Audit Regulation and Cost of Equity Capital: Evidence from the PCAOB's International Inspection Regime*

This study investigates the relation between audit regulation and cost of equity capital. There is scant empirical evidence on this relation because changes in audit regulation are frequently accompanied by other major regulatory changes. We exploit variation in the timing of regulatory changes induced by foreign governments' staggered allowance of PCAOB inspections. Using a difference-in-differences design, we find that foreign SEC registrants with auditors from countries that allow PCAOB inspections enjoy a lower cost of capital, relative to foreign SEC registrants with auditors from countries that prohibit inspections. Furthermore, we find that this cost of capital effect is attenuated for companies with higher-quality governance mechanisms. Finally, we document that inspection access is associated with higher-quality analyst forecasts, which suggests that this change in audit regulation reduces information risk for market participants.     

How do consumers determine the safety of milk in Beijing,China?

In asymmetric information markets, consumers often rely on certain extrinsic indictors to assess the safety of food products. This study analyzes how consumers in Beijing determined milk safety when they purchased liquid milk using survey data conducted just before the melamine-contaminated infant formula event was disclosed. The key finding indicates that milk brand and purchase venue, on average, were ranked as the first two important safety indicators in fluid milk purchases, suggesting that China's milk safety regulators should put more monitoring resources toward supervising the safety of milk produced from branded firms and milk sold in ostensibly trustable stores and not allow exemptions to inspections. Meanwhile, the findings of this study indicate that the existing milk safety certification system in China might be significantly inefficient, suggesting potential waste of regulatory resources.     

环保督察与企业信息披露——来自上市公司的证据

对于经济活动监管的效能取决于监管者能否获得充分的信息。文章研究中央政府的环保督察如何影响企业的负面信息披露。借鉴公司金融领域经典文献，文章利用股价数据构造了上市公司的负面信息披露指标。利用双重差分分析，研究发现受到环保督察影响省份的上市公司相对于未受督察影响的公司显著减少了信息披露，而公司财务指标则不受环保督察的显著影响。与地方政府具有政治联系的公司在督察期间更加显著地减少了信息披露。上述结果表明，环保部门、地方政府、企业和金融市场监管者之间的联动机制是决定监管政策有效性的一个重要维度。     

PCAOB Inspections and the Differential Audit Quality Effect for Big 4 and Non–Big 4 US Auditors*

In this study, we investigate whether the increase in regulatory scrutiny epitomized by the initial PCAOB inspection impacted audit quality differentially for Big 4 and non–Big 4 auditors to better understand the consequences of PCAOB inspections for different audit firm types. Because of competing views on the effect of PCAOB inspections, the relation between PCAOB inspections and the audit quality differential between Big 4 and other auditors is an empirical issue. Empirically, we take the endogenous choice of auditor as a given and utilize a difference‐in‐differences specification that takes into account the staggered timing of the initial PCAOB inspection for different‐sized auditors in the United States. Our results suggest that the initial PCAOB inspection improved audit quality more for Big 4 auditors than for other annually inspected or triennially inspected non–Big 4 auditors. We also examine annually and triennially inspected non–Big 4 auditors separately, and find that the pre‐post Big 4/non–Big 4 differential audit quality effect is more pronounced for the triennially inspected non–Big 4 firms. In the larger context of the highly concentrated US audit market, our findings that PCAOB inspections accentuate the Big 4/non–Big 4 audit quality differential are of potential interest to public company audit clients contemplating an auditor change, investors interested in learning about the consequences of PCAOB inspections, regulators concerned about the Big 4 dominance of the US audit market, and academics investigating audit quality differences.     

中央环保督察和企业进入:来自企业注册数据的证据

本文利用2013-2018年中国所有新建企业的注册信息,构建中国所有城市月度分行业的企业进入数据,并利用双重差分模型识别第一轮中央环保督察如何通过影响新企业进入进而影响中国的产业结构调整。结果表明,环保督察显著减少了民营、高污染行业的企业进入数量。此外,部分生产性服务业企业进入数量也受到环保督察的冲击。在督察组退出督察省份之后,其影响有随时间增强的趋势。环保督察促进了新建企业平均投资规模的增长,在一定程度上提高了行业集中度。考虑到环保督察政策常态化,本文有利于理解中央环保督察政策对产业的影响,并为环保督察政策的制度化和进一步完善提供依据。     

Euro area inflation: aggregation bias and convergence

Monetary policy of the European Monetary Union targets aggregate euro area inflation. Concerns are growing that a focus on aggregate inflation may cause national inflation rates to diverge. While different explanations for diverging aggregate euro area inflation have been brought forward, the very impact of aggregation on divergence has, however, not been studied. We find a striking difference in convergence depending on the level of aggregation. While aggregate national inflation rates are diverging, disaggregate inflation rates are converging. We find that aggregation appears to bias evidence towards non-convergence. Our results are consistent with prominent theoretical and empirical evidence on aggregation bias.     

Volatility dependence across Asia-Pacific onshore and offshore currency forwards markets

This paper estimates switching autoregressive conditional heteroskedasticity (SWARCH) time series models for weekly returns of nine Asian forward exchange rates. We find two regimes with different volatility levels, whereby each regime displays considerable persistence. Our analysis provides evidence that the knock-on effects from China's currency forwards markets upon other Asian countries have been modest, in that little evidence exists for co-dependence of volatility regimes.     

The Fischer Black Hypothesis: Some Time-Series Evidence

We estimate an ARCH-M model to analyze the relationship between the conditional standard deviation of real gross national product (GNP) and its growth rate for the period 1871-1993. We find that variability significantly increases output growth rates. In addition, impulse response functions show that the effect of variability on growth rates is dynamic. These results provide evidence in favor of Black's (1987) business cycle hypothesis.     

Does Public Country-by-Country Reporting Deter Tax Avoidance and Income Shifting? Evidence from the European Banking Industry*

In this study, we examine the effect of increased tax transparency on the tax planning behavior of European banks. In 2014, the European Union introduced public country-by-country reporting requirements to the banking industry. Treating this new requirement as an exogenous shock, we find limited evidence consistent with a decline in income shifting by the banks' financial affiliates in the post-adoption period (starting from 2015). We do not, however, find robust evidence of a significant change in the consolidated book effective tax rates among the affected banks. Our findings suggest that increased transparency from public country-by-country reporting can deter tax-motivated income shifting but that it did not appear to materially influence the banks' overall tax avoidance. Our findings have policy implications for the ongoing debate between the European Parliament, the Organisation for Economic Co-operation and Development, and accounting standard-setting bodies on whether to require multinationals to publish country-by-country reports.     

Gross worker flows and unemployment dynamics in Japan

This paper studies the dynamics of worker flows in Japan between 1980 and 2009. We construct gross worker flows data using the monthly Labor Force Survey. Our data enables us to examine the size and cyclical patterns of the flows and transition rates between employment, unemployment, and not being-in-the labor force. We find that the cyclical pattern of worker flows is similar to that found in other countries; however, worker flows in Japan are generally smaller than those in the US and European countries. We also decompose changes in unemployment into contributions from unemployment inflow and outflow rates. We find that both inflow and outflow rates significantly affect variations in unemployment.     

Job Creation and Destruction in South Africa

Analysts of the South African labour market have mainly used household surveys to analyse the labour market. It has been more difficult to explore the labour demand of firms, as a result of limited data availability. We use the Quarterly Employment Statistics survey, an enterprise survey conducted by Statistics South Africa, to explore how South African firms create and destroy jobs, thereby shedding light on many of the policy questions that are relevant in a high unemployment society like South Africa. We find that job creation and destruction rates are similar to those found in Organisation for Economic Co‐operation and Development countries. There is little evidence that labour legislation creates rigidities that prevent firms from hiring or firing workers. We also find that larger firms are better net creators of jobs than small firms and that net job creation rates are negative in manufacturing. Our research has important policy implications – particularly for the South African National Planning Commission's 2030 plan, in which new jobs are envisaged to come mainly from small‐ and medium‐sized firms. Our research suggests that this scenario is not likely without changes to policy or legislation.     

Currency crisis and contagion: evidence from exchange rates and sectoral stock indices of the Philippines and Thailand

This paper analyzes empirically the recent Asian financial crisis by using high-frequency data of exchange rates and stock indices of the Philippines and Thailand. With time-series techniques, this study confirms that benchmark stock indices often fail to provide valuable insights into currency crises, but there is evidence that developments in some sectoral indices—including those of banking and financial sectors—seem to have caused upward pressure on exchange rates. Our evidence therefore confirms the importance of financial markets as a transmission channel during the currency crisis period.     

The Contributions of Early Health-Insurance Programs to Mortality Declines in Pre-World War I Europe: Evidence from Fixed-Effects Models

The causes of the historical decline in European mortality rates are still vigorously debated. Our contribution is to examine a previously neglected aspect, the role of the early government-sponsored health-insurance programs in widening access to medical care. We construct and test fixed-effect models of mortality rates, using data for a panel of five European countries over the 1878–1913 period. After diagnostic tests of our results, we conclude that the expanding population coverage of these health-insurance programs contributed significantly to the observed declines in mortality.     

Cambium non est mutuum: exchange and interest rates in medieval Europe

A major gap in our understanding of the medieval economy concerns interest rates, especially relating to commercial credit. Although direct evidence about interest rates is scattered and anecdotal, there is much more surviving information about exchange rates. Since both contemporaries and historians have suggested that exchange and rechange transactions could be used to disguise the charging of interest in order to circumvent the usury prohibition, it should be possible to back out implied interest rates from exchange rates. The analysis presented in this article is based on a new dataset of medieval exchange rates collected from commercial correspondence in the archive of Francesco di Marco Datini of Prato, c. 1383–1411. It demonstrates that the time value of money was consistently incorporated into market exchange rates. Moreover, these implicit interest rates are broadly comparable to those received from other types of commercial loan and investment. Although on average profitable, the return on any individual exchange and rechange transaction did involve a degree of uncertainty that may have justified their non‐usurious nature. However, there were also practical reasons why medieval merchants may have used foreign exchange transactions as a means of extending credit.     

When is Lift-Off? Evaluating Forward Guidance from the Shadow

We examine the record of the CD Howe’s shadow Monetary Policy Council (SMPC) in Canada. We report a considerable diversity of opinion about the recommended future path of interest rates inside the SMPC. During the period of Bank of Canada forward guidance, market determined forward rates diverge considerably from the recommendations implied by the SMPC. Nevertheless, there is little evidence that the Bank of Canada and the SMPC coordinate their future views about the interest rate path. Finally, changes in views about future changes in policy rates for horizons beyond the next two interest rate decisions are difficult to explain. Our findings imply that there remain challenges in understanding the evolution of future interest rate paths over time. We conclude with some policy implications.     

Impact of European food safety border inspections on agri-food exports: Evidence from Chinese firms

The cost of complying with a sanitary standard is certain. However, such measure introduces uncertainty for exporters in relation to border rejections. Shipments may fail to pass inspections and may be refused entry into the importing country. This risk is shaped by variance in the quality of the exported product, and the stringency of the border controls. We examine how the risk of rejection at European borders on safety grounds is affecting Chinese agri-food exporters. We combine information from the European Rapid Alert System for Food and Feed with Chinese firm-level export data by product, destination and year for the period 2000–2011. Information externalities and reputation effects are important. Border rejections amplify the turnover among firms at the extensive margin of trade. This risk is curbing small exporters and resulting in a concentration of Chinese exports among big exporters.     

Debt Covenant Violations,Firm Financial Distress,and Auditor Actions

We conduct a comprehensive study on the associations between debt covenant violations (“violations”) and auditor actions for financially distressed and nondistressed firms. Our study is motivated by a lack of research on the consequences of violations resulting from auditors' actions. We find that firms with violations have significantly higher audit fees, a greater likelihood of receiving a going‐concern opinion, and a greater likelihood of experiencing an auditor resignation. Importantly, the positive associations hold for all types of firms, including financially nondistressed firms. In fact, we find that, after controlling for other financial information, the relation between violations and an increased likelihood of a going‐concern opinion is stronger for nondistressed versus distressed firms. Our evidence is consistent with belief‐revision research in auditing that finds auditors react more strongly to information that is inconsistent with their prior beliefs. This study provides further evidence on the indirect yet significant consequences of covenant violations on firms resulting from auditor actions.     

Real Exchange Rate Dynamics in the Asian Economies: Can Regime Shifts Explain Purchasing Power Parity Puzzles?

Abstract

We show that the strong version of the purchasing power parity (PPP) hypothesis holds in most of the US dollar real exchange rates using cointegration method that accounts for breaks in the models. The break dates in seven of the Asian currencies coincide with the two rounds of currency depreciation recorded during the 1997–1998 financial crises. We obtain a mean half-life estimate of about 10 months for PPP to converge to its long-run equilibrium level. Our confidence intervals based on persistence profile approach for the half-lives is much narrower than previous evidence might indicate. Taken together, these results show that mean reversion is stronger than commonly thought.     

Flood Fatalities in the United States: The Roles of Socioeconomic Factors and the National Flood Insurance Program

Flooding is the most frequent disaster type among all severe weather events in the United States. Over the 20‐year period from 1996 to 2015, a total of 107,743 floods resulted in 1563 fatalities and over $167 billion in damages. Climate models suggest that the risk of major flooding will increase in the coming years. In this article, we provide new analysis of the life‐saving role of the National Flood Insurance Program (NFIP) using county‐level data for the United States over the years 1996–2015. The integrated view of the physical, social, economic, and political elements of disaster vulnerability guides the empirical analysis. Our analysis indicates that people most affected by floods are those who have weaker economic and social bases; lower education levels and poor housing quality increase flood vulnerability. We also find that local government spending on public safety and welfare significantly reduces overall flood vulnerability. Importantly, our estimates present new evidence that ex ante floodplain management and mitigation efforts required for participation in the NFIP have played a vital role in reducing flood‐related fatalities.