm's corporate tax avoidance measure is within the top quintile of each country-industry combination, we find strong evidence that auditor quality is negatively associated with the likelihood of tax aggressiveness, even after controlling for other institutional determinants such as home-country tax system characteristics. We also find that the negative relation between auditor quality and the likelihood of tax aggressiveness is more pronounced in countries where investor protection is stronger, auditor litigation risk is higher, the audit environment is better, and capital market pressure is higher. JEL Classifications: M42; M48; H20; F30.</jats:p