Neel Corporate Governance Center Research Review: 2017-18

May 30, 2018

The Neel Corporate Governance Center published and presented an impressive research canon in the 2017-18 academic year. Our 10 research fellows published 15 corporate governance-related papers in top tier outlets and presented at 29 conferences in the U.S. and internationally, including five presentations to professional audiences. They also served as editors of seven publications and held 10 editorial review board seats related to corporate governance.

Research Fellow Publication Spotlights

Does It Pay to Treat Employees Well? International Evidence on the Value of Employee-Friendly Culture, Journal of Corporate Finance

Larry Fauver and his coauthors, Michael McDonald and Alvaro Taboada, show that companies with a more employee-friendly culture have higher valuations. Employee-friendly cultures improve technical efficiency and profitability, which in turn benefits valuation. The impact is larger for firms in countries with better investor protection, firms with better governance and fewer agency problems, and for those in high-tech and in labor-intensive industries.

The Monitoring Effectiveness of Co-opted Audit Committees, Contemporary Accounting Research (forthcoming)

Linda Myers and her coauthors, Cory Cassell, Roy Schmardebeck and Jian Zhou, investigate the relationship between audit committee co-option (proportion of members who joined after the CEO) and financial reporting quality. They found that higher levels of audit committee co-option correlated with less effective monitoring, as evidenced by more financial statement misstatements and greater absolute discretionary accruals. Their findings provide new evidence about how potential CEO influence on director nominations and audit committee appointments impacts the effectiveness of monitoring by the audit committee.

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

Regulators have expressed concerns about how the increase in consulting services at public accounting firms following the Sarbanes-Oxley Act (SOX) impacts audit quality. Yet, accounting firms assert the work gives consulting professionals additional expertise that helps them to provide better quality audits. Linda Myers and her coauthors, Ling Lisic, Robert Pawlewicz and Timothy Seidel, examine the relationship between audit quality and increased consulting revenue in the pre- and post-SOX eras.

They find evidence suggesting that before SOX, higher proportions of audit firm consulting revenues negatively impacted both audit quality and investor perceptions of audit quality. However, they do not find a statistically significant association between audit firm consulting revenues and either audit quality or investor perceptions of audit quality following SOX. Their analyses suggest that even if these relations exist following SOX, the potential economic magnitude of the effect is small.

Can paying ‘too much’ or ‘too little’ tax contribute to forced CEO turnover? The Accounting Review

James Chyz and his coauthor Fabio Gaertner examine the effect of corporate tax outcomes on forced CEO turnover. While prior research argues that firms often do not engage in tax avoidance due to reputational concerns, the empirical evidence suggesting the existence of reputational costs is scarce. In a broad sample of firms, they find evidence of a relationship between paying low taxes and forced turnover. They also find that forced CEO turnover is more likely when the firm pays a high tax rate relative to its peers. In other words: CEOs can be penalized for either paying ‘too much’ or ‘too little’ in taxes.

Impact of Auditor Report Changes on Financial Reporting Quality and Audit Costs: Evidence from the United Kingdom, Contemporary Accounting Research (forthcoming)

The United States’ regulator for audits of public companies, the PCAOB, enacted a new standard requiring auditors to disclose “critical audit matters” for their public company clients in reports. This new ruling was met with contention: investors want more information than just a basic “pass” or “fail” opinion; auditors are wary about releasing information that management has not already disclosed in the financial statements.

Joseph Carcello, Terry Neal and their coauthors, Chan Li and Lauren Reid, studied the effect of a similar rule change in the United Kingdom and find that new requirements are associated with a significant improvement in financial reporting quality without detecting a significant increase in audit costs. In the U.K., the regime is associated with significant decreases in absolute abnormal accruals and the propensity to just meet or beat analyst forecasts, and a significant increase in earnings response coefficients. They do not find a significant change in audit fees or audit delay surrounding the implementation of the new reporting regime.

CEO Turnovers and Disruptions in Customer–Supplier Relationships, Journal of Financial and Quantitative Analysis

Events that disrupt customer–supplier relationships pose a source of risk for suppliers that depend on a customer for a large portion of their revenues. Matthew Serfling and his coauthors, Vincent Intintolli and Sarah Shaikh, identify the replacement of a customer’s CEO as a disruptive event that results in suppliers losing substantial sales. These losses are greater when an incumbent customer CEO is more likely to be entrenched and stem largely from the successor divesting assets. Finally, they document that losses in sales following a customer CEO turnover lead to declines in a supplier’s financial performance and that suppliers experience negative abnormal stock returns to announcements of customer CEO departures. Their paper identifies a significant risk that corporate boards should consider when evaluating the risks of certain customer-supplier relationships.

Selling Crowdfunded Equity: A New Frontier, Oklahoma Law Review

In April 2012, the JOBS Act made it possible for small businesses to raise up to $1 million online through equity crowdfunding, which allows people to invest in a company not listed on the stock market and exempt from federal regulation. Joan Heminway’s article offers information and observations about federal securities law transfer restrictions imposed on people who participate in equity crowdfunding. She discerns that, ultimately, the long-term potential for suitable resale markets for crowdfunded equity — whether under the CROWDFUND Act or otherwise — is likely to be important in generating capital for small business firms (and especially start-ups and early-stage ventures). Three important areas of reference will be shareholder exit rights, public offering regulation, and offering and trading markets. Only after a period of experience with resales under the CROWDFUND Act will we be able to judge whether the resale restrictions under that legislation are appropriate and optimally crafted.