Closing the Loop: Review Process Factors Affecting Audit Staff Follow‐Through

The PCAOB recently expressed concern regarding the sufficiency and effectiveness of review and supervision of audit fieldwork. For the audit review process to succeed as a quality control mechanism, any issues or questions identified by a reviewer must be adequately resolved and documented in the workpapers. If audit review fails to correct for errors/biases in the work of reviewees, there can be serious detrimental effects on audit quality and, in turn, financial statement quality. Our study extends the literature by examining the phase of the review process in which reviewees respond to (or “close”) notes/comments provided by their reviewers. Utilizing an experiment, we find that certain contextual factors (review timeliness and review note frame) influence reviewee follow‐through during this critical phase. Specifically, we find that a delayed review elicits significantly lower effort levels than a timely review. Review note frame (i.e., how the reviewer phrases the rationale given for the underlying directive of a review note) significantly affects reviewee effort and performance when the review is timely. Through mediation analyses, we explore the mediating effect of effort on performance. In addition, we find that reviewer delay leads to greater over‐documentation.     

Optimal Taxation of International Income Flows*

Double taxation of international income flows has been regarded as undesirable and international tax agreements have been negotiated to avoid it. The questions asked are whether double taxation is appropriate and whether cooperation is required to reach the optimal solution. The results are that generally some double taxation is desirable, as long as taxes are applied at the appropriate rates, and that an efficient solution can be attained in the absence of explicit cooperation using a deduction rule, instead of the now commonly used credit rule. A rationale for the current system of tax agreements and their emphasis of the credit rule is discussed.     

THE INDUSTRIAL ORGANIZATION OF THE CHINESE FOOD ECONOMY: SOCIALISTIC OR CAPITALISTIC?

The controversy over the transformation of socialism recently has focused on China. The analysis here uses an industrial ORGANIZATION framework to portray the key features of "Socialism with Chinese Characteristics." The structures of ownership, supply, and demand and the process of price formation are analyzed to explicate the ramifications of the reform process and the changing patterns of government intervention and market forces in the Chinese food economy. An examination of this. fusion reveals a number of implications for international socialism.     

Resident Networks and Corporate Connections: Evidence from World War II Internment Camps

Using customs and port authority data, we show that firms are significantly more likely to trade with countries that have a large resident population near their firm headquarters, and that these connected trades are their most valuable international trades. Using the formation of World War II Japanese internment camps to isolate exogenous shocks to local ethnic populations, we identify a causal link between local networks and firm trade. Firms are also more likely to acquire target firms, and report increased segment sales, in connected countries. Our results point to a surprisingly large role of immigrants as economic conduits for firms.     

Decoding Inside Information

Exploiting the fact that insiders trade for a variety of reasons, we show that there is predictable, identifiable “routine” insider trading that is not informative about firms’ futures. A portfolio strategy that focuses solely on the remaining “opportunistic” traders yields value‐weighted abnormal returns of 82 basis points per month, while abnormal returns associated with routine traders are essentially zero. The most informed opportunistic traders are local, nonexecutive insiders from geographically concentrated, poorly governed firms. Opportunistic traders are significantly more likely to have SEC enforcement action taken against them, and reduce trading following waves of SEC insider trading enforcement.     

Atypical Work and Employment Continuity

Atypical employment arrangements have long been criticized as offering more precarious and unstable work than regular employment. Using data from the Contingent and Alternative Employment Arrangement Supplement and the National Longitudinal Survey of Youth, 1979 Cohort, we determine whether workers who take such jobs rather than regular employment, or the alternative of continued job search, experience greater or lesser employment continuity. Controlling for unobserved individual heterogeneity, the advantage of regular work over atypical work and atypical work over continued joblessness dissipates.     

Labor Force Participation and Monetary Policy in the Wake of the Great Recession

This paper provides compelling evidence that cyclical factors account for the bulk of the post‐2007 decline in the U.S. labor force participation rate (LFPR). We then formulate a stylized New Keynesian model in which the LFPR is practically acyclical during “normal times” but drops markedly following a large and persistent aggregate demand shock. These considerations have potentially crucial implications for the design of monetary policy, especially when interest rate adjustments are constrained by the zero lower bound; specifically, monetary policy can induce a more rapid recovery of the LFPR by allowing the unemployment rate to fall below its natural rate.