Competition for Andersen\u27s Clients

We examine competition for Andersen’s public clients during and after its failure in 2002. This setting provides a natural experiment to examine audit market dynamics at the local level. We construct a database documenting Big4 purchases of local Andersen offices. After exploring the factors associated with office purchases, we examine the impact of office purchases on public client market share gains and changes in audit fees. We find that three Big4 firms – Deloitte, Ernst & Young, and KPMG – purchased approximately 60% of Andersen’s offices while PricewaterhouseCoopers did not purchase any. The probability that a firm purchased a specific office is greater in markets where the acquiring firm: 1) already had a presence, 2) had a lower ratio of local Andersen clients to the purchaser’s clients, and 3) had already acquired relatively more local former Andersen public clients than other firms prior to the purchase. Our fee analysis expands the United States Government Accountability Office (GAO) post-Andersen audit market study by documenting that the former Andersen clients’ change in audit fees is associated with the differences in client acquisition method

Financial reporting consequences of CEOs\u27 early-life exposure to disasters and violent crime

Understanding the behavior of chief executive officers (CEOs) enables investors, regulators, and others to better appreciate CEOs\u27 corporate decisions. Among the many aspects that determine CEO behavior are early-life experiences, we examine whether a CEO\u27s exposure to two important events—fatal natural disasters and violent crime—during the individual\u27s formative years is associated with the firm\u27s financial reporting outcomes. We argue that a CEO with early life exposure to fatal natural disasters and violent crime may be over-confident when dealing with risk and is more likely to make riskier decisions. However, this relationship becomes negative when the exposure reaches a certain level, consistent with the CEO becoming risk-averse when making business decisions (Bernile, Bhagwat, & Rau, 2017). Consistently, we report evidence of a U-shaped association between financial reporting quality and both types of early-life exposures. In addition, we find that the link between a CEO\u27s early-life exposures and financial reporting quality is more pronounced in firms with greater incentives to manage earnings

Bankruptcy: The result of failed financial relationships

Purpose – The purpose of this study is to investigate whether a firm’s cost structure (specifically, its cost stickiness) is associated with environmental, social, and governance (ESG) sustainability factors of performance and disclosure. Methodology/approach – This study uses MCSI Research KLD Stats (KLD) and Bloomberg databases for the 13-year period from 2003 to 2015 in constructing ESG performance and disclosure variables, respectively. The authors adopt the general cost stickiness models from Anderson, Banker, and Janakiraman (2003) and Banker, Basu, Byzalov, and Chen (2016) to perform the analysis. Findings – The authors find that a firm’s level of cost stickiness is positively associated with certain sticky corporate social responsibility (CSR)/ESG activities (both overall and when separately classified as strengths or concerns) but not with other nonsticky CSR activities. The authors also show that the association between cost stickiness and ESG disclosure is incremen-tally stronger for firms with CSR activities classified as sticky. Furthermore, the authors provide evidence that ESG disclosure is greater when both cost stickiness and the degree of sticky CSR activities increase. The authors show that when cost stickiness is high and CSR activities are sticky, management has incentives to increase CSR/ESG sustainability disclosure to decrease information asymmetry. Originality/value – The findings present new evidence to understand how management integrates cost management strategies with various dimensions of sustainability performance decisions and show that not all ESG activities are equally effective when it comes to cost stickiness. The authors also demonstrate that increased sustainability disclosure helps reduce information asymmetry incrementally more when both costs are sticky and CSR activities are sticky

The Unintended Effects of Financial Accounting Standard 123R on Stock Repurchase and Dividend Activity

We investigate whether Financial Accounting Standard (FAS) 123R, which requires a firm to recognize its stock-based compensation at fair value, affects the firm’s stock repurchase activity. Specifically, we examine the effect of the standard on the incentive to substitute stock repurchases for dividends. As stock-option holdings increase, firms alter their payout composition; rather than offering dividends, they increase their stock repurchases to return cash to their shareholders. Prior research also indicates that stock repurchases are used to manage earnings per share (EPS). Managers are likely concerned that FAS 123R negatively impacts earnings, as firms must now record stock-based compensation at fair value. Overall, we find that FAS 123R is associated with an increase in stock repurchases and that this effect is greater the higher the level of management stock options; the impact on dividend yields, however, is less pronounced. Our study reveals the unintended economic consequences of a change in accounting by demonstrating its effects on how firms return cash to their shareholders

Addressing cheating when using test bank questions in online Classes

Academic dishonesty in online classes is widespread, and instructors’ attempts to minimize its effects have had mixed results. We validate one approach to reducing the benefits from cheating on online exams: the use of paraphrasing. In three online undergraduate auditing courses, we challenged students with a verbatim test bank question and a paraphrased question for each topic tested. The students performed better on the verbatim questions compared to the paraphrased questions (80.4% vs. 69.1%), even after we controlled for use of an honor code statement and online exam proctoring technology. Our results are consistent with the notion that, when faced with a paraphrased test bank question, students cannot easily find the answer on the Internet because the question does not exist in a verbatim form online. Our study is important for educational institutions and professors seeking to combat academic dishonesty and for instructors wishing to avoid the pitfalls of using test banks

The influence of family firm dynamics on voluntary disclosures

We examine the voluntary disclosure practices of family firms. Family firms have longer investment horizons and lower agency conflicts between owners and managers. However, they also exhibit higher agency conflicts between controlling and non-controlling shareholders, and greater concerns about their own reputations. We therefore hypothesize that the previously documented association between stock-based incentives and voluntary disclosures is dampened for family firms. In comparison to non-family firms, we find that family firms are less likely to provide management earnings forecasts when their CEO\u27s wealth (linked to the firm) is higher. We note this influence only in larger firms, which is consistent with the finding that larger firms have a significantly higher number of stock-based incentives than smaller firms. Additionally, the main result continues to hold when a family member serves as CEO or on the board of directors. We contribute to the literature by extending the research on stock-based incentives and voluntary disclosure, linking this research to family firms, and providing insight on the conflicting results found in prior family firm research

Are Earnings Strings Restrained after SOX?

Purpose: This paper aims to examine whether external monitors (auditors and analysts) constrain earnings strings, an indicator of earnings management, and whether this monitoring is more effective after the implementation of the Sarbanes-Oxley Act of 2002 (SOX), given the emphasis of SOX on improving auditing, financial reporting and the information environment. Design/Methodology/Approach: Agency theory establishes the premise between external monitoring and earnings strings. Auditor tenure and number of analysts following provide measures for external monitoring quality. Using prior research, empirical models explaining the presence of an earnings strings and earnings strings trend are developed to test the hypotheses. Findings: Pre-SOX, extreme auditor tenure, indicating lower quality external monitoring, is associated with greater earnings strings trend, and analyst coverage is associated with increased likelihood of earnings strings and greater earnings strings trend consistent with analyst pressure on management. More effective auditor and analyst monitoring occurs post-SOX in terms of reduced likelihood of earnings strings and earnings strings trend. Originality/Value: The authors provide evidence on how elements of external monitoring are associated with increased earnings strings pre-SOX. Further, they contribute to the debate on the impact of SOX on external firm monitoring and the overall financial information environment. By focusing on earnings strings, the outcome of earnings management, the authors provide a unique understanding of external monitoring that also provides insight on the overvaluation of equity and ultimate destruction of firm value. The evidence demonstrates how regulation has contributed to an improved financial reporting environment and external monitoring