1. Are Lessons Well Learned? Evidence from SEC Enforcement Releases
SEC Accounting and Auditing Enforcement Releases (AAERs) sometimes demonstrate wealth pursuing through compensation schemes as a motive for misreporting (henceforth, compensation-mentioned releases or CMRs). Do firms revise their CEO compensation after CMRs to prevent future misreporting? Conventional Bayesian learning suggests that firms update the misreporting probability as more information becomes available. However, the availability heuristic suggests that firms assess the misreporting probability subjectively based on how easily they recall these releases. I examine the equity-based compensation of non-accused firms and find firms that proactively benchmark their CEO compensation against fraudulent firms named in CMRs significantly reduce their CEOs’ risk-taking incentives, manifested in replacing option grants with restricted stock grants. Changes are greater when firms are closer (both in geography and social identity) to CMRs, which is consistent with the availability heuristic hypothesis. The findings suggest that narratives on misreporting motives in AAERs can affect corporate policies, which provide implications for resource-constrained regulators and corporate policy-makers.
Conventional agency theory suggests that equity-based pay-for-performance sensitivity (i.e., delta) effectively mitigates agency conflict between incumbent shareholders and CEOs. However, rational choice theory in criminology suggests the opposite for the shareholder-CEO conflict that manifests as misreporting motivated by a CEO’s intention to pursue equity wealth (henceforth, wealth-pursuing misreporting). Does delta curb or aggravate such shareholder-CEO conflict? This question is difficult to address because a CEO’s misreporting intention is difficult to measure. To tackle this empirical challenge, we identify wealth-pursuing misreporting from the unstructured textual data in SEC Accounting and Auditing Enforcement Releases (AAERs). Consistent with rational choice theory, we find that the propensity for wealth-pursuing misreporting is strongly and positively associated with delta. Our findings have broad implications for using delta as a corporate governance tool to mitigate the shareholder-CEO conflict regarding financial reporting.
Best Paper Award at 2016 Nordic Accounting Conference hosted by Copenhagen Business School
This paper studies the effect of the time-oriented tendency embedded in languages on corporate income smoothing behavior across 39 countries. Using a linguistic future time reference (FTR) that separates languages into weak- and strong-FTR, we find that firms in weak-FTR countries tend to smooth income more. We also find that the informational component (rather than the garbled component) of income smoothing is stronger for firms in weak-FTR countries, indicating that the higher degree of income smoothing behavior documented in weak-FTR countries enhances the informativeness of corporate earnings. These results are consistent with the ‘linguistically-induced bias in time perception’ mechanism of FTR, suggesting that language affects management’s future-related choices by changing how distant future events feel. Taken together, these findings advance our understanding of whether and how the FTR of language influences corporate financial reporting decisions.
We find that CEOs engage in the political system through personal contributions when they face an increased risk of SEC enforcement. CEOs of firms with regulatory violations almost double their personal campaign contributions during violation years, and these increased contributions are directed towards candidates rather than parties, consistent with influence acquisition. We provide evidence on causality using SOX, which increased expected personal enforcement costs for CEOs. Lastly, we document that the rate of increase in CEO contributions is negatively associated with the likelihood that the CEO is personally named in SEC enforcement proceedings, consistent with transactional regulatory capture.
Best Paper Award at Music City Accounting Research Conference 2022 hosted by Vanderbilt Owen Graduate School of Management
Media Coverage: Columbia Law School: Blue Sky Blog on corporate governance
5. “Customer-Base Concentration and Financial Reporting Quality: International Evidence” (with Xi Fu, Xiaoxi Wu, and Zhifang Zhang)
We investigate the influence of customer-base concentration on supplier firms’ financial reporting quality in an international setting. Using a large sample of 110,447 firm-year observations from 61 countries for the period of 2003-2018, we find that firms with a more concentrated customer base have higher-quality financial reporting. We further explore the country of origin of major customers and find that this positive relation is mostly driven by foreign major customers rather than domestic major customers. However, the impact of foreign major customers on financial reporting quality is reduced with a higher level of institutional distance between the customer and the supplier. In addition, we find that the documented positive relation is stronger when suppliers are in countries with a lower degree of trust, a lower level of legal enforcement, and lower monitoring quality from other stakeholders. Overall, our results support the notion that major customers perform an important disciplinary role on suppliers and promote the financial reporting quality of suppliers.
6. “Political Networking: Consequences for Cross-Border Acquisitions of Peer Firms” (with Zhiyan Wu)
Using a regression discontinuity design in a sample of U.S. congressional special elections, we investigate how political networking by one firm (networking firm) will affect the cross-border acquisition activity by its peers (peer firms) which compete in the same product market. Relying on the victory or failure of political campaigns with a narrow margin of votes, we find that when the networking firm had donated to a politician who just marginally won a special election, the cross-border acquisition activity by its peer firms in the following year is 18.75% higher than that of the peer firms when the networking firm had donated to a politician who just lost a special election by a small margin. The effect appears even stronger when the product similarity between the networking firm and peer firms is higher and when the winning politicians secured senior positions in the congress. Our findings contribute to the political networking literature and inform a behavioral understanding of corporate cross-border acquisition activity.