Do Accounting Firm Consulting Revenues Affect Audit Quality? Evidence from the Pre‐ and Post‐SOX Eras

In recent years, public accounting firms have experienced a steady increase in the proportion of their revenues generated from consulting services. Although growth in consulting revenue following the Sarbanes‐Oxley Act (SOX) has been generated primarily from services provided to nonaudit clients, regulators have expressed concerns about the potential implications of this increase for audit quality. In contrast, accounting firms assert that the expertise developed by their consulting professionals helps them to provide better quality audits. We examine the relation between the proportion of accounting firm consulting revenue to total revenue and audit quality and investor perceptions of audit quality. Because SOX drastically altered the source of consulting revenues for public accounting firms, we also separately examine these relations in the pre‐ and post‐SOX eras. We find evidence suggesting that before SOX, higher proportions of audit firm consulting revenues negatively impacted both audit quality and investor perceptions of audit quality. However, we do not find a statistically significant association between audit firm consulting revenues and either audit quality or investor perceptions of audit quality following SOX. Our analyses suggest that even if these relations exist following SOX, the potential economic magnitude of the effect is small.     

Do Analysts' Cash Flow Forecasts Encourage Managers to Improve the Firm's Cash Flows? Evidence from Tax Planning

Recent research finds that analysts' cash flow forecasts have meaningful financial reporting ramifications, but, to date, the identified effects are unlikely to yield meaningful cash flow benefits. This study examines whether analysts' cash flow forecasts encourage managers to enhance the firm's cash flow position through tax avoidance activities. We evaluate the change in cash tax avoidance after analysts begin issuing cash flow forecasts relative to a propensity score matched control sample of firms without cash flow forecasts. Consistent with analysts' cash flow forecasts encouraging tax avoidance that enhances the firm's cash flow health, we find a negative association between cash tax payments and analysts' cash flow coverage. Additional analysis suggests this association is driven primarily by strategies to permanently avoid rather than to temporarily defer tax payments and that increased cash tax avoidance activity represents a nontrivial component of the overall increase in reported operating cash flows after the initiation of analysts' cash flow coverage.     

Does China Transfer Productivity Enhancing Technology to Sub‐Saharan Africa? Evidence from Manufacturing Firms*

Abstract: This paper considers whether trade between China and sub‐Saharan Africa results in productivity‐enhancing technology transfers to sub‐Saharan African manufacturing firms. As trade flows between countries potentially results in interactions that lead to technological improvements in the production of goods and services, we parameterize the level of total factor productivity for African manufacturing firms as a function of foreign direct investment flow, and for the country in which it operates, trade openness with China, and its interaction with foreign direct investment. With micro‐level data on manufacturing firms in five sub‐Saharan African countries, we estimate the parameters of firm‐level production functions between 1992 and 2004. Our parameter estimates reveal that across the firms and countries in our sample, there is no relationship between productivity‐enhancing foreign direct investment and trade with China. In addition, increasing trade openness with China has no effect on the growth rate of total factor productivity. To the extent that total factor productivity and its growth is a crucial determinant of economic growth and living standards in the long run, our results suggest that increasing trade openness with China is not a long‐run source of higher living standards for sub‐Saharan Africa.     

Do Foreign Firms Transfer Gender Norms in the Labour Market? Evidence from Sub-Saharan Africa

Closing the gender gaps in economic opportunities is crucial for boosting economic growth and the empowerment of women. In this paper, we study how foreign firms contribute in reducing gender disparities in the labour market by transferring the gender norms of their country of origin to the affiliates in the host countries. We use cross sectional data on foreign firms located in 19 Sub Saharan Africa countries in 2010 by UNIDO. We find that firms coming from more gender equal countries employ more female workers in their affiliates. This effect is more relevant for the highly skilled female workers.     

Profit Leak? Pre‐Release File Sharing and the Music Industry

Using data from an exclusive file‐sharing Web site that allows users to share music files using the BitTorrent protocol, I exploit exogenous variation in the availability of sound recordings in file‐sharing networks to isolate the causal effect of file sharing of an album on its sales. Using within‐album variation in illegal downloads and sales, I find that the effect is essentially zero: The elasticity of sales with respect to illegal downloads is one‐tenth of one percentage point. However, the finding that file sharing is not harmful to individual artists is not inconsistent with the well‐documented fact that file sharing is harmful to the music industry (the fallacy of composition). More important, I find that file sharing benefits more established and popular artists who are signed to major labels, which is consistent with recent industry trends.     

Why Do Property‐Liability Insurers Destroy Liquidity? Evidence from South Africa

This paper examines liquidity creation behaviour in the property‐liability insurance market in South Africa. Using annual data on 76 insurers from 2007 to 2014, the paper employs the three‐stage approach to estimate liquidity creation. The results suggest that property‐liability insurers are characterised by liquidity destruction by transforming liquid assets in cash and investable securities into illiquid reserves liabilities. The findings also indicate that the R1.32 billion in liquid assets were transformed into illiquid reserves liabilities in 2014, an increase from the R700 million liquidity de‐created in 2007. The increases were mainly driven by large insurers which accounted for about 70% liquidity de‐created. The results of panel regression analysis provide evidence in support of the “risk‐absorption” hypothesis which argues that high levels of capital increases liquidity creation. In addition, size, leverage and reinsurance were also identified as the firm‐level factors that explain liquidity creation. The policy implications of the findings are discussed.     

How Do Retailers Price Beer During Periods of Peak Demand? Evidence from Game Weeks of the German Bundesliga

This article considers retail beer pricing during game weeks of the German Bundesliga. German consumers exhibit a high degree of brand‐loyalty in their preference for regionally crafted beers, and we exploit the regional brand‐loyalty of German beer consumers to identify brand‐level demand shocks for beers preferred by the home team's fans and visiting team's fans during Bundesliga game weeks. We find retailer price adjustments at the category level mask a considerably more nuanced pricing behavior at the brand level. Retailers in regions hosting Bundesliga games significantly increase beer prices at the category level during game weeks; however, at the brand level, we find retailers selectively discount prices on the home team's sponsored beers and systematically raise prices on the visiting team's sponsored beers. Our findings are consistent with a “tourist–natives” model of retail pricing during periods of increased demand in the German beer market.     

Pre‐colonial culture,post‐colonial economic success? The Tswana and the African economic miracle

Cultural explanations of economic phenomena have recently enjoyed a renaissance among economists. This article provides further evidence for the salience of culture through an in‐depth case study of one of the fastest‐growing economies in the world during the last 50 years—Botswana. The unique culture that developed among the Tswana before and during the early days of colonialism, which shared many features with those of western nation‐states, appears to have contributed significantly to the factors widely seen as determinants of Botswana's post‐colonial economic success: state legitimacy, good governance and democracy, commercial traditions, well‐established property rights, and inter‐ethnic unity. Neighbouring Southern African cultures typically did not exhibit these traits.     

When Do Analysts Adjust for Biases in Management Guidance? Effects of Guidance Track Record and Analysts’ Incentives

Prior research indicates that analysts do not fully adjust for the general downward bias in earnings guidance issued by management. We report the results of two experiments designed to investigate how guidance track record and analysts’ incentives jointly explain the extent to which analysts adjust for guidance bias. Our results suggest that analysts with accuracy incentives adjust for management’s track record of downwardly biased guidance when the bias is relatively small (one cent), but those with relationship incentives do not. Furthermore, the difference in adjustment is larger when the bias track record is inconsistent than when it is consistent. Also, when guidance bias is larger (two cents) relative to smaller (one cent), analysts with relationship incentives partially adjust, as they appear to strike a balance between accuracy and their desire to please management. These findings hold implications for investors, regulators, and the interpretation of prior research.     

Does Terrorism Affect the Stock‐Bond Covariance? Evidence from European Countries

Using daily stock and bond returns data from four European countries—France, Germany, Spain, and Great Britain—that have been the victims of significant terrorist activity, this study addresses the issue of whether transnational and/or domestic terrorist attacks have affected in any significant manner the time‐varying stock–bond covariance, their returns, and their variances. Stock and bond markets can be influenced and determined not only by the usual array of macroeconomic factors but also by security shocks, such as a terrorist incident, that have the potential to affect investors' sentiment and portfolio allocation decisions. The issue at hand is addressed using a VAR(p)‐GARCH(1,1)‐in‐mean model, and the results reported herein indicate that terrorist attacks trigger a flight‐to‐safety effect primarily in France and Germany and to a smaller degree in Great Britain and Spain.     

Does Information Asymmetry Matter to Equity Pricing? Evidence from Firms’ Geographic Location*

The scarcity of suitable proxies for asymmetric information has impeded empirical research from providing reliable evidence on whether information risk shapes equity pricing. In reexamining this unresolved question, we rely on firms’ geographic distance from financial centers to gauge information asymmetry. We provide strong, robust evidence supporting the prediction that equity financing is cheaper for firms nearer central locations, implying that investors rationally require more compensation when information asymmetry is worse. The equity pricing role of geographic proximity is economically large, with our coefficient estimates translating into firms located within 100 kilometers of the city center of the nearest of six major financial centers, or in their metropolitan statistical areas, enjoying equity financing costs that are seven basis points lower. Our inferences are insensitive to measuring both the cost of equity capital and distance in several ways, controlling for corporate governance quality, and addressing endogeneity. Collectively, our analysis suggests that investors discount the price that they pay for their securities to reflect the greater information asymmetry that ensues when firms are far from major financial centers.     

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.     

Do men and women discriminate against women for the same reason? Evidence from China

In this study, we examine whether men and women form gender discrimination for the same reason. To do that, we build an experimental Chinese labor market in which employers evaluate the productivity of workers who perform a real-effort task. Before evaluation, the employer observes the worker’s personal and group information. The personal information contains gender identity and a signal of productivity. The group information reveals the productivity distributions of some other male and female workers who do not differ in average productivity. However, it shows more male workers at the very top productivity levels and more female workers at the very bottom productivity levels in one treatment than in the other. According to the belief-based theory, there will be a greater degree of discrimination against female workers in the former. We find that, however, only male employers’ evaluations are well predicted by this approach. Female employers behave oppositely: their degree of gender discrimination is smaller in the treatment emphasizing men’s advantage in the tails of the productivity distributions. To explain female employers’ evaluations, we adopt the preference-based approach. Our findings suggest that employers of different genders can have different motivations for gender discrimination, and thus call attention to the theoretical foundation of gender discrimination and policy measures aimed at reducing gender discrimination.     

Do Monetary Policy Announcements Affect Exchange Rate Returns and Volatility of Returns? Some Evidence from High‐Frequency Intra‐Day South African Data

This paper examines the temporal effect of domestic monetary policy surprises on both returns and volatility of returns of the South African rand/U.S. dollar exchange rate. The analysis in this “event study” proceeds using intra‐day minute‐by‐minute exchange rate data, repo rate data from the South African Reserve Bank's scheduled monetary policy announcements, and market consensus repo rate forecasts. A carefully selected sample over the period August 2003 to November 2017 ensures that the change in monetary policy is exogenous to the exchange rate. We find statistically and economically significant responses in intra‐day high‐frequency South African rand/U.S. dollar exchange rate returns and volatility of exchange rate returns to domestic interest rate surprises, but anticipated changes have no bearing on exchange rate returns and their volatility. The empirical results also indicate that there is an instantaneous response of the rand/dollar exchange rate to monetary policy surprises and that monetary policy news is an important determinant of the exchange rate until at least 42 minutes after the pronouncement – suggesting a high degree of market “efficiency” in its mechanical sense (although not necessarily in the deeper economic‐informational sense) in processing this information. Essentially, the asymmetric GARCH results exhibit no leverage effects – positive and negative information shocks have symmetric effects on conditional variance.