Includes bibliographical references.

The effects of analysts’ tax expense forecast accuracy on corporate tax avoidance: An international analysis -- Audit firm operating leverage and pricing strategy: Evidence from lowballing in audit industry -- Impact of Basel III on the discretion and timeliness of Banks’ loan loss provisions -- Board cultural diversity, government intervention and corporate innovation effectiveness: Evidence from China -- The impact of economic sanctions on audit pricing -- Is there a dark side of managerial ability? Evidence from the use of derivatives and firm risk in China -- Do government say-on-pay policies distort managers’ engagement in corporate social responsibility? Quasi-experimental evidence from China -- Sustainability with high-speed rails: The effects of transportation infrastructure development on firms’ CSR performance -- Tax haven Use, the pricing of audit and Non-audit Services, suspicious matters reporting obligations and whistle blower hotline Facilities: Evidence from Australian financial corporations -- Do family firms engage in less tax avoidance than non-family firms? The corporate opacity perspective -- Does religiosity matter for corporate labor investment decisions? -- Do firms anticipate security issues by conservative reporting?

[Article Title: The effects of analysts’ tax expense forecast accuracy on corporate tax avoidance: An international analysis / Ye Ji Lee ]

Abstract: A spotlight has recently been cast on the role of analysts as monitors of corporate tax planning, but investigations beyond the US are rare. After extension to the international setting, I investigate whether the strength of investor protection impacts the relationship between analysts’ tax expense forecast accuracy and tax avoidance. Using a sample from 24 countries, I find that firms with high analysts’ tax expense forecast accuracy engage in lower levels of tax avoidance than firms with low forecast accuracy; this relationship is greater for firms in countries with weaker investor protection. These findings suggest that the extent of country-level investor protection substitutes for firm-level governance in constraining managerial incentives for tax avoidance.

Link: https://doi.org/10.1016/j.jcae.2021.100243

[Article Title: Audit firm operating leverage and pricing strategy: Evidence from lowballing in audit industry / Seunghee Yang and three others]

Abstract: Using a unique set of Korean data for the years 2004–2013, we show that audit firms’ operating leverage is related to lowballing and audit quality. To capture audit firms’ operating leverage, we estimate audit hour elasticity from a regression of changes in logged audit hours on changes in logged audit fees for all audit clients of each audit firm. We find that audit firms with higher audit hour elasticity are more likely to discount fees for new clients (i.e., more lowballing). Further, we find that the relation is more salient when benefits of lowballing is expected to be greater, i.e., in the voluntary auditor rotation regime compared with the mandatory rotation regime. However, we find no evidence suggesting that audit quality of auditors with low operating leverage is compromised due to lowballing.

Link: https://doi.org/10.1016/j.jcae.2021.100254

[Article Title: Impact of Basel III on the discretion and timeliness of Banks’ loan loss provisions / Pearpilai Jutasompakorn and three others]

Abstract: The Basel III Accord tightens capital adequacy requirements for banks by increasing the minimum Tier 1 regulatory capital threshold from 4 to 6 percent. It also emphasizes the need to improve timeliness of loan loss provisions. Using a sample of European banks, we examine the impact of this regulation on banks’ discretionary loan loss provisioning behavior. Underscoring banks’ increased incentives to report higher capital ratios, we observe a post-Basel III increase in banks’ use of discretionary loan loss provisions (DLLPs) for capital management purposes and a corresponding reduction in the use of these provisions for income smoothing purposes.

Link: https://doi.org/10.1016/j.jcae.2021.100255

[Article Title: Board cultural diversity, government intervention and corporate innovation effectiveness: Evidence from China / Kun Luo and three others]

Abstract: This study explores whether the impact of board cultural diversity on corporate innovativeness is contingent on the firm’s exposure to local government intervention. Using Chinese firm-year observations spanning 2008–2016, we find that the positive impact of board cultural diversity on corporate innovativeness is more (less) pronounced for Chinese firms subjecting to a low (high) level of local government intervention.

Link: https://doi.org/10.1016/j.jcae.2021.100256

[Article Title: The impact of economic sanctions on audit pricing / Oksana Kim]

Abstract: This study extends the literature on the association between business risk and audit pricing by exploring the economic sanctions of 2014 imposed by the Western community on Russia. The sanctions targeted predominantly Russian companies with state ownership, potentially leading to increased business risk for these companies. I find support for the notion that, post-2014, audit fees increased in the case of Russian state-owned companies. This evidence suggests that auditors passed on costs, arising from sanctions-driven increase in audit risk, to their clients. Further, the Russian government responded to sanctions by encouraging state-owned companies to terminate their audits conducted by auditing firms with foreign capital and/or foreign partnerships—Big 4 firms—meaning these firms were likely to lose their lion’s share of the Russian audit and consulting revenues. Nevertheless, I do not find evidence that Big 4 firms started to offer services at a discount to retain lucrative contracts with leading Russian companies. In contrast, the results indicate that Big 4 firms charged companies with state ownership higher fees for their audits, following the imposition of sanctions.

Link: https://doi.org/10.1016/j.jcae.2021.100257

[Article Title: Is there a dark side of managerial ability? Evidence from the use of derivatives and firm risk in China / Lingsha Cheng and Adrian (Waikong) Cheung]

Abstract: In the absence of agency problems, firms with able managers are expected to use derivatives effectively for risk management purposes. But the agency theory suggests that self-interested managers may use derivatives to their advantage for rent-seeking activities. Using a sample of Chinese listed firms from 2008 to 2019, we find strong evidence consistent with this rent-seeking idea. In particular, we find that the relationship between the use of derivatives and firm risk is negative, but this negative relationship is less pronounced for firms with high-ability managers compared to firms with low-ability managers, suggesting that managerial ability has a positive moderating effect on this negative relationship. In addition, this positive moderating effect is more (less) pronounced in firms with weak (strong) monitoring, diffuse (concentrated) ownership, high (low) information asymmetry, and weak (strong) corporate governance. The findings are robust to alternative measures of key variables, an alternative empirical model, and endogeneity concerns. Consistent with the view that able managers’ rent-seeking activities (through taking risky derivatives position(s)) cannot enhance firm value or growth, further analyses reveal that both managerial ability and its interaction with the use of derivatives, have negative impacts on Tobin’s Q.

Link: https://doi.org/10.1016/j.jcae.2021.100258

[Article Title: Do government say-on-pay policies distort managers’ engagement in corporate social responsibility? Quasi-experimental evidence from China / Haiyan Jiang and three others]

Abstract: Against the backdrop of a series of regulations issued by the Chinese Government in an effort to rein in top executives’ compensation in state-owned enterprises, this study investigates whether the exogenous shock resulting from restricting top executives’ pay levels modifies their incentives to conduct socially responsible activities. Our analyses, using a baseline regression and a difference-in-differences (DiD) approach, both reveal that the pay restriction on top executives imposed by the government adversely affects firms’ CSR performance. The results hold after conducting tests to alleviate the concerns about possible self-selection bias and reverse causality between the pay restriction and CSR. In addition, we reveal that the negative effect of the pay restriction on CSR is alleviated in regions with a high level of social capital, suggesting that the social expectation of firms serves as an influential factor in managers’ CSR decisions. Meanwhile, managerial shareholding mitigates the negative effect of the pay restriction on CSR performance because of an alignment of interests between managers and other stakeholders.

Link: https://doi.org/10.1016/j.jcae.2021.100259

[Article Title: Sustainability with high-speed rails: The effects of transportation infrastructure development on firms’ CSR performance / Yu Chen and three others]

Abstract: By using the unbalanced data of 1,433 listed firms from 2008 to 2018, this paper examines the relationship between high-speed rails (HSRs) and corporate social responsibility (CSR) in China. Building on institution theory and resource dependency theory, we argue that the development of HSRs can accelerate information flow and human mobility, thus improving the CSR performance of firms. The underlying mechanisms include public pressure and potential investment opportunities, which are associated with the intention to engage in CSR practices, and the diffusion of managerial practice, which is associated with the capability of implementing CSR practices. The relationship is moderated by resource dependence on external stakeholders. Specifically, when a firm perceives that it has strong capabilities and does not need to rely heavily on external stakeholders, the relationship between HSRs and CSR will be weakened. Moreover, when a firm operates in an uncertain and competitive environment, the positive impacts of HSRs on CSR implementation will be enhanced. Supplementary analyses based on firms’ sensitivity to public pressure, investment opportunities and diffusion of managerial practice also indicate that the HSR-effects in consumer-sensitive firms, younger firms, and firms with interlock board members are stronger.

Link: https://doi.org/10.1016/j.jcae.2021.100261

[Article Title: Tax haven Use, the pricing of audit and Non-audit Services, suspicious matters reporting obligations and whistle blower hotline Facilities: Evidence from Australian financial corporations / Baban Eulaiwi and five]

Abstract: Since accounting conservatism is a measure of biased reporting which may or may not reflect high quality earnings, the relation between managerial ability and accounting conservatism is unclear ex ante. High-ability managers may report conservatively to improve the efficiency of contracts, avoid agency conflicts by the timely reporting of future losses, and build reputations for conservative reporting. Conversely, they may not report conservatively to the extent that conservatism reflects biased, and consequently, low-quality earnings.

Link: https://doi.org/10.1016/j.jcae.2021.100262

[Article Title: Do family firms engage in less tax avoidance than non-family firms? The corporate opacity perspective / Cheng-Hsun Lee and Sudipta Bose]

Abstract: We examine the moderating effect of corporate opacity on the relationship between family firms and tax avoidance. We find, ceteris paribus, that family firms and tax avoidance are negatively associated. However, the negative association is attenuated when corporate opacity increases. Our results indicate that corporate opacity affects firms’ tax avoidance, with this effect stronger for family firms than for non-family firms. We also find that tax avoidance by and corporate opacity of family firms are negatively associated with firm valuation. These results are consistent with the opportunistic perspective that family firms engage in more tax avoidance than non-family firms when corporate opacity is higher.

Link: https://doi.org/10.1016/j.jcae.2021.100263

[Article Title:Does religiosity matter for corporate labor investment decisions? / Mehdi Khedmati, Mohammed Aminu Sualihu and, Alfred Yawson]

Abstract: We examine the effect of county-level religiosity on labor investment decisions. Drawing on the social norm theory, we hypothesize that firms located in religious counties are less likely to engage in inefficient labor investment decisions. Consistent with this prediction, we find that county-level religiosity reduces inefficient labor investment. Using the exogenous shock of the 2002 revelation of the Catholic Church’s sexual abuse scandal, we show a causal relationship between religiosity and inefficient labor investment. We also find that religiosity’s impact on inefficient labor investment diminishes for firms that adopt greater corporate social responsibility (CSR) practices. Our findings suggest that religious beliefs matter in managerial labor investment decisions.

Link: https://doi.org/10.1016/j.jcae.2021.100264

[Article Title: Do firms anticipate security issues by conservative reporting? / Mehdi Khedmati, Mohammed Aminu Sualihu and, Alfred Yawson]

Abstract: We examine the importance of debtholders’ and shareholders’ concern for conservative accounting. We use the concept of conditional conservatism and study a firm’s earnings behavior around important capital structure decisions, i.e. debt and equity issues. We employ a large sample of US debt and equity issues, which allows us to investigate the timing of conservatism. Our results show that firms issuing equity exhibit increasing conservatism in the period preceding the issue, driven by the demand of shareholders in the public markets. This finding is consistent with the notion that managers signal credibility to the market in an attempt to improve issue terms. We obtain weaker results for the role of conservatism in issuing debt, which is inconsistent with the idea that financial reports are primarily meant as a governance mechanism in debt contracting.

Link: https://doi.org/10.1016/j.jcae.2021.100260