Sunday, November 4, 2018

Innovation, Reallocation, and Growth


We build a model of firm-level innovation, productivity growth, and reallocation featuring endogenous entry and exit. A new and central economic force is the selection between high- and low-type firms, which differ in terms of their innovative capacity. We estimate the parameters of the model using US Census microdata on firm-level output, R&D, and patenting. The model provides a good fit to the dynamics of firm entry and exit, output, and R&D. Taxing the continued operation of incumbents can lead to sizable gains (of the order of 1.4 percent improvement in welfare) by encouraging exit of less productive firms and freeing up skilled labor to be used for R&D by high-type incumbents. Subsidies to the R&D of incumbents do not achieve this objective because they encourage the survival and expansion of low-type firms.

Article Citation:
Acemoglu, Daron, Ufuk Akcigit, Harun Alp, Nicholas Bloom and William Kerr. 2018. "Innovation, Reallocation, and Growth." American Economic Review, 108(11):3450-91.                

Temporary Protection and Technology Adoption: Evidence from the Napoleonic Blockade


This paper uses a natural experiment to estimate the causal effect of temporary trade protection on long-term economic development. I find that regions in the French Empire which became better protected from trade with the British for exogenous reasons during the Napoleonic Wars (1803-1815) increased capacity in mechanized cotton spinning to a larger extent than regions which remained more exposed to trade. In the long run, regions with exogenously higher spinning capacity had higher activity in mechanized cotton spinning. They also had higher value added per capita in industry up to the second half of the nineteenth century, but not later. 

Article Citation:
Juhász, Réka. 2018. "Temporary Protection and Technology Adoption: Evidence from the Napoleonic Blockade." American Economic Review, 108(11):3339-76.               

Sunday, October 28, 2018

The Expected Rate of Credit Losses on Banks' Loan Portfolios


Estimating expected credit losses on banks' portfolios is difficult. The issue has become of increasing interest to academics and regulators with the FASB and IASB issuing new regulations for loan impairment. We develop a measure of the one-year-ahead expected rate of credit losses (ExpectedRCL) that combines various measures of credit risk disclosed by banks. It uses cross-sectional analyses to obtain coefficients for estimating each period's measure of expected credit losses. ExpectedRCL substantially outperforms net charge-offs in predicting one-year-ahead realized credit losses, and reflects nearly all the credit loss-related information in the charge-offs. ExpectedRCL also contains incremental information about one-year-ahead realized credit losses relative to the allowance and provision for loan losses and the fair value of loans. It is a better predictor of the provision for loan losses than analyst provision forecasts, and is incrementally useful beyond other credit risk metrics in predicting bank failure up to one year ahead.

Sunday, October 8, 2017

The Financial Crisis and Corporate Credit Ratings


Credit ratings on many financial instruments failed to accurately portray default risk before the global financial crisis. I find no decline in the performance of corporate credit ratings during or after the crisis, indicating that the failures of ratings on financial instruments were due to conditions unique to the rating agencies' financial instruments divisions. Rather, the preponderance of tests indicate that corporate credit rating performance improves after the crisis, consistent with the rating agencies positively responding to public criticism and regulatory pressures. At the same time, I find evidence of sophisticated market participants decreasing their reliance on corporate credit ratings after the crisis. Consistent with theoretical models of reputation cyclicality, a likely explanation is that the rating agencies suffer spillover reputation damage from their failed ratings on financial instruments. My study informs regulators, practitioners, and academics about the performance of corporate credit ratings during and after the crisis, and provides novel empirical evidence consistent with reputation concerns affecting credit rating usage decisions.

Keywords: credit ratings, financial crisis, rating reputation, rating performance, debt contracting

Article Citation:
Ed deHaan (2017) The Financial Crisis and Corporate Credit Ratings. The Accounting Review: July 2017, Vol. 92, No. 4, pp. 161-189. 

Auditing Challenging Fair Value Measurements: Evidence from the Field


Concern about effective auditing of fair value measurements (FVMs) has risen in recent decades. Building on prior interview-based and experimental research, we provide an engagement-level analysis of challenging FVMs, using quantitative and qualitative data on audit phases from risk assessment to booking adjustments. Challenging FVMs have high estimation uncertainty, high subjectivity, significant/complex assumptions, and multiple valuation techniques. Estimation uncertainty is associated with higher inherent risk assessments, which are, in turn, predictive of client problems identified during the engagement. The use of a valuation specialist by auditors, associated with higher inherent risk and client specialist use, is a key decision: procedures performed by specialists have the highest yield in identifying problems. Auditor-client discussion of an adjustment increases with problem identification and auditors' expressions of residual concern about uncertainty post-testing. However, booked audit adjustments are infrequent; the only factors explaining income-decreasing adjustments are better evidential support and breadth of problems identified.

Keywords: auditing, fair value measurement, estimation uncertainty, materiality, valuation specialists

Article Citation:
Nathan H. Cannon and Jean C. Bedard (2017) Auditing Challenging Fair Value Measurements: Evidence from the Field. The Accounting Review: July 2017, Vol. 92, No. 4, pp. 81-114. 

Do CEO Succession and Succession Planning Affect Stakeholders' Perceptions of Financial Reporting Risk? Evidence from Audit Fees


In this paper, we examine how CEO succession and succession planning affect perceptions of financial reporting risk among stakeholders who are responsible for and oversee firms' financial reporting (e.g., auditors, management, and audit committees). Management succession introduces uncertainty about firms' future operations, financial policies, and potential motivation for earnings management, which we predict elevates the perceived risk of financial reporting improprieties. Consistent with this prediction, we find that audit fees are higher for firms with new CEOs. Importantly, however, we note that careful CEO succession planning (i.e., promoting an “heir apparent”) attenuates perceptions of higher risk, as evidenced by a lack of an audit pricing adjustment. These results are robust to several alternative specifications and analyses designed to mitigate the concern that the association between audit fees and CEO succession and succession planning is driven by factors leading to the CEO change. We also show that audit fee increases dissipate over time as the new, non-heir CEO stays longer at the firm, reinforcing the inference that audit fees increase in response to the uncertainty surrounding a new CEO. Additionally, we do not find evidence of a deterioration in audit quality with new CEOs, independent of the succession plan.

Keywords: CEO succession, succession planning, financial reporting risk, audit fees, heir apparent, insider CEO

Article Citation:
Kenneth L. Bills, Ling Lei Lisic, and Timothy A. Seidel (2017) Do CEO Succession and Succession Planning Affect Stakeholders' Perceptions of Financial Reporting Risk? Evidence from Audit Fees. The Accounting Review: July 2017, Vol. 92, No. 4, pp. 27-52. 

Saturday, June 24, 2017

Comparability and Cost of Equity Capital


We investigate how the comparability of a company's financial statements is related to its cost of equity capital. The Financial Accounting Standards Board's (FASB 2010) Statement of Financial Accounting Concept No. 8 proposes that comparability is a key tenet of accounting because it allows users of financial statements to benchmark a firm against similar firms when distinguishing between alternative investment opportunities. We provide evidence that greater financial statement comparability is associated with lower cost of equity capital, and show that comparability's effect on cost of equity remains after controlling for within-firm accounting quality. Additionally, we find that investors derive greater benefits from financial statement comparability in firms whose information environments are less transparent (high information asymmetry) and whose equity shares trade in markets that are less competitive (imperfect markets). Our findings contribute to accounting research by providing evidence justifying comparability as a separate element of the FASB's conceptual framework.