Job-market paper (mentioned in The Dig: "The PCAOB Goes to China, Well, Just Hong Kong and Inspects Some Audits")

Abstract:

Over the past 15 years, the PCAOB has faced shifting barriers to secure unrestricted access to inspect Chinese
audits, reflecting the increasingly complex US-China relations. I examine variation in the likelihood of PCAOB
inspection access, focusing on two critical events: a memorandum of understanding (MOU) in 2013 (which increased
the likelihood of access) and a break of cooperation (BOC) in 2017 (which decreased such likelihood). Following the
2013 MOU, smaller Chinese companies are increasingly likely to list in Hong Kong rather than in the US, consistent
with marginal companies facing difficulties to absorb the incremental compliance costs associated with heightened
probability of inspection. Subsequently, after the 2017 BOC, politically sensitive Chinese companies are more likely
to list in Hong Kong, consistent with companies with sensitive information facing more substantial penalties from the
US market associated with reduced probability of inspection. Finally, US-listed Chinese companies have not experienced
a detectable variation in audit quality throughout this period, inconsistent with the notion that a cross-border
inspection agreement, without accompanying enforcement measures, directly impacts the audit quality of US-listed
foreign companies. Overall, for Chinese companies, the variation in the likelihood of PCAOB oversight seems to have
more immediate consequences for the appeal of the US market than for audit quality.

Co-authored with Pietro Bianchi, Miguel Minutti-Meza and Maria Vulcheva

Abstract:

Disclosure in going private transactions has become a topic of increasing interest for regulators and policymakers. Going private transactions are subject to special SEC rules that mandate management to provide detailed disclosure to all shareholders before a general vote. We examine the role of disclosure in addressing the frictions between sellers and buyers. We find that disclosure volume is positively associated with the likelihood of closing a deal. However, disclosure volume is also positively related to the intensity of shareholders’ negotiations, increasing the likelihood of upward price revisions, and shareholder litigation. Our findings speak to the extent to which the SEC rules fulfill the regulator’s intent when mandating going-private disclosures. Our findings suggest that disclosure has real effects related to the success of going private transactions, and shed light on the trade-offs that buyers face when determining the extent of disclosure in SEC filings.

Co-authored with Lin Liao, Miguel Minutti-Meza, Yun Zhang, and Youli You

Abstract:

We examine the adoption of the IAASB expanded audit report standards in Hong Kong and Mainland China in December 2016 and 2017, respectively. These jurisdictions combined represent one of the largest economies that has mandated expanded reports in a staggered fashion. This setting offers rich data that can help us to overcome some shortcomings of earlier studies, which document inconclusive and limited causal inferences about the consequences of expanded reports. We do not find compelling evidence that expanded reports, and specifically Key Audit Maters (KAMs), have provided incremental information to investors or improved audit quality. Next, several cross-sectional tests based on variations in companies’ information environment and KAMs’ characteristics confirm the conclusions of our main analyses. Our evidence supports some stakeholders’ concerns that expanded reports provide little company-specific or value-relevant information. Auditors still have an unrealized potential to provide useful information in expanded reports.

Co-authored with: Pietro Bianchi, Lin Liao, and Miguel Minutti-Meza

Abstract:

We examine a recent regulatory intervention that changed the professional certification requirements for
Big 4 firms’ partners in China. In 2012, the Chinese Ministry of Finance issued a mandate that required 80% of the
Big 4 firms’ engagement partners to hold a local CPA license by 2017, but this mandate did not apply to non-Big 4
firms. We examine various outcomes at both the partner and client levels for the Big 4 and other firms over a 14-year
period around the implementation of the mandate. We find that the Big 4 fulfilled the mandate by restructuring their partnerships and prioritizing local talent in junior signer roles for new clients. Next,we do not find systematic evidence of a deterioration in the audit quality of the Big 4, or externalities for other firms. However, in the post-rule period, the Big 4 accepted more clients with different characteristics and charged lower audit fee premiums. Overall, the change in professional requirements fostered the development of local talent and competition between the Big 4 and local firms without decreasing audit quality. Our study sheds light on a unique regulatory change, the quality of the Chinese CPA, and the Big 4 processes to appoint engagement partners.

Co-authored with: Fabrizio Ferri and Zeyu Ou

Abstract:

Does it matter who identifies and proposes anew board member? We exploit a 2003 Securities and Exchange
Commission (SEC) disclosure rule to identify the source recommending new independent directors (NID) appointed
to corporate boards. We document that disclosure of the source of recommendation is missing for 75% of NID –
suggesting a high degree of non-compliance. Among those with disclosed sources, 44% are recommended by search
firms, 30% by current independent directors, and 20% by CEO and other executives – with the role of search firms
increasing in recent years as the push for board diversity intensified. Next, we explore whether and how the "origin"
of the NID affects their characteristics, the market reaction to their appointment, and subsequent progression on the
board and in the director labor market. We find that boards turn to search firms when they need to go beyond their
immediate network and look for candidates with greater executive expertise, or to diversify the board along dimensions
of gender and race. As for candidates recommended by the CEO, there is some support for the notion that CEOs
try to bring on the board loyal directors. For example, CEO-recommended NID tend to receive higher shareholder
voting dissent during their tenure (i.e., they take a more management-friendly stance). Notably, three years after their
appointment CEO recommended NID tend to enjoy greater progress on the board and its committees (e.g., in terms
of chair positions), relative to search firm-recommended NID. Overall, our evidence suggests that the "origin" matters,
in that it affects the characteristics of NIDs appointed and their ability to gain influence on the board.

Co-authored with: Daniele Macciocchi and Dhananjay Nanda

Abstract:

We examine whether the family ownership of a firm and the family legacy incentives influence the relative
salience of earnings and stock returns in governance decisions. In non-family firms, we find that CEO turnover
is sensitive to both earnings and stock returns. In contrast, in family firms CEO turnover is sensitive only to earnings
but not to stock returns. We examine the mechanism behind this result. We find that behavioral motives–like
family legacy incentives–do not explain variation in CEO turnover. Conversely, ownership concentration in family
firms decreases the precision with which returns reflect managers’ actions and ability. Our findings contribute to the
theory on multiple-performance-measure agency models, which imply that the emphasis on performance measures in
governance decisions increases in the sensitivity to and the precision with which they reflect agents’ actions and ability.