Ling Lei Lisic

Executive Overconfidence and Compensation Structure

We examine the impact of overconfidence on compensation structure. Our findings support the exploitation hypothesis: firms offer incentive-heavy compensation contracts to overconfident Chief Executive Officers (CEOs) to exploit their positively biased views of firm prospects. Overconfident CEOs receive more option-intensive compensation and this relation increases with CEO bargaining power. Exogenous shocks (Sarbanes-Oxley Act of 2002 (SOX) and Financial Accounting Standard (FAS) 123R) provide additional support for the findings. Overconfident non-CEO executives also receive more incentive-based pay, independent of CEO overconfidence, buttressing the notion that firms tailor compensation contracts to individual behavioral traits such as overconfidence.

CEO Power, Internal Control Quality, and Audit Committee Effectiveness in Substance Versus in Form†

During the past decade, new regulations have been adopted to improve audit committee effectiveness. Prior research has generally provided evidence in support of these regulations and suggests that a more independent and expert audit committee is more effective. We posit that CEO power reduces or even eliminates the improvements in audit committee effectiveness resulting from independent and financially expert committee members. Thus, CEO power may result in an audit committee that appears effective in form but is not in substance. We construct a composite index for CEO power by combining ten CEO characteristics and employ the incidence of internal control weaknesses as a proxy for audit committee monitoring quality. Since all the firms in our sample have completely independent audit committees, we use financial expertise to examine the impact of CEO power on audit committee effectiveness. We find that, when CEO power is low, audit committee financial expertise is negatively associated with the incidence of internal control weaknesses. However, as CEO power increases, this association monotonically weakens. When CEO power reaches a sufficiently high level, this association is no longer negative. The moderating effect of CEO power on audit committee effectiveness is more prominent when the CEO extracts more rents from the firm through insider trading. Our results are not driven by the CEOs involvement in director selection. Our paper suggests that more expert audit committees in form do not automatically translate into more effective monitoring. Rather, the substantive monitoring effectiveness of audit committees is contingent on CEO power.

Determinants of Audit Staff Turnover: Evidence from Taiwan

High employee turnover has long been a concern in the public accounting profession. Frequent hiring, training, and replacement of professional staff could have an adverse impact on audit quality. Using proprietary data from a Big Four accounting firm in Taiwan, we employ survival analysis and examine the factors that explain the turnover of entry‐level auditors. We find that female auditors are more likely to depart the accounting firm, while performance ratings, salary, and accounting background are significantly related to higher retention rates. We do not find, however, that masters degrees incrementally increase the retention rates of professional employees. These results hold after controlling for macroeconomic factors. Our evidence complements prior survey studies and suggests that gender, performance, salary, and accounting degree explain employee turnover in Taiwanese public accounting firms.

Auditor-Provided Tax Services and Earnings Management in Tax Expense: The Importance of Audit Committees

Regulators do not prohibit auditors from providing tax services to their audit clients, provided these services are preapproved by audit committees. I examine whether the association between auditor-provided tax services and earnings management in tax expense varies with audit committee effectiveness. I develop a composite proxy for audit committee effectiveness by combining six audit committee characteristics. I find that auditor-provided tax services are less positively associated with earnings management in tax expense as audit committee effectiveness increases. My findings suggest that the knowledge spillover effect of auditor-provided tax services is more likely to dominate the independence impairment effect when auditor-provided tax services are preapproved by more effective audit committees.

Auditor-Provided Tax Services and Earnings Management in Tax Expense

Regulators do not prohibit auditors from providing tax services to their audit clients, provided that these services are preapproved by audit committees. I examine whether the association between auditor-provided tax services and earnings management in tax expense varies with audit committee effectiveness. I develop a composite proxy for audit committee effectiveness by combining six audit committee characteristics. I find that auditor-provided tax services are less positively associated with earnings management in tax expense as audit committee effectiveness increases. My findings suggest that the knowledge spillover effect of auditor-provided tax services is more likely to dominate the independence impairment effect when auditor-provided tax services are preapproved by more effective audit committees.

Do Accounting Firm Consulting Revenues Affect Audit Quality? Evidence from the Pre- and Post-SOX Eras

The Big 4 accounting firms have experienced a steady increase in the proportion of their revenues generated by providing consulting services post-SOX, primarily to nonaudit clients. Regulators have expressed concerns about the potential implications of this increase for audit quality. In contrast, the accounting firms assert that the expertise developed by their consulting professionals helps them to provide better quality audits. We examine the relation between the proportion of accounting firm consulting revenue to total revenue and audit quality, measured using financial statement misstatements. Our results suggest that, on average, higher consulting revenues are not associated with impaired audit quality. However, higher consulting revenues are associated with reduced audit quality among clients with lower litigation risk. These results support the argument that a cultural shift associated with the provision of more consulting services, even to nonaudit clients, can adversely affect audit quality in some circumstances (e.g., when litigation risk-related incentives for high audit quality are weaker). In addition, although the effect of higher consulting revenues only impacts audit quality among low litigation risk clients, results of earnings response coefficient tests suggest that investors perceive a deterioration in audit quality when a higher proportion of accounting firm revenue is generated from consulting services regardless of the client’s level of litigation risk. These results suggest that regulator and investor concerns about the provision of consulting services (at least at the levels we observe) may be warranted, but only among clients where opposing incentives to provide high audit quality are weaker.

Technology Spillover and Corporate Disclosure Transparency

In recent decades the United States has become increasingly a knowledge-based economy as evidenced by a surge in patents. Companies strive to develop valuable technologies and to protect them from appropriation by competitors. We examine the implications of technological competition for patent-issuing firms’ redactions of technological information from new material contracts included with 10-K filings. We find that firms facing more intense technological competition are more likely to redact such information, and they redact it to a greater extent, presumably due to proprietary cost concerns. Total redactions (both technological and non-technological) also are greater for these firms. The results persist after controlling for a variety of product market competition measures. The results are more pronounced for firms with greater growth options, firms less financially constrained, and firms having recently sued others for patent infringements. The results are robust to using exogenous changes in state level R&D tax credits as an instrumental variable to address the endogeneity concern of technological competition. Our inferences can be extended to technologically innovative firms that do not hold patents. In summary, we document the implications of technological competition for redaction of proprietary technological information and these implications are distinct from and incremental to those of product market competition.In recent decades, the United States has become predominantly a knowledge-based economy, where investments in research and development intensify competition among firms in the knowledge space as well as in the product market space. While the implications of product market competition on corporate policies have been widely studied in the literature, we focus on the under-explored implications of technological competition on corporate disclosure policies. We find that firms facing more intense technological competition are more likely to redact material information from their 10-K filings. In addition, their annual reports are less readable, have a more negative tone, and contain more uncertain words. Our results suggest that firms provide less transparent disclosures when they face greater technological competition, presumably due to greater proprietary cost concerns. We also show that the corporate information environment is worse as evidenced by larger absolute analyst forecast errors, higher analyst forecast dispersion, greater stock illiquidity, greater stock turnover, and greater bid-ask spread when firms face more intensive technological competition. These results are more pronounced for more profitable firms where proprietary costs of disclosure are likely higher. We obtain all the results after controlling for a variety of product market competition measures, suggesting that the implications of technological competition on corporate disclosures and information environment are distinct from and incremental to those of product market competition. Our results are robust to using two natural experiments and using an instrumental variable approach to address the endogeneity concern of technological competition.

Information in Financial Statement Misstatements at the Engagement Partner Level: A Case for Engagement Partner Name Disclosure?

Using data from Taiwan, where a long history of engagement partner performance is available, we examine the reputational consequences that engagement partners suffer for having a recent history of past audit failures. We find that when an engagement partner’s recent history of poor audit quality is observable to audit clients, they are more likely to lose clients and are less likely to be reassigned to serve other clients of the audit firm over the next five years. We also find that these engagement partners are more likely to stop serving as engagement partners in the next five years, and those who remain in client service experience a re-allocation of assignments (both as a lead engagement partner and as a concurring (second) partner). Additionally, the clients that these partners continue to serve exhibit increased risk. Overall, our findings suggest that an engagement partner’s prior audit quality influences clients’ and audit firms’ engagement partner selection. The results suggest that audit clients can obtain valuable information from partner name disclosures and that audit firms signal a commitment to quality by managing engagement partner assignments.