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      School of Accounting Research

      Abstract Report 2022

CEOs and Moral Balancing

CEOs of public companies may serve of boards of non-profit organizations out of intrinsic motivation, reflecting a preference for the well-being of others.  Alternatively, CEOs may serve on non-profit boards to increase moral reputation or manage their public image. Consistent with moral balancing incentives, we find that firms with CEOs serving on boards of non-profit organizations are associated with a higher likelihood of meeting or beating earnings targets via earnings management.  Our findings suggest that on average, CEOs service on non-profit boards is driven by public image concerns and not intrinsic motivation.

Sponsors: Oklahoma State University, Kansas State University, Gonzaga University

PI/PDs: Bryan G. Brockbank

Kansas State University: Thomas K. Kelemen

Gonzaga University: Samuel H. Matthews


Cutting R&D to Meet Earnings Benchmarks: The Effect of Firm-Level Innovation

This study examines whether innovation affects the likelihood of firms cutting research and development (R&D) spending to meet earnings benchmarks. Consistent with R&D cuts being used to signal stronger future performance, we find that innovative firms that cut R&D to meet benchmarks have higher future earnings and operating cash flows. Results are concentrated among firms with greater R&D intensity and for firms operating in poor information environments. Overall, results suggest that managers of innovative firms have a long-term focus and are unwilling to sacrifice long-term performance to meet short-term benchmarks.

Sponsors: Oklahoma State University, Drake University

PI/PDs: Bryan G. Brockbank

Drake University: Kent Hu


Non-GAAP Earnings and Future Earnings Predictability

Motivated by regulators’ concerns about non-GAAP financial measures and building on research that finds more informative disclosures allow current stock returns to better reflect future earnings, I examine whether non-GAAP earnings exclusions enhance or garble the future earnings news captured in current stock returns.  Utilizing Amazon Mechanical Turk (MTurk), I collect non-GAAP earnings data from 2003 to 2012 and measure managers’ non-GAAP exclusions relative to three comparable earnings:  1) GAAP earnings before extraordinary items, 2) GAAP earnings from operations, and 3) analyst-adjusted “street earnings.” Finally, I find that consistent non-GAAP reporting is associated with more future earnings information reflected in current stock returns.

Sponsor: Oklahoma State University

PI/PD: Bryan G. Brockbank


Auditing Standards Setting: Perspectives and Recommendations from Academic Members of the Auditing Standards Board Auditing standard setting in the United States enjoys a dynamic, sometimes contentious, history. Auditing professors and students should understand the current state of auditing standards, and the history and dynamism of the processes by which they are constructed and applied. We contribute toward that goal by providing an overview of the history of audit standard setting in the United States. We offer insights into the functioning of the Auditing Standards Board through our personal experiences. We also highlight the important role that academics can play in audit standard setting.

Sponsors: Oklahoma State University, Auburn University, Brigham Young University, University of Miami, University of South Florida

PI/PDs: Audrey A. Gramling

Auburn University: J. Gregory Jenkins

Brigham Young University: Douglas F. Prawitt

University of Miami: Kay W. Tatum

University of South Florida: Mark H. Taylor


Thinking Like an Auditor: Evaluating Information to Arrive at Evidence-Based Conclusions The sources of information today are quite varied and often conflicting, leading to claims of fake news, conspiracy theories, lies, and censorship. How do you work toward evidence-based conclusions in such an environment? We discuss the Auditing Standards Board’s Audit Evidence Framework (AEF) and recent PCAOB evidence-related guidance as useful tools to help auditors and others evaluate the information they might use to arrive at evidence-based conclusions. In short, we encourage others to think like an auditor when evaluating information to arrive at professional and personal decisions, and we develop implications for practitioners, students, and others.

Sponsors: Oklahoma State University, University of Utah, Kennesaw State University

PI/PDs: Audrey A. Gramling

University of Utah: Robert D. Allen

Kennesaw State University: Dana R. Hermanson


The Relevance of non-income tax relief

Governments regularly offer non-income tax relief to attract business interests. However, it is unclear whether markets impound information about the relief into security prices. We use novel data from retrospective public records to examine the information content of non-income tax relief. We find that non-income tax relief is strongly associated with future accounting performance and future abnormal returns. Overall, our evidence suggests the receipt of non-income tax relief reflects relevant information, but investors have difficulty impounding the information into security prices in a timely way.

Sponsors: Oklahoma State University, Brigham Young University, Iowa University, University of Texas at Austin

PI/PDs: Ryan Hess

Brigham Young University: Michael S. Drake

Iowa University: Jaron Wilde

University of Texas at Austin: Braden Williams


Government assistance: A growing, undisclosed financing source

We investigate whether firms treat government assistance as an additional source of external capital to provide standard setters evidence on a distinct impact of assistance on a firm’s financial statements. We find corporations in the highest decile of size-adjusted government assistance received have meaningfully lower leverage ratios than those in the bottom decile. We also find firms with lower debt ratios have higher investment commitments to governments, implying government assistance often creates off balance sheet obligations. These findings are relevant to the FASB as it deliberates requiring additional disclosure on government assistance under Topic 832.

Sponsors: Oklahoma State University, University of Texas at Austin

PI/PDs: Ryan Hess

University of Texas at Austin: Lillian F. Mills


Cash and Tax Evasion

Economists and public policy experts contend that paper currency facilitates tax evasion. However, due to the illicit nature of tax evasion, limited empirical evidence exists to document or quantify this claim. I use the staggered implementation of the Electronic Benefit Transfer (EBT) program to identify a decrease in local cash circulation that holds constant the level of income to provide empirical evidence on the role of cash in tax evasion and offer magnitude estimates. My results suggest that cash transactions are an economically significant means by which small businesses evade income taxes.

Sponsor: Oklahoma State University

PI/PD: Ryan Hess


The Feedback Loop of FDIC Insurance Premiums

There is a broad awareness about the potential for feedback effects in insurance premium pricing. Increasing (decreasing) deposit insurance premiums when a bank is performing poorly (well) has the potential to further constrain bank lending ability. We examine this feedback loop using confidential, archival bank data from the Federal Deposit Insurance Corporation (FDIC). Using credit unions as a suitable control group we estimate the impact of insurance premiums on bank lending. We empirically document a feedback loop between insurance premium and bank lending and further show that community banks are disproportionately affected by this feedback mechanism.

Sponsors: Oklahoma State University, Center for Financial Research Federal Deposit Insurance Corporation

PI/PDs: Ryan Hess

Federal Deposit Insurance Corporation: Jennifer S. Rhee


The Spiderweb of Partnership Tax Planning

We study the tax planning choices of pass-through businesses, focusing on partnership entities. We examine the role of organizational complexity using confidential, anonymized administrative tax data. We first construct partnership entity network structures to evaluate the size, ownership, and connections among partnership entities. Preliminary work leverages machine learning (ML) approaches to predict partnership non-compliance; future analyses will include additional features and alternative ML approaches to improve upon this baseline. Our analysis of network structures and tax planning strategies helps explain why partnerships are attractive to both businesses and high net worth individuals for tax planning purposes.

Sponsors: Oklahoma State University, Stanford University

PI/PDs: Ryan Hess

Carnegie Mellon University: Emily Black

Stanford University: Jacob Goldin

Stanford University: Daniel E. Ho

Stanford University: Rebecca Lester

Stanford University: Mansheej Paul

Internal Revenue Service: Annette Portz


Does audit committee reporting need to be improved? Evidence from a large-scale textual analysis?

The SEC is considering expanding audit committee reporting requirements to include greater disclosure of the audit committee’s oversight of the external auditor. To provide insight into whether additional reporting requirements are needed we (1) perform a large-scale textual examination of the characteristics and time trends of over 35,000 US firms’ audit committee report disclosures issued between 2004 and 2015 and (2) explore whether investors find such reports useful. In sum, our findings suggest that there is a need to improve the usefulness of audit committee report disclosures.

Sponsors: Oklahoma State University, Colorado State University, University of Texas

PI/PDs: Bradley P. Lawson

Colorado State University: Michelle Draegar

University of Texas: Jaime J. Schmidt


Audit Market Structure and Audit Quality: Evidence from Analysts’ Forecasts

We examine whether audit market concentration influences properties of analysts’ forecasts. We find that greater concentration is associated with more accurate analyst forecasts and less forecast dispersion. Path analyses provide evidence of decreased auditor independence in concentrated markets but also increased auditor effort and a higher likelihood of a Big N auditor, resulting in an overall net positive effect between audit market concentration, audit quality, and, ultimately, analysts’ forecasts. These results support regulators’ concerns regarding U.S. audit market concentration, but also help explain the documented relation between audit market concentration and improvements to audit quality.

Sponsors: Oklahoma State University, University of Nevada, Reno

PI/PDs: Bradley P. Lawson, Bryan Brockbank

University of Nevada, Reno: Chuong Do


Audit Partner Masculinity, Audit Pricing, and Audit Quality

Biology research finds that more masculine faced men are associated with greater ambition, greater competitiveness, and less interpersonal trust. We examine the consequences of this trait for both audit pricing and quality in the non-Big 4 audit setting. We find that partner facial masculinity is associated with higher audit fees. We also find that partner facial masculinity is associated with higher fraud risk. Finally, we find that partner facial masculinity is associated with lower likelihood of restatement announcements, but only for high fraud risk clients. Therefore, masculine faced partners earn a fee premium, but are associated with lower audit quality.

Sponsors: Oklahoma State University, Stoney Brook University, Rutgers, the State University of New Jersey, Mississippi State University

PI/PDs: Bradley P. Lawson

Stoney Brook University: Keval Amin

Rutgers, the State University of New Jersey: John Daniel Eshleman

Mississippi State University: Nathan Berglund


Consistently Aggressive? An Examination of Manager Characteristics Across Tax and Financial Reporting

We examine the consistency of individual manager traits across different reporting outcomes. Upper Echelon theory posits that managers significantly influence firms’ reporting outcomes. However, it is unknown whether managers are consistently aggressive across different reporting dimensions. Building upon Frank, Lynch, and Rego (2009), we examine whether CEOs and CFOs who exhibit aggressive financial reporting characteristics are the same managers who exhibit aggressive tax choices. Results indicate that CFOs exhibit a positive relation between financial and tax aggressiveness. Alternatively, CEOs display a negative relationship between financial and tax aggressiveness, which is driven by the tail ends of the tax aggressiveness distribution.

Sponsors: Oklahoma State University, University of Florida

PI/PDs: Bradley P. Lawson, Brian Webb

University of Florida: Michael Mayberry


Believe Who You Trust: How Do Inappropriate Auditor Actions to Improve PCAOB Inspection Outcomes Influence Non-Professional Investors’ Decision Making?

We examine how an accounting firm’s attempt to circumvent the PCAOB inspection process influences non-professional investors’ judgments about auditor credibility and willingness to continue investing in a company the firm audits. We find a negative association between PCAOB inspection deficiency rate and perceived expertise and between breaching the inspection process and perceived trustworthiness. Next, we observe that lower perceived expertise and trustworthiness are jointly associated with lower perceived auditor due care, lower perceived financial statement accuracy, and a lower likelihood that participants maintain their investment. Finally, inferences are similar when we measure trustworthiness as improperly revising the materiality threshold.

Sponsors: Oklahoma State University, University of Louisville, DePaul University     

PI/PDs: Leah Muriel                                                                                                                              University of Louisville: Dereck Barr-Pulliam 

DePaul University: Stephani A. Mason


Does the Reporting of Critical Audit Matters Affect Nonprofessional Investors’ Perceptions of Auditor Credibility, Information Overload, Audit Quality, and Investment Risk?

A new PCAOB standard requires the reporting of critical audit matters (CAMs) within the audit report. This change has lengthened the report but may provide investors with cues about auditor credibility and audit quality. We find evidence that a CAM improves perceived auditor credibility, but also has the unintended consequence of increasing feelings of information overload. More importantly, the disclosure of a CAM has a significant, positive total effect on perceived audit quality. This effect, in turn, lowers investors’ perceptions of investment risk. These findings highlight the potential for CAMs to impact investor perceptions and, possibly, subsequent decision-making.

Sponsors: Oklahoma State University, Clemson University, Iowa State University

PI/PDs: Leah Muriel

Clemson University: Brian T. Carver

Iowa State University: Brad S. Trinkle


Delegating Accounting on the Executive Team: The Impact on CFO Retention and Promotion

This study examines whether the delegation of accounting on the executive team impacts CFO retention and promotion to CEO. We conjecture that delegation eases the CFO’s multitasking demands and reduces the likelihood of burnout. We find evidence of a negative association between voluntary CFO departures and the delegation of accounting responsibility to an executive officer. This finding is most pronounced within a subsample of CFOs with accounting experience. Moreover, we find the likelihood of promotion to CEO is increasing in the delegation of accounting which is consistent with greater career opportunities with enhanced time for strategic and general management responsibilities.

Sponsors: Oklahoma State University, The University of Iowa, The University of Arizona

PI/PDs: Leah Muriel

The University of Iowa: Adrienne Rhodes

The University of Arizona: Dan Russomanno


If You Build the Culture, They Will Come: Examining What Influences Auditors’ Remote Work Preferences

COVID-19 unexpectedly created many remote working options for lower-level auditors. However, firm leaders still often believe in-person interactions are better for development. Drawing on recent developments in team theory, we contend that the more auditors’ value their work environment, the more they value in-person interactions. Results from a firm developed survey suggest that firm leaders must first improve team interactions—namely, team effectiveness, productivity, and communication—while also improving overall perception of the firm culture to increase auditors’ perceived value of in-person interactions. Reassuringly, any remote working inclinations are seemingly constrained by auditors’ due care expectations.

Sponsors: Oklahoma State University, Texas A&M University, Le Moyne College

PI/PDs: Leah Muriel

Texas A&M University: Brent Garza

Le Moyne College: Christie Novak


Where to Whistleblow? The Consequences of Reward and Retaliation Provisions

Given the important role that whistleblowers play in uncovering corporate fraud, additional provisions have been strengthened within multiple legal jurisdictions. We observe that only visible protection provided by the organization was associated with higher internal reporting. We do not find evidence that external retaliation protection or external reward are associated with higher external reporting. Furthermore, we find evidence of an unintended consequence from the reward program. The presence of an external reward was associated with lower intent to report internally. These results suggest that policy makers and organizations should carefully consider the costs and benefits of reward programs.

Sponsors: Oklahoma State University, Universidad Adolfo Ibanez, The University of Tennessee

PI/PDs: Leah Muriel

Universidad Adolfo Ibanez: Nelson Carrasco

The University of Tennessee: Robert M. Fuller


A Cross-Language Analysis of Disclosure Properties: Evidence from Hong Kong We examine how the linguistic properties of financial disclosure differ across languages. We exploit the requirement that firms listed on the Hong Kong Stock Exchange publish annual reports in both English and Chinese. We find that English reports are more positive, convey more uncertainty, and focus more on the past and present and less on the future, than Chinese reports. We also find that English (Chinese) reports are more likely to manage their tone by varying the frequency of positive (negative) words. Finally, the stock market only reacts positively to tone management in Chinese reports.

Sponsors: Oklahoma State University; Drake University; University of Nevada, Reno

PI/PDs: Sandeep Nabar

Drake University: Kent Hu

University of Nevada, Reno: Chuong Do


Accruals Earnings Management: Do CFO Power and Career Horizon Matter?

We find a negative relationship between the CFO's internal power and discretionary accruals. We do not find any evidence that CFO career horizon impacts accrual management.  We further find that the negative association between CFO internal power and discretionary accruals is evident only for income-decreasing accruals, and only in firms that meet or just beat earnings forecasts. The evidence implies that CFOs exert their influence to ratchet down large positive earnings surprises, thereby creating cookie jar reserves for future years.  

Sponsors: Oklahoma State University

PI/PDs: Sandeep Nabar, Yahya Abdullah


The Impact of Benefit Plan Audits on the Financial Statement Audit

We explore the implications of benefit plan audits for the financial statement audit. We find that performing a benefit plan audit increases the likelihood that the firm will be selected as a company’s financial statement auditor. Further, we find that companies that engage the same audit firm for both their benefit plan and financial statement audits have a lower likelihood of misstatements, shorter audit report lags, and a lower likelihood of switching the financial statement auditor. Our findings speak to the continued debate over effective market expansion of financial statement audit providers, audit quality determinants, and audit efficiencies.

Sponsors: Oklahoma State University, Michigan State University, University of Arkansas

PI/PDs: Jaclyn Prentice

Michigan State University: Kenneth L. Bills

University of Arkansas: Gary F. Peters


The Effect of Analyst Conservatism on Meeting the Consensus Via Earnings Management

Little is known about the impact of conservative analysts on firm management. We examine the effect of analyst conservatism on firms meeting the consensus via accrual-based earnings management. We find that firms with a more conservative analyst following engage in less accrual-based earnings management to meet the consensus, with this effect being strongest in poor information environments. We also find that firms followed by more conservative analysts are more likely to meet the consensus forecast via accruals-based earnings management. Collectively, our results suggest that management’s reporting behavior is impacted by the conservatism of the firm’s analyst following.

Sponsors: Oklahoma State University, University of Nebraska-Kearney
PI/PDs: Matt Bjornsen, Bryan Brockbank, Jaclyn Prentice

University of Nebraska-Kearney: Matt Bjornsen


Does Insider Trading Affect Auditors’ Risk Assessments? Evidence from Audit Pricing

Audit regulations require auditors to consider insider trading as part of their risk assessment. Companies file Form 4 with the SEC when insiders trade. We find that the number of requests for Form 4 in the SEC EDGAR online system is positively associated with audit fees. In addition, audit fees are higher among companies with net insider selling, relative to companies with net insider buying. We find that officer net selling drives this relation. These results suggest that auditors’ risk assessments are sensitive to information reflected in insider trading, consistent with regulatory requirements for auditors to consider non-traditional risk characteristics.

Sponsors: Oklahoma State University, Texas Tech

PI/PDs: Jaclyn Prentice

Texas Tech: Sabrina Chi


Goodbye and hello: audit quality, the Big 4, and acquiring consulting practices

The largest accounting firms have been acquiring consulting practices for the last decade. I find that the audit quality of the companies being audited by the accounting firm acquiring a large consulting practice decreases in the year of the acquisition, but this result reverses in the subsequent period. This finding suggests accounting firm management may be distracted in the year of the acquisition and then in the subsequent year audit quality improves as accounting firms are better able to utilize consulting practices’ specialized knowledge.

Sponsor: Oklahoma State University

PI/PD: Jaclyn Prentice


IT Environment Quality and Effectiveness of Controls over the Tax Function and Income Tax Avoidance

If a firm’s information technology (IT) environment is not able to handle tax complexities, then the firm’s financial accounting for income taxes is at risk for errors. We find that having an IT-related material weakness (MW) hinders tax avoidance and is positively associated with a likelihood of having a tax-related MW. We find that firms having a CFO with IT expertise or receiving the Most Admired Knowledge Enterprise award are positively associated with tax avoidance. This suggest that firms with higher quality IT environments are more likely to have effective tax-related controls and more effective tax avoidance efforts.

Sponsors: Oklahoma State University, Texas Tech, University of California – Irvine, University of Arkansas

PI/PDs: Jaclyn Prentice

Texas Tech: Sabrina Chi

University of California – Irvine: Morton Pincus

University of Arkansas: Vernon J. Richardson


Equity Valuation Impacts of Multiemployer Pension Plans

The recognition and disclosure requirements for single-employer pension plans are complex and provide robust information that prior research shows to be value relevant. Alternatively, the recognition and disclosure requirements for multiemployer pension plans are sparse and provide opaque information. We examine whether the information from multiemployer plans is value relevant to investors. Specifically, we examine whether pension expense is associated with abnormal returns. We also examine whether voluntarily paying the assessed withdrawal liability is associated with abnormal returns. We conclude by examining whether abnormal returns of a firm are associated with financial difficulty of firms in the multiemployer plan.   

Sponsor: Oklahoma State University 

PI/PDs: Bryan G. Brockbank, William C. Schwartz, Craig A. Sisneros 


Are Analysts’ Forecast More Informative than a Random Walk Model of Earnings Before Extraordinary Items in the Presence of Special Items?

The purpose of this study is to determine whether analysts’ forecasts outperform a simple random walk model in the presence of special items, both positive and negative.  Prior research shows that special items have market and future earnings implications on their own as well as affect the implications of adjusted (for special items) earnings.  We test this by comparing the strength of association between these constructs and cumulative abnormal returns at earnings announcement dates.

Sponsor: Oklahoma State University

PI/PDs: Bryan Brockbank, William C. Schwartz, Jr. and Craig A. Sisneros


Uncovering Structural Barriers to CPA Exam Success

This proposed study examines the impacts of structural factors on historically underrepresented populations earning their CPA certification. Specifically, we examine the 18-month expiration window for passing scores, and the inability (in many jurisdictions) for candidates to sit for the exam until all the completion of educational requirements. We hypothesize these features are negatively associated with CPA Exam pass rates. Importantly, we predict the negative association is more pronounced in underrepresented populations. Identification of structural impediments will present an opportunity for regulators to consider potential modifications to these rules to provide more equitable opportunities for all CPA Exam candidates.

Sponsor: Oklahoma State University

PI/PDs: George W. Krull, William C. Schwartz, Jr., Angela Wheeler Spencer and Alyssa D. Vowell


The SEC’s New Environmental, Social and Governance Disclosures: Should We or Shouldn’t We be Making ESG Disclosures?

The Securities and Exchange Commission (SEC) will soon issue an updated version and more comprehensive set of proposed corporate climate disclosures. The updates follow a four-month comment letter period. The probable case is that the SEC has enhanced disclosure requirements relative to what was put forth for the comment period. We critically review the new required disclosures and firm implications. Then we ask a simple yet primary question: should we be making ESG disclosures? To answer the question, we discuss the pros and cons of making the disclosures.

Sponsors: Oklahoma State University, University of Mississippi

PI/PDs: William C. Schwartz, Jr., Angela Wheeler Spencer and Thomas Z. Webb

University of Mississippi: Thomas Z. Webb


Bridging the Gap: Responding to a Reduction of Accounting Principles in the Business Core

We use the natural experiment provided by curriculum change to analyze assessments of students’ financial accounting understanding given alternate paths into the first intermediate financial course.  A new “bridge” course was created for accounting majors in response to the reduction in principles of accounting courses from two courses (six semester hours) to one (three semester hours).  As compared to students who had completed the traditional six hours of principles courses, the students who completed this new course sequence scored higher on a financial accounting assessment than their peers who completed a traditional financial accounting and introductory managerial accounting course sequence. 

Sponsor: Oklahoma State University

PI/PDs: Bryan G. Brockbank, Craig A. Sisneros, Angela Wheeler Spencer

Library: W. Adam Stroud


Toward Equitable Remediation: Insights from a Natural Experiment in Financial Accounting

A curriculum change provided a natural experimental setting to examine the efficacy of several methods of alleviating a significant gap in knowledge created by the change. Students were given three options: Self-study and a "gateway" examination; a self-paced adaptive learning software and examination or opting into a "bridge" course combining the adaptive learning software and proctored exams.  Our results suggest the latter method resulted in no significant differences in assessed performance between underrepresented minority students and the broader population.  However, the adaptive learning tool alone resulted in significantly lower scores on assessed performance for underrepresented minority students in this study.

Sponsor: Oklahoma State University

PI/PDs: Bryan G. Brockbank, Craig A. Sisneros, Angela Wheeler Spencer

Library: W. Adam Stroud


Response Coefficients on Earnings, Special Items, and Negative Special Item Components

In this study, we investigate the response coefficients on earnings and special items, with particular attention to the differences in these coefficients in the presence of positive or negative special items and the most common components of negative special items, restructuring charges, asset write-downs, and goodwill impairments. We find that responses to earnings change in the presence of positive or negative special items. Furthermore, we show that responses to restructuring charges, asset write-downs, and goodwill impairments reflect relatively positive, negative, and no news to the market, respectively, as compared to adjusted earnings changes.

Sponsor: Oklahoma State University

PI/PDs: Bryan G. Brockbank, William C. Schwartz, Jr., Craig A. Sisneros


Multiemployer Pension Plans: Disclosure and Recognition Requirements, Recent Legislation, and Firm Responses

This paper describes and compares accounting and disclosure requirements of single-employer versus multiemployer pension plans. The purpose of the paper is to describe implications of multiemployer pension plans including the unique features and risks associated with these plans. Comingling of plan assets and potential withdrawal penalties in multiemployer pension plans create a “last firm standing” moral hazard problem. Significant underfunding of these plans coupled with solvency issues within the Corporation Division of the PBGC responsible for insuring multiemployer plans pose a significant warning sign to accounting professionals and investors, but especially to retirees expecting benefits from these plans upon retirement.

Sponsor: Oklahoma State University

PI/PDs: Bryan G. Brockbank, William C. Schwartz, Jr., Craig A. Sisneros


An Analysis of the Historical Analysis and Future Outlook for Sustainability Reporting

Sustainability reporting holds the promise to significantly improve the decision-relevant information set available to capital providers and other stakeholders of firms and organizations. However, the current set of sustainability information is often unstandardized, lacking comparability, and potentially lacking reliability. In this paper, we explore the history of sustainability reporting, examine the need for reporting about sustainability issues, and examine shortcomings in the current sustainability landscape. Drawing upon the historical and theoretical underpinnings of financial reporting, we conclude with recommendations about the prospects for the accounting profession to provide value-added information related to sustainability issues.

Sponsors: Oklahoma State University, The University of Mississippi

PI/PDs: Angela Wheeler Spencer

University of Mississippi: Zach Webb


The Impact of Managerial Discretion in Revenue Recognition: A Reexamination

Relevance and faithful representation are the fundamental qualitative characteristics of useful financial statement information. Prior research, however, suggests that revenue recognition accounting standards that restrict managerial discretion resulted in improved faithful representation but reduced relevance of revenues. We use the adoption of Accounting Standards Updates 2009-13 and 2009-14 to examine the effects of increased management discretion to accelerate revenue recognition. We find this increased discretion results in an increase in the relevance of reported revenues without reducing faithful representation. These results provide important evidence for assessing whether standards that allow greater discretion in revenue recognition affect the usefulness of revenues. 

Sponsors: Oklahoma State University, University of Tennessee, Brigham Young University

PI/PDs: Michael Stuart

University of Tennessee: Linda Myers, Roy Schmardebeck

Brigham Young University: Timothy Seidel


CEO Partisan Bias and Management Earnings Forecast Bias

Political science research finds individuals exhibit unduly favorable economic expectations when their partisanship aligns with that of the US president. We examine whether this partisan bias is present in management earnings forecasts. We find that firms with CEOs whose partisanship aligns with that of the US president issue more optimistically biased forecasts than firms with CEOs who are not aligned. Our results suggest CEOs fall prey to partisan bias, resulting in suboptimal forecasting behavior. Additionally, we find that investors fail to discount the news in forecasts issued by partisan-aligned CEOs and that post-forecast abnormal returns are lower for these firms.

Sponsors: Oklahoma State University, Queen’s University, Vanderbilt University

PI/PDs: Michael Stuart

Queens University: Jing Wang

Vanderbilt University: Richard Willis


Voluntary Accounting Policy Changes and Earnings Informativeness: The Impact of Recycled Earnings

Although voluntary accounting policy changes (VAPCs) reflect a significant source of financial reporting discretion that enable managers to better present the firm’s financial results as circumstances change, discretion may be used to opportunistically influence current and future earnings. We examine whether VACPs that increase future earnings by re-recording earnings that had been recorded in previous years (recycled earnings VAPCs) affect the informativeness of earnings. We find that earnings informativeness is lower following recycled-earnings VAPCs. We also find that a recently adopted accounting standard (SFAS 154) that eliminated deterrents to recording recycled-earnings VAPCs increased the likelihood of recycled-earnings VAPCs.

Sponsors: Oklahoma State University, Queen’s University, Vanderbilt University

PI/PDs: Michael Stuart

Queens University: Jing Wang

Vanderbilt University: Paul Chaney, Rita Gunn


CEO Political Alignment and Corporate Tax Avoidance

We investigate the impact of CEOs’ sentiment towards the government on firms’ tax avoidance behavior. We proxy for CEOs’ attitudes toward the government using their political alignment with the US president, where a politically aligned CEO is expected to possess more favorable views of the government. We find that effective corporate tax rates are higher for firms with politically aligned CEOs, suggesting that CEOs who have more trust in the current administration engage in less tax avoidance behavior. Our research contributes to literature suggesting that top managers’ experiences, values, and personalities significantly influence a firm’s choices and actions.

Sponsors: Oklahoma State University, Queen’s University, University of Texas at El Paso

PI/PDs: Michael Stuart

Queens University: Jing Wang

University of Texas at El Paso: Yun Ke


The Substance of Enduring Relationships: Interpreting Auditor Tenure

A public company’s auditor must now disclose in the audit report the year it began serving as the company’s auditor. Yet the interpretation of auditor tenure is unclear. We address this gap in understanding by examining what characteristics of an auditor-client relationship affects its persistence. Using survival analysis, we find that enduring relationships are characterized by sustained conservative financial reporting choices, choices evident since the inception of a relationship.

Sponsors: Oklahoma State University, Vanderbilt University

PI/PDs: Michael Stuart

Vanderbilt University: Paul Chaney, Karl Hackenbrack, Catherine Lee


Does How Managers Answer an Analyst’s Questions during an Earnings Call Matter?

Earnings calls are quarterly interactive conference calls in which firm managers present corporate financial information and address questions from call participants. We examine whether, and, if so, in which direction, the tone of managers’ responses to an individual analyst’s questions during an earnings call are associated with the analyst’s subsequent earnings forecast revision for the company on whose call the analyst participated. We are analyzing data to study these relationships, and we believe that our research will be the first archival study to directly study the direct interchanges between analysts and managers on earnings calls.

Sponsors: Oklahoma State University, Vanderbilt University

PI/PDs: Michael Stuart

Vanderbilt University: Craig Lewis, Richard Willis


The Effects of Independent Director Litigation Risk

The unexpected In re Investors Bancorp decision in 2017 by the Delaware Supreme Court lowered the liability threshold only for directors in derivative litigation over their own equity grants, increasing their future litigation risk. Investors and firms reacted to the decision. Overall, results are consistent with director litigation concerns having a significant effect on firm value and firm and director behavior.

Sponsors: Oklahoma State University, University of Iowa, Texas A&M University

PI/PDs: Elizabeth Tori

University of Iowa: Dain C. Donelson

Texas A&M University: Christopher G. Yust


Rival Firms’ Response to a Competitor’s Bankruptcy: Can Press Releases

Facilitate a Competitive Advantage?

I investigate how rival firms alter their voluntary disclosures, specifically their press releases, following a competitor’s bankruptcy. I find that rival firms increase their product-related, but not their earnings-related press releases following a bankruptcy. I also investigate the change in market share for disclosing rivals and find that market share increases, consistent with press releases affecting product market conditions. The results suggest that bankruptcy provides an opportunity for rival firms to gain a competitive advantage through disclosure of product-related information, highlighting a benefit of voluntary disclosure.

Sponsor: Oklahoma State University

PI/PD: Elizabeth Tori


Non-Financial Violations and the Credibility of Voluntary Disclosures: Evidence from Employee Discrimination Violations

We examine whether firms’ non-financial violations lead to a loss of credibility in the capital markets. Specifically, we examine whether investors change the magnitude of their reaction to management earnings forecasts and product press releases following an employee discrimination violation. Despite growing interest in firms’ non-financial performance, prior studies have found no evidence of capital market reputation damage from these failures. This study provides the first evidence of the capital market reputation damage caused by non-financial violations as measured by voluntary disclosure credibility.

Sponsors: Oklahoma State University, University of California - Irvine, London School of Economics

PI/PDs: Elizabeth Tori

University of California - Irvine: Devin Shanthinkumar

London School of Economics: Aneesh Raghunandan


Voluntary Disclosure by Firms with Negative Net Debt

We examine the disclosure practices of negative net debt (NND) firms. Investor demand for information is high for NND firms because their financial resources increase their flexibility to pursue risky projects. In addition, NND firms are subject to less monitoring by creditors. Investor demand for information is especially strong for young NND firms because those firms have yet to establish a record of operating success and reporting reliability. We find that young NND firms provide more frequent sales revenue guidance than other NND firms. In contrast, older, more entrenched NND firms disclose less than PND firms across all guidance measures.

Sponsors: Oklahoma State University, Texas A&M University, University of Connecticut

PI/PDs: Elizabeth Tori

Texas A&M University: Senyo Tse, Sarah Noor

University of Connecticut: Nina Xu


Mutual Fund Disclosure and Board Monitoring

Mutual funds are required to disclose their fund performance and fees relative to their peers and the board is required to review and approve this disclosure. We find that firms truthfully disclose low fees but avoid disclosing high fees. We also examine the effect of director monitoring on the truthfulness of the disclosures. 

Sponsors: Oklahoma State University, Texas A&M University, University of Houston

PI/PDs: Elizabeth Tori

University of Houston: Minjae Koo


Spring Loaded Compensation Awards

The SEC recently announced a crackdown on “spring-loaded” compensation awards to executives and released guidance about how to properly recognize and disclose compensation costs for these types of awards. The academic literature believed that regulatory changes, public scrutiny, and improvements in governance practices in the 2000s lead to a successful elimination of CEO opportunism around option grants. However, there is anecdotal evidence of companies such as Kodak in 2020 issuing compensation awards and then immediately announcing good news. This evidence paired with the SEC’s initiative leads us to explore the prevalence of spring-loaded compensation awards and investors response to regulation attempts.

Sponsors: Oklahoma State University, University of Iowa, Texas A&M University

PI/PDs: Elizabeth Tori

University of Iowa: Dain C. Donelson

Texas A&M University: Christopher G. Yust


Can FinTech Competition Improve Sell-Side Research Quality?

We examine how competition from FinTech influences analyst research quality. We find that firms added to Estimize, a platform that crowdsources short-term earnings forecasts, experience a substantial reduction in consensus bias and a limited increase in consensus accuracy. Long-term forecasts and recommendations remain similarly biased, alleviating the concern that the documented reduction in bias is a response to broad economic forces. At the individual analyst level, bias reduction is more pronounced among close-to-management analysts, and more biased analysts respond by reducing their coverage of Estimize firms. The evidence suggests that competition from Estimize improves research quality by discouraging strategic bias.

Sponsors: Oklahoma State University, University of Kentucky, University of Texas at Dallas

PI/PDs: Michael C. Wolfe

University of Kentucky: Russell Jame

University of Texas at Dallas: Stanimir Markov


Corporate Codes of Ethics and Cash Holdings

We examine the relation between corporate codes of ethics and cash holdings. We find a negative association between code of ethics quality and cash holdings which suggests that managers hold less cash when the firm has a strong code of ethics in place. The effect is greater when agency costs are elevated due to weaker country-level investor protections. We also find that payouts and the marginal value of cash holdings to investors are increasing in code quality. Overall, our results are consistent with ethics codes helping to limit opportunistic behavior from managers when determining the firm’s level of cash holdings.

Sponsors: Oklahoma State University, University of Texas at El Paso, University of Nebraska, Korea University

PI/PDs: Michael C. Wolfe

University of Texas at El Paso: Giorgio Gotti

University of Nebraska: Tony Kang,

Korea University: Yong K. Yoo


Earnings Attributes and Credit Ratings

We investigate the association between different earnings attributes and credit ratings. We examine seven attributes - discretionary accruals, accruals quality, persistence, predictability, smoothness, timeliness, and conservatism. We find that six of the seven attributes are associated with credit ratings and that accrual quality and predictability dominate the other attributes, including accounting conservatism. Additional analysis shows that accruals quality is relatively more important to credit rating agencies than equity investors. This study provides comprehensive evidence on the relative importance of different earnings attributes to credit rating agencies. 

Sponsors: Oklahoma State University, University of Nebraska, Korea University

PI/PDs: Michael C. Wolfe

University of Nebraska: Tony Kang

Korea University: Sang Ho Lee, Yong K. Yoo


Accounting Comparability and the Efficiency of Intra-Industry Information Transfer

Prior studies find that the market is inefficient in its reaction to the earnings announcements of industry peers. This study contributes to the literature by showing that this overreaction is related to differences in accounting comparability. The evidence also suggests that that this association has diminished in recent years, particularly for firms with the highest levels of comparability. Overall, the results suggest that investors are unable to properly adjust for differences in accounting comparability when responding to the information releases of peer firms.

Sponsor: Oklahoma State University

PI/PD: Michael C. Wolfe


Government Debt and Financial Reporting Quality

We investigate the impact of government debt on financial reporting quality in an international setting. Prior studies find evidence that government debt crowds out corporate debt. We find evidence of a positive relationship between government debt and financial reporting quality. The relationship is stronger for firms with a lower quality information environment and less access to equity markets. Our results are consistent with firms responding to the crowding-out effect of government debt by improving the quality of their financial reporting.

Sponsors: Oklahoma State University, University of Nebraska

PI/PDs: Michael C. Wolfe

University of Nebraska: Tony Kang


Broadband and Externally-Financed Firm Growth

We examine the effect of country-level investments in broadband on firms’ use of external finance to fund growth. We find a positive relationship between the number of broadband subscriptions in a country and externally-financed firm growth. We also find evidence that this increased growth is funded primarily through increases in equity. Overall, our results suggest that greater internet access facilitates investors’ access to information and financial markets which allows firms to more easily attract external financing.

Sponsors: Oklahoma State University, University of Nebraska

PI/PDs: Michael C. Wolfe

University of Nebraska: Tony Kang

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