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ItemThe Effect of Accounting Reporting Complexity on Financial Analysts( 2017-08-30)We investigate the association between a new XBRL based measure of accounting reporting complexity (ARC) and analyst behavior. We find that analysts are less likely to cover firms with complex accounting. Further, higher ARC is associated with lower forecast accuracy, higher forecast dispersion, and lower informativeness of recommendation revisions and responsiveness to earnings announcements. This association is attenuated when analysts have longer tenure, greater firm-specific experience, and are focused on fewer industries. Investigating several complex accounts, we find that the complexity of derivatives, fair value, and pension accounts are each negatively associated with forecast accuracy, suggesting that understanding these complex accounts requires specialization. We propose a new measure of analysts’ account-specific expertise and find that expertise with derivative and fair value accounts attenuates the negative effects of complexity in these accounts to a greater extent than general analyst experience. Overall, our findings suggest that analysts’ expertise plays an important role in mitigating the adverse effects of ARC.
ItemLife in the fast lane: Investor sophistication and information flow( 2017-08-30)Prior literature has commonly used institutional ownership or trade size as proxies for investor sophistication. We propose an alternative measure of investor sophistication based on Internet connectivity. Using a dataset that tracks user requests for filings stored in the SEC EDGAR database, we document a positive association between the percent of high speed Internet downloads of newly released 10-K, 10-Q, and 8-K filings and stock price reaction to the release of these filings. The relation between the percent of high speed downloads and filing date price reaction is greater when the firm is more complicated and the disclosure is more complex. All the above results similarly hold for trading volume. We further provide evidence that a greater percent of high speed downloads is associated with a lower price drift subsequent to the release of a 10-K, 10-Q, and 8-K filing on EDGAR.
ItemFraud Auditing in the Era of Big Data( 2017-08-26)The availability of Big Data has energized the public accounting industry in the development and use of technological tools for its assurance and advisory practices (Ernst and Young 2014). In this paper, we study the impact of Big Data on one of such services - fraud auditing. We conducted in-depth interviews with and distributed online survey to auditors in the field. We review and summarize changes that have been implemented in auditing procedures and identify the areas where regulations and guidance are lacking with regard to technology-enabled auditing procedures. We also discuss the changing role and skill sets required of auditors due to this rapidly evolving data and technological environment. The result of our survey and interviews revealed that the impact of Big Data on auditing practice is not universal across firms. Big Four accounting firms have deployed internally-developed Big Data analytical tools and transformed their audit procedures. However, significant disparity of organizational knowledge and availability of technological tools exist between big international accounting firms, regional firms, and small local firms. While changes are beginning to be tested and implemented in Big Four, the practice of smaller firms has not been altered by the presence of Big Data because the infrastructure is still not quite there for these firms and their clients.