Top executive gender diversity and financial reporting quality

We examine whether gender diversity of chief executive and chief financial officers (CEOs and CFOs) is associated with financial reporting quality. The CEOs and CFOs of publicly traded companies are both required to certify the appropriateness of their financial statements and annual disclosures. We argue that gender diverse dyads (groups) of executives can bring different perspectives and professional skepticism to financial reporting. Using a sample of different CEO/CFO gender dyads during 2006–2019, we postulate and find evidence of higher accruals quality among firms led by gender-diverse dyads compared to accruals quality reported by firms led by all-male CEO/CFO pairs. Additional analyses reveal that the auditors of firms with gender-diverse executive dyads issue audit reports later, charge higher audit fees, and are more likely to be one of the Big 4 firms. These findings support the view that top executive gender diversity enhances financial reporting quality, which has important implications for corporate governance mechanisms.     

The Influence of Country‐ and Firm‐level Governance on Financial Reporting Quality: Revisiting the Evidence

This paper examines how firm‐level governance and country‐level governance interplay in shaping financial reporting quality. Using IFRS adoption as a source of variation in firms’ reporting discretion, and a large sample of European firms that mandatorily switch to the new set of standards, we find that in countries with low enforcement and weak oversight over financial reporting, only firms with strong board‐level corporate governance mechanisms experience an increase in financial reporting quality, consistent with firm‐ and country‐level governance mechanisms being substitutes. However, in countries with high enforcement and strict oversight over financial reporting, firms with either strong or weak board‐level governance mechanisms experience an increase in financial reporting quality, even if the increase is larger for the former group. Overall, our findings indicate that in the debate about the effects of governance on the quality of financial reporting, it is important to consider both country‐ and firm‐level corporate governance mechanisms.     

Managerial academic experience,external monitoring and financial reporting quality

This study examines the effect of managerial academic experience on firms’ financial reporting quality. Using data from China, we find that firms with top managers possessing academic experience exhibit lower levels of both accrual and real earnings management, along with a lower probability of future restatements. This effect is more pronounced for firms with inefficient external monitoring, suggesting that the higher financial reporting quality is mainly explained by the managers’ intrinsic motivation to report truthfully. The results hold when we use firm fixed‐effect regressions, instrumental variable two‐stage regressions, and a propensity score matching (PSM) approach to mitigate the omitted variable and endogeneity concerns. Our study suggests that academic experience can serve as a source of valuable expertise for corporate executives.     

Financial Reporting Quality and Wage Differentials: Evidence from Worker-Level Data

We examine whether financial reporting quality affects worker wages using employer-employee matched data in the United States. We find that low financial reporting quality is associated with a compensating wage differential—that is, a risk premium—using three distinct approaches while controlling for worker characteristics by (1) regressing wages on firm-year–level and firm-level reporting quality, (2) documenting wage changes when workers switch firms, and (3) estimating a structural approach that separates reporting quality from performance-related volatility. We find evidence consistent with two channels: performance pay and turnover risk, where workers bear risks from noise in performance measurement and unemployment, respectively. To mitigate endogeneity concerns, we show that—after the accounting scandals in 2002 and after the announcements of an internal control weakness (ICW)—former Arthur Andersen clients and ICW firms pay wage premiums to employees, with magnitudes between 0.9% and 2.8% of annual wages.     

The Timeliness of Restatement Disclosures and Financial Reporting Credibility

This study investigates whether prompt discovery and disclosure of earnings restatements is associated with greater post‐restatement financial reporting credibility. We measure the timeliness of restatement detection by the length of time between the end of the misstated period and the subsequent restatement announcement. We document that shorter detection periods are significantly associated with high‐quality corporate governance characteristics and executive and/or auditor turnover, but not with characteristics of restatements. We also find that firms with shorter detection periods exhibit a more moderate decline in the information content of earnings following restatement announcements relative to firms with longer detection periods, and that detection period length has an incremental effect on the information content of earnings relative to executive and/or auditor turnover alone. In addition, we find that restatement disclosures are more timely following the implementation of the SOX‐era reforms, and that only firms with shorter detection periods experience more moderate post‐restatement declines in the information content of earnings following the implementation of the SOX‐era reforms. The results from this study suggest that the timeliness of restatement detection and disclosure is associated with greater financial reporting credibility following restatements.     

Top executives’ early-life experience and financial disclosure quality: impact from the Great Chinese Famine

This study investigates the impact of top executives’ Great Chinese Famine experience on firm financial disclosure quality. We find firms led by top executives who experienced the great famine in early life are less likely to conduct fraudulent financial reporting. The famine effect is more pronounced in state-owned enterprises (SOEs), smaller-cap, lower-profitability level firms and firms with weaker external monitoring. Further evidence suggests that top executives with great famine experience show greater tendency to implement secured debt structure, effective internal control and spend less on entertainment and travel costs, which in turn reduce the likelihood of fraudulent financial reporting.     

Financial reporting quality and corporate innovation

This paper examines the relationship of financial reporting to corporate innovation. Given the importance of a high‐quality information system and coordination to innovation, I predict a positive association between financial reporting quality and future innovation. My empirical evidence is consistent with this prediction. I also find some evidence that the positive association between financial reporting quality and innovation is more pronounced for firms with intensive internal research and development activities and for firms in competitive industries. The main findings are robust to using an instrumental variable approach as well as controlling for alternative explanations. I find that firms with high‐quality financial reporting transform investment inputs into greater innovation outcomes and firm value. This study provides additional insight into the role of financial reporting quality and its relation to the real economy.     

Top management turnover and firm default risk: Evidence from the Chinese securities market

China has moved rapidly from a socialist planned economy to a market economy. As a result, many enterprises in China are seeking talented top management to increase their performance and decrease their default risk. Studies abound regarding top management turnover and its relationship with firm performance, however, few studies have connected top management turnover with firm default risk. In China, a market with extensive financial fraud, firm default risk is an important factor and thus we explore this relationship in the Chinese securities market. Our results indicate that firms with higher default risk are more likely to change their top management in the next financial reporting period. In addition, following changes in top management, such firms default less than other companies.     

Loan collateral and financial reporting conservatism: Chinese evidence

We examine the relation between the use of collateral and financial reporting conservatism for a sample of Chinese firms. In the absence of flexibility in risk pricing through interest rates and strong contract enforcement in China, we find that lenders reduce collateral requirements from more conservative borrowers and that this negative relation is significantly moderated by borrowers’ poor credit quality and low asset tangibility. Our finding that conservatism can result in a tangible benefit in the form of lower collateral requirements indicates that lenders value financial reporting conservatism. However, the benefit from financial reporting conservatism is muted as lenders become more concerned about borrowers’ default risk or ability to pledge tangible assets as collateral against loans.     

Tick Size and Financial Reporting Quality in Small-Cap Firms: Evidence from a Natural Experiment

Using a natural experiment (the SEC's 2016 Tick Size Pilot Program), we investigate the effects of an increase in tick size on financial reporting quality. The tick size pilot program reduces algorithmic trading (AT) and increases fundamental investors’ information acquisition and trading activities. This in turn increases the scrutiny of managers’ financial reporting choices and reduces their incentives to engage in misreporting. Using a difference-in-differences research design, we find a significant decrease in the magnitude of discretionary accruals, a significant reduction in the likelihood of just meeting or beating analysts’ forecasts, and a marginally significant decrease in restatements for the treated firms in the pilot program. Furthermore, we find that the change in financial reporting quality is concentrated in treated firms experiencing decreases in AT and increases in information acquisition activities. We also find that the mispricing of accruals is significantly lower for treated firms. Taken together, our results suggest that an increase in tick size has a causal effect on firms’ financial reporting quality.     

Tax enforcement and corporate financial irregularities: Evidence from China

This paper examines whether and how tax enforcement affects corporate financial irregularities in China, utilizing the merger of the State Tax Bureau (STB) and Local Tax Bureaus (LTB) in 2018 as a quasi-natural experiment. Our findings show that stricter tax enforcement significantly reduces corporate financial irregularities, especially for firms with lower tax compliance, poorer internal governance, laxer external supervision, and lower economic status. Furthermore, the mechanism tests demonstrate that stricter tax enforcement forces firms to reduce tax avoidance and tax reporting irregularities. These findings are consistent with the effective supervision channel. Our findings suggest that stricter tax enforcement can improve the quality of corporate information disclosure, and providing useful insights for alleviating information asymmetry and improving information environment in the Chinese capital market.     

Overlapping Membership on Audit and Compensation Committees and Financial Reporting Quality

This paper examines whether the audit committee members of a board improve financial reporting quality if they are also on their organisation's compensation committee. Audit committees are responsible for overseeing the financial reporting process of organisations and have been urged to broaden their understanding of business risk and of the incentives provided by their firms’ executive compensation structures. Acknowledging the interrelationships among executive compensation, risk‐taking and financial reporting quality, members of audit and compensation committees have been advocating more information sharing between the two committees. Using archival data from a sample of Australian Stock Exchange listed companies, and discretionary accruals as a proxy for financial reporting quality, this study finds that firms with overlapping committees have better quality financial reporting than those without such an overlap. Our evidence for this is stronger in cases where managers tend to manage earnings upwards in order to meet or beat earnings benchmarks. We also find that the beneficial effect of the existence of overlapping committees is adversely affected by the equity holdings of directors with overlapping memberships.     

Are Entrenched Managers’ Accounting Choices More Predictive of Future Cash Flows?

We examine the role manager entrenchment has on firms’ financial reporting quality. More specifically, we test whether entrenched managers’ reported accruals deviate from industry norms and whether entrenched managers’ abnormal accruals are more (or less) predictive of future cash flows. Consistent with implications from prior research, we find that firms with entrenched managers generally report lower levels of abnormal accruals (in an absolute sense), but the abnormal accruals utilized by entrenched managers are more predictive of future cash flows. Contrary to a more traditional view of manager entrenchment, our evidence suggests that entrenched managers report higher quality abnormal accruals. While prior research provides evidence that manager entrenchment is associated with negative economic outcomes, we argue that attempts to limit entrenchment are unlikely to improve financial reporting quality and may actually lower quality. Future corporate governance research should consider not only the level but also the quality of the association between accounting choices and manager entrenchment.     

Trust and Financial Reporting Quality

Using unique survey data from Great Place to Work® Institute, we investigate the association of intraorganizational trust (i.e., employees’ trust in management) with three aspects of financial reporting: accruals quality, misstatements, and internal control quality. We find that trust is associated with better accrual quality, lower likelihood of financial statement misstatements, and lower likelihood of internal control material weakness disclosures. However, these effects are not uniform across all companies. Consistent with trust improving financial reporting quality through improved information production and information sharing, we find that trust is significantly associated with financial reporting quality in relatively decentralized firms, but not in firms that are relatively centralized. Our results are robust to several analyses that attempt to control for potential alternative explanations.     

IFRS adoption,reporting incentives and financial reporting quality in private firms

This study examines financial reporting quality (FRQ) effects around voluntary International Financial Reporting Standards (IFRS) adoptions by German private firms across two important dimensions, earnings quality and disclosure practices. To capture differences in the motivations for IFRS adoptions, we identify four different types of IFRS adopting firms based on a comprehensive set of firm characteristics. We observe earnings quality improvements around IFRS adoptions primarily for one type of firm, which is young, fast growing and seeking access to public equity markets. Using a matched sample of private German GAAP and IFRS reporting firms, we find some evidence suggesting that IFRS also contribute to higher earnings quality. Recognizing that our earnings quality metrics are only incomplete measures of FRQ, we also compare the disclosure practices of IFRS and German GAAP firms. We find that all IFRS firm types disclose significantly more information in their financial reports and show a higher propensity to publish their financial reports voluntarily on the corporate website. Our findings indicate that failure to identify earnings quality changes around IFRS adoption cannot be automatically interpreted as IFRS adoption having no effect on the FRQ of (private) firms. Collectively, our results suggest that both incentives and accounting standards shape private firms’ FRQ.     

Beyond Tax Avoidance: Offshore Firms’ Institutional Environment and Financial Reporting Quality*

We explore how firms’ operations in Offshore Financial Centers (OFCs) through subsidiaries or affiliates affect the quality of financial reporting. Using a unique and large sample of firms that have headquarters in the 15 countries with the strictest legal regimes and have subsidiaries or affiliates in OFCs, we find that such firms exhibit lower financial reporting quality than comparable firms without OFC operations. We also find that as OFC characteristics become more prevalent, firms are more likely to engage in both accrual‐based and real earnings management. More importantly, after disentangling OFC characteristics into the opportunity for tax avoidance, regulation arbitrage and secrecy policies, we find that beyond tax avoidance, regulation arbitrage and the secrecy policies of OFCs significantly affect financial reporting quality. The causal effect of OFC operations is supported by the analysis of financial reporting quality when firms set up OFC operations. Our findings are robust to various additional tests addressing potential endogeneity issues. We conclude that the assessment of a firm's institutional environment must encompass the registration status of its subsidiaries or affiliates as well as its own.     

Limits of private firms’ disclosure avoidance – Evidence from enforcing financial statements publication in Germany

In 2006 Germany strengthened the enforcement of mandatory financial statement disclosure for private firms. Since the law enforced disclosure but not its quality, we examine whether firms forced to disclose reduced financial reporting quality, for example to prevent competitors and other parties from inferring profitability, liquidity and other negotiation relevant information in time. We use proprietary data by the Deutsche Bundesbank, which covers information about firms that did not disclose financial statements before the law. Analyses based on differences-in-differences, regression discontinuity and PSM extend prior studies and suggest that firms did not significantly reduce financial reporting quality. These findings are potentially relevant for regulators as they document limits of private firms’ disclosure avoidance and emphasize the benefits of disclosure.     

Private company finance and financial reporting

This article provides a comprehensive assessment of private firms’ financing sources and their relation with financial reporting practices. We consider debt financing (bank financing, leasing, and government guarantees), equity financing (family ownership, government ownership, employee ownership, and private-equity financing), and trade credit (supplier credit and factoring). Our primary conclusions are that there is significant heterogeneity in the way in which private companies are financed that is influenced by their specific business contexts, and that this heterogeneity in financing is associated with differential demand for and supply of financial reporting.     

A Comparison of Between‐Country Measures of Legal Setting and Enforcement of Accounting Standards

Academics and practitioners agree that the enforcement of accounting standards has an important role in promoting high quality financial reporting and favourable capital market outcomes. We test three new enforcement proxies from Brown, Preiato and Tarca (2014) that focus specifically on auditing and accounting enforcement. We examine firms’ information environments, represented by the error in analysts’ consensus forecasts and the extent of disagreement among analysts, as indicated by forecast dispersion. For financial years ending from 2003 to 2009, we construct a sample of 357,034 firm–month observations on the errors and dispersion of analysts’ earnings forecasts for 10,769 firms domiciled in those 39 countries. We find that higher scores for all three proxies are associated with lower error and less disagreement in forecasts. In addition, we find that the indices have significant explanatory power when previously used enforcement proxies (such as Kaufmann et al.'s 2010 rule of law measure) are included in the regression models, pointing to the importance of specific measures of accounting enforcement. We conclude that accounting enforcement may be more important in securing favourable economic outcomes than has been previously realised, because researchers commonly have used noisier, more general legal proxies for enforcement that understate its marginal effects.     

Downlistings in European exchange-regulated markets: The role of enforcement

This paper investigates the potential role of enforcement action in shaping firms’ decisions to opt out of highly regulated stock market regimes. Our analyses are set in the German environment, where firms may choose to “downlist” from an EU-regulated to an exchange-regulated stock market, thereby circumvent mandatory preparation of IFRS financial statements and enforcement oversight. We find that downlisting firms are more likely to have been censured by enforcement bodies for erroneous accounting, compared to a sample of control firms, and that this association is more pronounced for severe or controversial errors. This finding is consistent with enforcement actions creating costs for firms and managers. Event study analyses show that market price reactions to firms’ downlisting announcements are negative in about one out of two cases. This suggests that in quite a few cases, managers, by downlisting, may be protecting private benefits rather than the interests of equity holders. Additional analyses reveals that about half of our sample firms continued to prepare IFRS financial statements on a voluntary basis after the downlisting. Taken together, our results contribute to the literature on the economic consequences of the EU’s IAS and enforcement regulation by suggesting that some firms adopt avoidance strategies to opt out of enforcement supervision.