The Influence of Nonaudit Service Revenues and Client Pressure on External Auditors' Decisions to Rely on Internal Audit*

This paper investigates how external auditor provision of significant nonaudit services and client pressure to use the work of internal audit influence external auditors' use of internal auditors' work. More specifically, we study how external audit evidence gathering choices are influenced by nonaudit fees and client pressure. Our research is motivated by an observation that the magnitude of nonaudit services provided to audit clients introduces the risk that client management may leverage its position with the external auditor and potentially affect the audit process. We address this issue by extending prior research and focusing on the importance of various explanatory variables, including nonaudit service revenues, client pressure, internal audit quality, and coordination, to the external auditor's decision to rely on the work of internal audit. We use data primarily obtained through surveys completed by internal and external auditors. The survey responses represent 74 separate audit engagements. Our findings reveal that when significant nonaudit services are not provided to a client, internal audit quality and the level of internal‐external auditor coordination positively affect auditors' internal audit reliance decisions. However, when the auditor provides significant nonaudit services to the client, internal audit quality and the extent of internal ‐ external auditor coordination do not significantly affect auditors' reliance decisions. Furthermore, when significant nonaudit services are provided, client pressure significantly increases the extent of internal audit reliance. Thus, external auditors appear to be more affected by client pressure and less concerned about internal audit quality and coordination when making internal audit reliance decisions at clients for whom significant nonaudit services are also provided.     

The Effect of External Monitoring on Accrual‐Based and Real Earnings Management: Evidence from Venture‐Backed Initial Public Offerings*

This paper investigates the effect of venture capitalist (VC) quality on earnings management in firms conducting initial public offerings of their equity stock, focusing on manipulation of both accruals and real activities. I develop a measure of VC quality based on a principal components factor analysis using data that are obtainable for virtually all VC firms. This metric is highly correlated with VC funds’ financial returns, and with the likelihood of successful exits through initial public offerings or trade sales. After going public, companies backed by higher quality VCs have lower abnormal accruals, lower earnings management through real activities manipulation, and a lower likelihood of financial restatement. Companies backed by top‐quartile VCs do not appear to engage in real activities manipulation as a substitute for accruals manipulation. Companies backed by lower‐tier VCs exhibit earnings management behaviors which are indistinguishable from those of non‐VC‐backed companies. The results continue to hold when controlling for endogeneity. Overall, the results suggest that higher quality VCs are better able to constrain opportunistic financial reporting by their portfolio companies going public.     

Indonesian Local Government Spending,Taxing and Saving: An Explanation of Pre‐ and Post‐decentralization Fiscal Outcomes*

As a result of Indonesia's decentralization program, local governments have gained significantly more responsibility for service delivery, considerably larger fiscal resources, and much greater authority over the use of those resources than before. The present paper develops a simple budget model to describe and explain the substantial differences in pre‐ and post‐decentralization local government fiscal behavior related to spending, taxing and saving. During the post‐decentralization period special attention is paid to the fiscal behavior of natural resource rich regions. Among other things, the evidence suggests that: post‐decentralization local government spending is partly responsive to increasing needs and partly the subject of elite capture; local government taxation has become more aggressive under decentralization and appears to be mostly driven by local bureaucratic expectations related to routine overhead budgets; and the increased savings of local governments during the post‐decentralization period is determined to a large degree by delayed central government transfer payments.     

The Multiplicity of Performance Management Systems: Heterogeneity in Multinational Corporations and Management Sense‐Making

This field study examines the workings of multiple performance measurement systems (PMSs) used within and between a division and Headquarters (HQ) of a large European corporation. We explore how multiple PMSs arose within the multinational corporation. We first provide a first‐order analysis which explains how managers make sense of the multiplicity and show how an organization's PMSs may be subject to competing processes for control that result in varied systems, all seemingly functioning, but with different rationales and effects. We then provide a second‐order analysis based on a sense‐making perspective that highlights the importance of retrospective understandings of the organization's history and the importance of various legitimacy expectations to different parts of the multinational. Finally, we emphasize the role of social skill in sense‐making that enables the persistence of multiple systems and the absence of overt tensions and conflict within organizations.     

着眼长远还是急功近利:竞争压力下腐败对企业创新和寻租的影响研究

遏制腐败能否引导企业着眼长远?基于世界银行对中国企业的调查数据,本文实证检验了腐败程度如何改变企业在竞争压力下的创新和寻租决定。主要结论包括:企业在竞争压力下会增加创新投入,也会增加寻租支出;遏制腐败能够减少企业在竞争压力下的寻租行为,但对创新投入有显著的挤出效应。进一步研究发现,市场化改革滞后所引致的资源错配是产生挤出效应的主因。研究意义在于:引导企业着眼长远需要同时改善多个制度环境,除了充分发挥遏制腐败规避急功近利的行为外,还应当注重市场配置资源对引导企业长期战略导向的作用。研究结论凸显了市场在资源配置中起决定性作用的战略意义,也为反腐败政策提供了有力佐证。     

A Comparison of Market Integration in Nineteenth‐Century China and Japan

This paper performs a cointegration analysis using an Error Correction Model (ECM) on annual rice prices to measure and compare market integration in China and Japan during the nineteenth century. We find markets in Japan were more integrated than in China at both the regional and national levels during the period. Moreover, market integration in Japan improved during industrialisation. These findings support the view that a well‐integrated market is a cause as well as a result of economic growth.     

A Cross‐national Comparison of R&D Expenditure Decisions: Tax Incentives and Financial Constraints*

We provide evidence on the impact of tax incentives and financial constraints on corporate R&D expenditure decisions. We contribute to extant research by comparing R&D expenditures in the United States and Canada, thereby exploiting the differences in the two countries' R&D tax credit mechanisms and generally accepted accounting principles. The two tax incentive mechanism designs are consistent with differing views of the degree of financial constraints faced by firms in these economies. Our sample also allows us to explore the effects of capitalizing R&D on Canadian firms. Employing a matched design, we document relations between tax credit incentives and R&D spending consistent with both Canadian and U.S. public companies responding as though they are not financially constrained. We estimate that the Canadian credit system induces, on average, $1.30 of additional R&D spending per dollar of taxes forgone while the U.S. system induces, on average, $2.96 of additional spending. We also find that firms that capitalize R&D costs in Canada spend, on average, 18 percent more on R&D. Collectively, this evidence is important to the ongoing debates in both countries concerning the appropriate design of incentives for R&D and is consistent with the assumptions found in the U.S. tax credit system, but not those found in the Canadian system.     

“Exports‐at‐Risk”: The Effect of Multimarket Contact in International Trade

Despite a well‐established literature examining possible impacts on competition in oligopolistic markets from multimarket contact (MMC) among diversified firms, only recently have trade theorists considered the possible effects of MMC among exporters in limiting the anticipated procompetitive role of imports. This article presents a first effort to test the empirical importance of a measure of this MMC, called “exports‐at‐risk,” on import prices (unit‐values). Suggestive evidence of anticompetitive impacts of MMC among exporters is obtained for highly traded four‐digit harmonized system (HS) products within the broad category of “fats and oils.” Exporters in fats and oils seem to price higher in markets where they meet rivals with the ability to retaliate against their “exports at risk.”     

中美货币政策的中观传导效应比较——基于产业效应的视角

货币政策不仅会从宏观和微观层面影响经济,而且中观传导效应也是不应忽视的。本文基于产业效应的视角,结合各产业对货币政策的反应程度以及各产业在国民经济中的地位对中美两国货币政策的中观传导效应进行了比较。中美两国货币政策的产业中观传导效应呈现出一定程度的相似性,但也存在一些差别。中国货币政策依次对材料、信息技术、工业和可选消费产业的影响最大,而美国货币政策依次对信息技术、能源、材料、可选消费和工业产业影响最大。结合中美两国不同产业对货币政策的敏感程度和产业结构特点,本文认为,我国的货币政策通过材料和工业这两个产业部门的中观传导效应较强,而美国的货币政策通过信息技术和可选消费产业传导的中观效应较强。     

The Effect of Humanizing Robo‐Advisors on Investor Judgments*

We examine the effect of humanizing (naming) robo‐advisors on investor judgments, which has taken on increased importance as robo‐advisors have become increasingly common and there is currently little SEC regulation governing key aspects of their use. In our first experiment, we predict and find that investors are more likely to rely on the investment recommendation of an unnamed robo‐advisor, whereas they are more likely to rely on the investment recommendation of a named human advisor. Theory suggests one reason that naming a robo‐advisor may have drawbacks pertains to the complexity of the task the robo‐advisor performs. We explore the importance of task complexity in our second experiment. We predict and find that investors are less likely to rely on a named robo‐advisor when the advisor is perceived to be performing a relatively complex task, consistent with our first experiment, and more likely to rely on a named robo‐advisor when the advisor is perceived to be performing a relatively simple task, consistent with prior research on human‐computer interactions. Our findings contribute to the literature examining how technology influences the acquisition and use of financial information and the general literature on human‐computer interactions. Our study also addresses a call by the SEC to learn more about robo‐advisors. Lastly, our study has practical implications for wealth management firms by demonstrating the potentially negative effects of making robo‐advisors more humanlike in an attempt to engage and attract users.     

Exploring Value‐Based Management Sophistication: The Role of Potential Economic Benefits and Institutional Influence

The complexity of value‐based management (VBM) is often not captured in empirical research. In particular, potential differences in the extent of VBM implementation are not considered. Firms are predominantly classified dichotomously into either VBM “adopters” or “non‐adopters.” In this study, we aim to fill this gap by introducing a framework to assess differences in the extent of VBM implementation (VBM‐sophistication) based on publicly available data. This approach enables us to study determinants of VBM‐sophistication based on a hand‐collected data set comprising 2,683 firm‐year observations from 16 European countries between 2005 and 2014. Specifically, we investigate (i) whether potential economic benefits associated with VBM implementation lead to a higher level of VBM‐sophistication, and (ii) if this relation is influenced by extra‐organizational institutions (e.g., industry norms). Our results indicate that companies exhibit higher VBM‐sophistication if certain firm characteristics that increase the potential economic benefits of VBM are present. Moreover, our study provides evidence that this effect is enhanced by extra‐organizational institutions that pressure and support firms in realizing the potential benefits of higher VBM‐sophistication.     

Auditor Reputation,Auditor Independence,and the Stock‐Market Impact of Andersen's Indictment on Its Client Firms*

In this paper, we study a broad sample of Arthur Andersen clients and investigate whether the decline in Andersen's reputation, due to its criminal indictment on March 14, 2002, adversely affected the stock market's perception of its audit quality. Because these reputa‐tional concerns are more of an issue if an auditor's independence is impaired, we investigate the relationship between the abnormal market returns for Andersen clients around the time of the indictment announcement and several fee‐based measures of auditor independence. Our results suggest that when news about Andersen's indictment was released, the market reacted negatively to Andersen clients. More importantly, we find that the indictment period abnormal return is significantly more negative when the market perceived the auditor's independence to be threatened. We also examine the abnormal returns when firms announced the dismissal of Andersen as an auditor. Consistent with the audit quality explanation, we document that when firms quickly dismissed Andersen, the announcement returns are significantly higher when firms switched to a Big 4 auditor than when they either switched to non‐Big 4 auditors or did not announce the identity of the replacement auditor. Our empirical results support the notion that auditor reputation and independence have a material impact on perceived audit quality and the credibility of audited financial statements, and that the market prices this.     

The Effect of a Program‐Based Housing Move on Employment: HOPE VI in Atlanta

We combine records of Atlanta Housing Authority (AHA) clients, Georgia Department of Labor (DOL) employment records, and neighborhood characteristics to analyze the causal effect of an exogenous move out of public housing on the employment of public housing residents. The exogenous move was caused by a HOPE VI or HOPE VI‐like project in Atlanta. We find that such an exogenous move has a positive and statistically significant effect on the probability of employment for those residents who moved relative to other public housing tenants. We also compare the change in employment of those whose exogenous move was to another public housing unit to those who took a housing voucher. We also compare the change in the probability of employment associated with an exogenous move and a voluntary move and find that both types of moves are associated with a greater probability of employment as compared to those who did not move.     

Audit Fees: A Meta‐analysis of the Effect of Supply and Demand Attributes*

We evaluate and summarize the large body of audit fee research and use meta‐analysis to test the combined effect of the most commonly used independent variables. The perspective provided by the meta‐analysis allows us to reconsider the anomalies, mixed results, and gaps in audit fee research. We find that, although many independent variables have consistent results, several show no clear pattern to the results and others only show significant results in certain periods or particular countries. These variables include a loss by the client and leverage, which have become significant in comparatively recent studies; internal auditing and governance, both of which have mixed results; auditor specialization, regarding which there is still some uncertainty; and the audit opinion, which was a significant variable before 1990 but not in more recent studies.     

The Trickle‐down Effect of Fintech Development: From the Perspective of Urbanization

The emergence of a digital divide or a lack of internet access may hinder urbanization and adversely affect growth. However, fintech development can help to improve the accessibility and affordability of financial services, particularly for sections of the population formerly excluded from such services. Improved access is expected to stimulate the growth essential for promoting urbanization, possibly alleviating the negative impacts of a digital divide and creating a trickle‐down effect. This paper is among the first to investigate the effect of fintech development on urbanization, as indicated by labor transfer from agricultural to non‐agricultural sectors in China. It is found that: (i) the digital divide hindered, while fintech development contributed to urbanization; (ii) the positive effect of fintech development on urbanization affects individuals both with and without access to the internet, yielding the so‐called trickle‐down effect and thus helping to alleviate the negative consequences of a digital divide; and (iii) regarding transmission mechanisms, fintech development helps to generate additional jobs and raise income in non‐agricultural sectors, stimulating urbanization even for those without access to the internet.