09 Financial Accounting 4: Accounting issues related to labor, politics, and environments (FAR4)

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    Employee forecast dispersion and firm efficiency
    ( 2022) Feng, Ivy ; Kimbrough, Michael ; Mayer, Liang ; Wei, Sijing
    This study examines the implications of employee forecast dispersion for firm efficiency. Organizations depend on successful collaboration among employees, which in turn depends on the sharing of high-quality information. Dispersion in employees’ forecasts of future firm performance is an observable consequence of the lack of information sharing among employees or of poor-quality internal information. We use employee reviews from Glassdoor to examine whether organizations with greater dispersion in employee outlooks — our proxy for employee forecasts — are less efficient. We find that firms with greater dispersion are less efficient in transforming inputs to outputs. Cross-sectional analyses indicate that this finding is more pronounced when employee collaboration is more important to firms’ operations, and among employees who are more likely to collaborate. We contribute to the growing literature on contributions of rank-and-file employees by documenting that frictions in the sharing of high-quality information among employees significantly undermine the value they generate.
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    Conflicted Regulators
    ( 2022) Kubic, Matthew ; Silva, Rui ; Toynbee, Sara
    We examine whether regulators’ prior employment influences regulatory strictness. We obtain the resumes or prior work experiences of over 200 accountants hired by the Securities and Exchange Commission (SEC), most of whom previously worked at a large public accounting firm. Using the SEC filing review process as a setting, we define conflicted regulators as those reviewing financial statements audited by their former employer. We find that conflicted accountants are less likely to detect financial statement errors, raise fewer accounting issues, and elicit less detailed responses to review comments. Results attenuate with tenure and have important implications for the design of regulatory oversight.
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    CSR Commitment, Financial Reporting Frequency, and Information Asymmetry: Evidence from eliminating mandatory quarterly financial reporting in U. K.
    ( 2022) Li, Yue ; Goh, Lisa ; Tang, Feng
    This study examines whether corporate commitment to CSR and sustainability affects firms’ choice of financial reporting frequency. Specifically, we examine whether firms with superior CSR performance and commitment to sustainability choose to abandon quarterly financial reporting voluntarily following the reporting regime change in Europe in 2013. We argue that corporate commitment to CSR and sustainability symbolizes a firm’s orientation towards long-term investments and management disapproval of short-termism. As such, firms with strong commitment to CSR would reduce financial reporting frequency to avoid undesired pressure from short-term oriented investors. Using a sample of the London Stock Exchange (LSE) listed companies, we find that firms with superior CSR commitment are more likely to abandon the quarterly Interim Management Statement (IMS) voluntarily following the change in the U. K’s Disclosure and Transparency Rules in 2014. Further analysis reveals that firms with superior CSR commitment do not exhibit increased information asymmetry following the abandonment of quarterly reporting. We find limited evidence that such firms are more likely to increase capital spending and long-term investments in later periods. Our results are robust to different specifications and controls for firm characteristics known to affect firms’ financial reporting decision. Overall, the evidence in this study is consistent with the argument that corporate commitment to CSR symbolizes a firm’s long-term investment focus and management orientation towards sustainability affects firms’ choice of financial reporting frequency and there is little evidence that investors and financial analysts’ information loss due to the abandonment of quarterly financial reporting.
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    Are Firms’ Disclosed Diversity Targets Credible?
    ( 2022) Cai, Wei ; Chen, Yue ; Yang, Li
    Amid growing pressures to comply with ESG standards, firms increasingly disclose their ESG targets. However, given the difficulty in verifiability, it is unclear whether this public commitment to ESG goals is credible or only cheap talk. In this paper, we answer the question of how stakeholders should interpret firms’ disclosure of ESG goals and what they could expect in terms of firms’ future ESG performance. Specifically, we examine whether firms that publicly disclose diversity targets truly increase their diversity levels after the target disclosure. Exploiting a novel dataset of detailed firm employee records, we find that firms that disclosed a diversity target have indeed improved their diversity, but the diversity level already increased substantially prior to the target disclosure. To further explore how certain target characteristics are associated with disclosure credibility, we hand collected and coded firms’ diversity goals from their sustainability reports. We show that numerical, forward-looking, and all-employee targeted goals are more credible than others. We also find that firms that are historically more compliant, with greater institutional pressure, and with greater innovation demand tend to disclose more credible goals, suggesting the importance of examining firms’ incentives rather than the act of disclosure itself. Overall, our results generate practical implications for two groups: investors adjusting their decisions based on ESG disclosure and regulators assessing the necessity and content of ESG disclosure regulations.
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    Institutional Blockholder Exit Threats and Corporate Social (Ir)responsibility
    ( 2022) Rim, Hyun Jung ; Sul, Edward
    Institutional blockholders, who have incentives to gather private information and sell their shares when managers underperform, exert governance through exit threats. Hence, managers align their actions with shareholders’ interests to dissuade blockholders from selling. We find that as exit threats increase, firms reduce not only social irresponsibility (CSI), but also social responsibility (CSR), implying that CSI and CSR are independent actions that both reflect agency problems rather than firm value enhancement. Furthermore, consistent with exit theory, the negative impact of exit threats on CSI and CSR increase as managerial wealth is sensitive to stock price, the firm is cash-rich (more susceptible to “bad” agency problems), and following Schedule 13G filings that indicate blockholders’ intent to remain passive (exert governance through exit threats only). We contribute to research on corporate social (ir)responsibility and the role of blockholders in disciplining both CSR and CSI that may not be in the shareholders’ interests.
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    The Impact of Financial Reporting Mandates on Labor Unions
    ( 2022) Le, Anthony ; Dong, Qingkai
    Labor unions in the United States are subject to financial reporting mandates, requiring them to disclose detailed financial information annually. This paper studies the effects of the reporting mandate on unions' representation elections and union charges. Exploiting a regulatory threshold that determines the amount of information publicly disclosed by unions, we document that unions just above the threshold, who are required to disclose more information, file fewer election petitions, are less likely to win elections, and receive fewer votes during those elections than unions just below the threshold. These effects are the strongest when employers hire labor relations consultants during elections. Additionally, we find that unions above the threshold have significantly fewer charges and grievances filed against them. This result is primarily driven by a decrease in non-meritorious charges. Collectively, our results suggest that mandated financial reporting imposes a substantial proprietary cost on unions during representation activities.
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    Communicating Corporate Culture in Labor Markets: Evidence from Job Postings
    ( 2022) Shi, Tianshuo ; Pacelli, Joseph ; Zou, Yuan
    A company’s culture represents one of the most important factors that job seekers consider when choosing a job. In this study, we examine how firms craft their job postings to convey their cultural values and whether doing so helps to attract employees. We utilize state-of-the art machine learning methods to develop a comprehensive dictionary of cultural values across the near-universe of corporate job postings. Our descriptive analysis reveals that firms are more likely to advertise corporate culture in their job postings when their culture is strong, as evidenced from strong external ratings and infrequent employment violations. In addition, culture information is more prevalent among job postings for positions in which the pool of labor is tighter. Our main analyses demonstrate that culture information in job postings ultimately attracts job seekers as it is associated with higher worker inflows. Culture information has a more pronounced effect on worker inflows following the Black Lives Matter movement, which increased the importance of culture to job seekers. In addition, job seekers respond more to culture information in job postings when alternative information about firm culture from outside sources is less readily available. Overall, our findings suggest that job postings are an important mechanism for communicating cultural values to prospective employees and attracting talent.
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    Hype or Hope? Selection and Performance of Accountable Care Organizations
    ( 2022) Ayabakan, Sezgin ; Bardhan, Indranil ; Banker, Rajiv ; Tripathi, Muktak
    The performance of pay-for-performance (P4P) models in healthcare has been mixed. While prior studies have explored various population-based payment models, there is a lack of empirical evidence related to selection of high risk, high-reward payment models in the context of value-based healthcare. Further, the performance implications of selection into new types of payment models is not well understood. We study the rollout of Accountable Care Organizations (ACO) under the Medicare Shared Savings Program (MSSP) and identify factors that explain their selection into two-sided risk models, which offer greater rewards as well as penalties. Specifically, we study whether such ACO selection decisions are associated with performance improvements based on their shared cost savings as well as quality of health outcomes. Our longitudinal analysis is based on publicly available Medicare ACO data for the six-year period between 2013 and 2018, and explores the antecedents and consequences of ACO selection into two-sided risk models. We find that ACOs with greater organizational scope, based on their scale, service variety and patient segments, are also more likely to switch to a two-sided risk model. Further, we observe that ACOs that switched into two-sided models exhibit greater savings and marginally higher quality, compared to ACOs that remained in a one-sided risk model. However, our analysis indicates that the initial gains after switching are not sustained over time, as these ACOs exhibit significant reduction in the rate of improvement of shared savings and quality, in the three-year period after switching. Our results indicate that ACOs with superior prior capabilities reap the advantages associated with MSSP incentives, and imply that incentive programs that promote short-term goals help participants who enjoyed greater a priori advantages in terms of their extant resources and capabilities. However, long-term sustainable performance improvements remain an elusive goal, and our research suggests that the incentives in the current ACO program need to be modified to reward improvements in their operational capabilities.
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    Sharing the Pain between Workers and Management: Evidence from the COVID-19 Pandemic and 9/11 Attacks
    ( 2022) Afzali, Mansoor ; Khan, Urooj ; Rajgopal, Shiva
    We examine the rhetoric in ESG literature that managers “share the pain” of employees who are laid off or whose benefits are cut by committing to reduce CEO pay or by enacting other positive worker friendly actions during the Covid crisis. Using the exogenous shock of the COVID pandemic and a unique database, we examine more than 4,062 positive and negative actions targeted at workers taken by the S&P 1500 firms in 2020 in response to the pandemic. Our findings indicate that economic considerations such as exposure to the pandemic and poor stock performance prior to the pandemic are the primary determinants of management’s decision to share the pain of employees. Stakeholder concerns, proxied by higher employee-related corporate social responsibility scores, lower pay disparity between the CEO and the median employee, or a signatory to the Business Roundtable Statement, are not associated with managers’ sharing of the pain. Evidence of such pain sharing from another unexpected crisis from the past –the September 11, 2001, terrorist attacks – is remarkably similar. Sharing the pain is not associated with future stock returns performance. Finally, we show that the median CEO’s wealth increased nearly 18-fold relative to the CEO pay cut for firms that enforced CEO pay cuts and laid off employees during the Covid crisis. The paper adds to growing evidence that U.S. firms do not appear to “walk the talk” of concerns for stakeholders.
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    The Effects of Regulatory Enforcement Disclosure: Evidence from OSHA’s Press Release about Safety Violations
    ( 2022) Huang, Allen ; Shen, Michael ; Tang, Chao ; Wang, Juanting
    This study investigates the effects of disclosures of regulatory enforcement on peer firms. To isolate the effect of disclosure, we exploit a setting where the Occupational Safety and Health Administration (OSHA) issues a press release about safety violations if the financial penalty is above a cutoff. Using a regression discontinuity design, we find that OSHA’s press release induces peer firms to increase their safety investments, consistent with the deterrence effect of enforcement disclosure. In cross-sectional tests, we find that this effect is stronger when peer firms headquarter in states with higher labor union coverage or are in industries with higher labor mobility, and when peer firms have higher advertisement expenses, consistent with information sharing among peer firms’ employees which increases their safety awareness being a possible mechanism. Meanwhile, we find that these firms also engage in more accrual earnings management, suggesting an unintended consequence of enforcement disclosures.