The impact of information frictions within regulators: evidence from workplace safety violations

The Occupational Safety and Health Administration (OSHA) is decentralized, wherein field offices coordinated at the state level undertake inspections. We study whether this structure can lead to interstate frictions in sharing information and how this impacts firms’ compliance with workplace safety laws. We find that firms caught violating in one state subsequently violate less in that state but violate more in other states. Despite this pattern, and in keeping with information frictions, violations in one state do not trigger proactive OSHA inspections in other states. Moreover, firms face lower monetary penalties when subsequent violations occur across state lines, likely due to the lack of documentation necessary to assess severe penalties. Finally, firms are more likely to shift violating behavior into states with greater information frictions. Our findings suggest that internal information within regulators impacts the likelihood and location of corporate misconduct

Are audit fees discounted in initial year audit engagements?

Many studies report that audit fees are discounted in the year of an auditor change and regulators have long been concerned that such fee discounting could impair audit quality. We find significant bias in the way studies have tested for fee discounting. The bias exists because interim procedures are usually performed by both the predecessor and successor auditors but only the successor’s fee needs to be disclosed. Accordingly, the disclosed fee during the auditor change year usually relates to a partial year of auditing services. We find that the evidence for fee discounting disappears after correcting for this measurement bias

Government subsidies and corporate fraud

I study the relation between firms' receipt of significant subsidies in their home states and their subsequent propensities to engage in financial fraud. Firms that receive subsidies are likely to have greater influence over the lawmakers who award these subsidies, relative to nonrecipient firms, but may also be subject to higher external scrutiny. I find that firms receiving tax breaks -- but not cash grants -- tend to engage in fraud more frequently relative to nonrecipient firms. Additionally, there is no relation between fraud and subsidies received in other states, even though those subsidies are similar in other respects; only firms' home-state subsidies are associated with higher levels of corporate fraud, consistent with lower enforcement intensity as a result of capture. I also show that the relation between targeted subsidies and fraud is mitigated in the presence of high third-party interest, measured using Google search volume intensity; counterfactual analysis suggests that a 1% increase in subsidy scrutiny would be associated with a roughly 1.3% decrease in fraud by subsidized firms. My findings provide insight into the relation between subsidies and financial fraud, suggesting that recent recommendations by standard-setters for additional subsidy disclosures by both governments and firms provide useful information to policymakers and investors

Financial misconduct and employee mistreatment: evidence from wage theft

I examine the relation between firms’ financial conduct and wage theft. Wage theft represents the single largest form of theft committed in the United States and primarily affects firms’ most vulnerable employees. I show that wage theft is more prevalent (i) when firms just meet or beat earnings targets and (ii) when executives’ personal liability for wage theft decreases. Wage theft precedes financial misconduct while the theft is undetected, but once firms are caught engaging in wage theft they are more likely to shift to engaging in financial misconduct. My findings highlight an economically meaningful yet previously undocumented way in which firms’ financial incentives relate to employee treatment

Misreporting, Regulatory Disclosure, and the Revolving Door

I develop a model of regulatory behavior as it relates to misreporting and regulatory disclosure. There is a self-interested regulator who may or may not wish to revolve to a higher-paying private-sector job. Whether he wants to do so, as well as his talent level and available resources, is private information that he may choose to disclose. The two types of regulators (revolvers and non-revolvers) face different decision problems. Revolvers would like to catch as much misreporting as possible in order to establish a track record (regardless of how much goes undetected). By contrast, non-revolvers would like for there to be as little undetected misreporting as possible. I establish a nontrivial disclosure equilibrium where the regulator reveals information for certain levels of available resources. Despite the presence of the revolving door, allowing selective disclose can lead to lower overall ex-ante expected misreporting. The model provides a lens through which to understand recent empirical studies on how regulators with private-sector ambitions behave, and suggests potential avenues for future empirical research. Furthermore, in light of a burgeoning empirical literature on regulatory disclosure and transparency, the model documents a potentially negative side effect of such transparency

Government subsidies and corporate misconduct

I study whether firms that receive targeted U.S. state-level subsidies are more likely to subsequently engage in corporate misconduct. I find that firms are more likely to engage in misconduct in subsidizing states, but not in other states that they operate in, after receiving state subsidies. Using data on both federal and state enforcement actions, and exploiting the legal principle of dual sovereignty for identification, I show that this finding reflects an increase in the underlying rate of misconduct and that this increase is attributable to lenient state-level misconduct enforcement. Collectively, my findings present evidence of an important consequence of targeted firm-specific subsidies: non-financial misconduct that potentially could impact the very stakeholders subsidies are ostensibly intended to benefi

Do ESG funds make stakeholder-friendly investments?

Investment funds that claim to focus on socially responsible stocks have proliferated in recent times. In this paper, we verify whether ESG mutual funds actually invest in firms that have stakeholder-friendly track records. Using a comprehensive sample of self-labelled ESG mutual funds (as identified by Morningstar) in the United States from 2010 to 2018, we find that these funds hold portfolio firms with worse track records for compliance with labor and environmental laws, relative to portfolio firms held by non-ESG funds managed by the same financial institutions in the same years. Relative to other funds offered by the same asset managers in the same years, ESG funds hold stocks that are more likely to voluntarily disclose carbon emissions performance but also stocks with higher carbon emissions per unit of revenue. Despite these findings, ESG funds hold portfolio firms with higher average ESG scores. We show that ESG scores are correlated with the quantity of voluntary ESG-related disclosures but not with firms’ compliance records or actual levels of carbon emissions. Finally, ESG funds appear to underperform financially relative to other funds within the same asset manager and year, and to charge higher fees. Our findings suggest that socially responsible funds do not appear to follow through on proclamations of concerns for stakeholders

Do socially responsible firms walk the talk?

Several firms claim to be socially responsible. We confront these claims with data using the most notable recent proclamation, the Business Roundtable’s (BRT) 2019 Statement on the Purpose of a Corporation. The BRT is a large, influential business group containing many of America’s largest firms; the Statement proclaimed a corporation’s purpose as delivering value to all stakeholders, rather than only shareholders. However, we find no evidence that signatories – who voluntarily signed – engaged in such stakeholdercentric practices before or after signing. Relative to peers, signatories violate environmental and labor laws more frequently, have higher carbon emissions, rely more on government subsidies, and are more likely to disagree with proxy recommendations on shareholder proposals. We also do not observe post-signing improvements along these dimensions, suggesting that the Statement was not a credible commitment to improve. Our results suggest that firms’ proclamations of stakeholder-centric behavior are not backed up by hard data

When do firms deliver on the jobs they promise in return for state aid?

US state governments frequently provide firms with targeted subsidies. In exchange, recipient firms promise to create or retain a certain number of jobs in the subsidizing state. In this paper, using novel hand-collected data, we address three questions: (i) the extent to which firms meet job creation targets promised in the application process, (ii) the factors that determine which firms meet job creation targets, and (iii) the benefits to firms from meeting promised job targets. We find that 63% of subsidies awarded to publicly traded U.S. firms between 2004 and 2015 meet their ex-ante promised job creation targets. Firms with poorer labor practices are less likely to meet job targets, as are politically connected firms that receive subsidies in election years. Conversely, promised job targets are also more likely to be met for subsidies accompanied by government press releases but less likely to be met for subsidies accompanied by firm-level press releases; the latter likely reflects the fact that firms put out press releases for larger subsidies with more ambitious job targets. In terms of consequences, firms that meet job targets are more successful at obtaining subsequent subsidies both in- and out- of subsidizing states. However, while firms’ success in meeting job targets is associated with an uptick in positive media coverage, this does not flow through to ESG ratings, even on scores specific to community impact. Our results should be of interest to both academics and policymakers interested in the design of state-level economic incentive programs