ABSTRACT We examine how audit firms changed their policies regarding audit partner performance measurement, career development, and compensation during a period of heightened public scrutiny of audit quality (2007 to 2017). We theorize how implementing policy changes requires a delicate transition in the organizational design and internal processes of the firms and may not effectively translate into their day-to-day practices. Our access to proprietary performance management policies and individual partner performance and compensation data from the eight largest Dutch audit firms allows us to gain an in-depth understanding of the evolution of performance management for audit partners. We find that most of the policy changes have real consequences. For example, audit quality becomes more consequential to career development, whereas profit sharing becomes better linked to quality and long-term performance. We conclude that audit firms appear effectively responsive to public scrutiny, increasingly aligning partner incentives with societal expectations of audit quality.

ABSTRACT The FASB recently issued ASU 2024-03, which requires disaggregation of significant expenses, like cost of goods sold (COGS) and selling, general, and administrative (SG&A) expenses. Proponents argue disaggregation will improve decision usefulness, whereas opponents suggest the information will be costly and provide little value. We provide large-sample evidence on the pre-ASU state of expense disaggregation, analyze whether it appears to provide decision-useful information, and explore differences across disaggregation components. Our findings suggest that disaggregation is relatively common, increasing over time, and correlated with demand for disclosure, disclosure incentives, and firm economics. Further, our evidence is consistent with COGS, but not SG&A, disaggregation providing decision-useful information for investors and analysts, and these benefits accrue via improved processing of expense-related news. Overall, our evidence suggests that not all disaggregation is equal. We also identify novel, large-sample expense disaggregation measures for U.S. firms, which are likely useful for evaluating other implications of disaggregation. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G18; M41; M48.

ABSTRACT Companies across industries face increasing pressure to assess the costs of decarbonizing their operations. This paper develops a generic model for constructing abatement cost curves in connection with carbon dioxide emissions. The resulting abatement cost curves provide a planning tool for companies seeking to project their decarbonization pathways and to determine optimal abatement levels in response to environmental regulations such as carbon pricing. We calibrate our model in the context of European cement producers that are required to obtain emission permits under the European Emissions Trading System. We find that a price of €85 per ton of carbon dioxide, as observed on average in 2023, incentivizes firms to reduce their annual direct emissions by about one-third relative to the status quo. Yet, this incentive increases sharply when prices rise above the benchmark of €100 per ton of carbon dioxide. Data Availability: Data used in this study are referenced in the paper and the Appendix. Data underlying the plots are provided in a supplemental material file Constructing Abatement Cost Curves - Supplementary Data.xlsx. Additional information is available upon request to the first and third authors. JEL Classifications: M41; M48; Q54; Q56.

ABSTRACT Concerns that goodwill impairments unresponsiveness to declining performance produces inflated goodwill led standard-setters to reconsider post-acquisition impairment-only accounting. We use granular large-scale data to provide institutionally relevant novel descriptive evidence motivated by this hotly debated accounting standard. Comparing goodwill versus other acquired intangibles growth rates for firms reporting goodwill throughout the 2010–2020 post-FAS 141(R) period provides no evidence of runaway goodwill inflation concerns. For firms with goodwill anytime during 2010–2020 we use Shapley values to explore the explanatory power of performance factors affecting goodwill impairments. Consistent with standard-setters’ intent, single-segment market performance explains 81 percent of goodwill impairment incidence variation (controlling for Fama-French-38 industry and time fixed-effects). Limited evidence of reduced impairment incidence after incorporating FASB sanctioned control premia or alternative market values provides little support for discretionary impairment avoidance. Conversely, higher impairment incidence when book values incorporate IFRS (2020) proposed off-balance-sheet headroom or market-to-book decreases supports discretionary impairment recognition. Data Availability: The data used in this study are obtained from commercial sources, including Compustat, Calcbench, I/B/E/S, FactSet Mergerstat/BVR, and Peters and Taylor's intangible capital dataset. JEL Classifications: M41; M48; G34.

ABSTRACT We exploit a one-month period when SEC activity largely stopped during a U.S. government shutdown to examine whether variation in SEC scrutiny affects its ability to enforce insider trading. Difference-in-differences analyses suggest insiders earn abnormal profits during the shutdown, and the findings are robust to using different control periods and groups. We estimate that it takes roughly one week before the abnormally profitable trading begins, consistent with insiders updating their beliefs regarding the duration and disruption of the shutdown. Supporting the claim that SEC regulatory activity drops with the shutdown and does not fully recover afterward, we find a decline in the frequency of insider trading enforcement releases, investigations, and comment letter issuances after the SEC resumes operations. Our study speaks to the SEC insider trading enforcement literature and economic consequences of a regulatory discontinuity in a divisive political climate. Data Availability: All data are available from public sources. JEL Classifications: G14; G30; M41; M48.

ABSTRACT We examine whether the adoption of the current expected credit losses (CECL) model, which incorporates forward-looking information in loan loss provisions (LLPs), enhances banks’ information production. Consistent with better information production, we document significant changes in both financial reporting and operational outcomes following CECL adoption. First, CECL banks’ LLPs become timelier and better reflect future local economic conditions. Second, CECL banks experience lower rates of loan defaults. These improvements are more pronounced among banks that invest more in CECL-related information systems and human capital, and are especially salient for larger banks. Our findings suggest that forward-looking accounting standards can enhance banks’ information environments. JEL Classifications: E32; G2; G28; M4; M48.

ABSTRACT Despite the potential of algorithms to improve judgment quality, recent research suggests that individuals may be averse to algorithmic use. We experimentally examine whether and how managers’ use of an algorithm-advised performance rating is influenced by rating valence and the decision rights managers have to adjust the algorithm. We find that managers are less willing to use an algorithm to evaluate subordinate performance when it advises a low, rather than high, rating. We further show that when the algorithm-advised rating is low, allowing managers to adjust how the algorithm computes the rating, compared with adjusting the rating itself or not allowing any adjustment, increases algorithmic use. Further analyses show this effect to be consistent with managers’ increased understanding of an algorithm when involved in its computation. Our findings inform organizations’ implementation of performance evaluation algorithms by showing how rating valence and decision rights jointly influence managers’ use of the algorithms.

ABSTRACT This paper examines the credit supply-side effect of the U.S. 2003 dividend tax cut on the real economy through the banking sector. We show that C-corporation banks (treatment group), particularly those capital-constrained, increase the supply of small business loans more than S-subchapter banks (control group) following the tax cut, aligning with the old view of dividend taxation and the supply-side effect rooted in credit rationing. Such an enhanced small business loan supply stemming from the tax cut translates into real effects on the economy. We find that areas with a greater presence of C-corporation banks exhibit more small business formations, employment, and innovations. The positive real effects are concentrated in subsamples when business growth opportunities are more abundant or international trade exposures are higher. Overall, our findings add to the literature on the real effects of the tax cut by showing an important yet unexplored bank credit supply channel.

ABSTRACT I examine how mandatory position disclosure of claimholders’ economic interests affects Chapter 11 bankruptcy outcomes. Exploiting a regulation that increased disclosure by creditors and equityholders on certain committees, I find that position disclosure is associated with a decrease in the length of bankruptcy cases, especially the duration of negotiations between claimholders across classes. Further, I show that position disclosure is associated with lower post-bankruptcy recidivism. Contrary to the concerns expressed by critics, I find little evidence that position disclosure reduced claimholders’ participation in committees or decreased trading in the market for bankruptcy claims. My findings highlight the overall benefits of position disclosure in facilitating negotiations during bankruptcy. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: D82; G33: G34; K22; M40.

ABSTRACT Non-arm’s-length transactions between a firm and its related parties, or related-party transactions (RPTs), are widely used in emerging economies. We examine the effect of creditor rights on the usage of financing RPTs using the enactment of India’s Insolvency and Bankruptcy Code (IBC) of 2016 as a shock to creditor rights. We show that stronger creditor rights make arm’s-length external financing more attractive relative to RPT financing. In particular, we find that firms that are ex ante more likely to be affected by IBC (i.e., those with low asset tangibility) reduce their dependence on financing-related RPTs, in particular, RPT loan inflows. This effect is strengthened for firms with greater financial constraints and higher growth opportunities. Our findings suggest that creditor rights influence financing choices and contribute to our understanding of how insolvency reforms affect financing and RPTs in emerging markets.