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Faculty Research
Faculty
Congratulations Terry Shevlin, Recipient of the ATA Outstanding Service Award
Terry Shevlin, Associate Professor and Paul Merage Chair, has recently been named the recipient of the 2022 American Tax Association’s (ATA) Outstanding Service Award in recognition of his outstanding service to the ATA. Terry has served the Association in some official capacity over 40 times over the years, chairing several committees, and serving as a Trustee, as President, and as Editor of JATA. He has gone on to serve as Editor of the Accounting Review, Accounting Horizons, American Accounting Association’s (AAA) VP for Research and Publications, and AAA President. Terry has also individually mentored many people in the profession and visited many campuses and conferences on innumerable occasions to share his wisdom and insight. Terry Shevlin’s contributions to the Association, and its members, have been immense. Congratulation Terry on this wonderful and well-deserved recognition!
2021 UCI Celebration of Teaching Award Recipients
The annual UCI Celebration of Teaching recognizes excellence in undergraduate teaching at UCI. These awards draw nominations from all over the UCI campus as students, faculty, and staff are invited to nominate the instructors and teaching assistants who have demonstrated exceptional leadership, innovation, and commitment to undergraduate education. We are excited to recognize our very own accounting instructors and recipients of the 2021 Celebration of Teaching award! Lecturer of the Year: Max Chao, Continuing Lecturer Dean’s Honeree: Devin Shanthikumar, Associate Professor
Accounting Area Faculty
Machiavelli (Max) W. Chao, JD Full-Time Lecturer
Nate Franke, CPA, MBA Full-Time Lecturer Elizabeth Chuk, PhD Associate Professor of Accounting
Joanna L. Ho, CPA, CMA, PhD Professor of Accounting Stephen Cooke Lecturer
Chuchu Liang, PhD Assistant Professor of Accounting
Radhika Lunawat, CA, PhD Assistant Professor of Accounting
Patricia Wellmeyer, CPA, CGMA, MS, PhD Clinical Assistant Professor of Accounting, Director of MPAc Program Mort Pincus, CPA, PhD Professor Emeritus of Accounting
Chenqi Zhu, PhD Assistant Professor of Accounting Devin Shanthikumar, PhD Associate Professor of Accounting Julie Flaiz-Windham, CPA, CISA, MBA Lecturer
Ben Lourie, PhD Associate Professor of Accounting
Terry Shevlin, PhD Professor of Accounting, Paul Merage Chair in Business Growth
Faculty Research
The value of public information when private information acquisition is sequentially rational
Radhika Lunawat Co-author: Jeroen Suijs, Department of Business Economics, Erasmus University
This paper presumes that an individual investor acquires private information in a sequentially rational way, i.e., an investor can acquire as many costly private signals as he wants and after each signal is acquired, he decides whether to acquire another one. When the investor stops acquiring private information, he makes a binary decision (e.g., whether to buy stock) which yields a benefit when the decision is optimal. We analyze the effect of public information on the decision of the investor. We find that public information improves the decision of the investor when his prior beliefs are unbiased or optimistic. When prior beliefs are pessimistic, the public information may result in worse decisions. We further find that public information is more likely to improve the decision of a more sophisticated investor than a less sophisticated investor, i.e., public information does not level the playing field when private information acquisition is sequentially rational.
From Left: Ben Lourie, Chuchu Liang, Devin Shanthikumar, Terry Shevlin, Mort Pincus, Joanna Ho, Siew Hong Teoh, Radhika Lunawat, and Patricia Wellmeyer
The unintended consequences of the FASB’s Simplification Initiative: Does ASU 201609 reduce earnings informativeness?
Elizabeth Chuk Co-authors: Qiao Annie Wang and Tonni Shijun Xia
ASU 2016-09 Improvement to Employee Share-Based Payment Accounting significantly alters the financial reporting for stock-based compensation by requiring the recognition of excess tax benefits and tax deficiencies in net income, whereas the prior accounting regime required only balance sheet recognition (in most instances). Our paper examines whether earnings become less informative after ASU 201609. Using a difference-in-differences design, we find a reduction in earnings informativeness after ASU 2016-09. In cross-sectional tests, we find that the reduction in earnings informativeness is greater for firms that are more impacted by the ASU: in particular, (i) firms that more extensively use stockbased compensation and (ii) firms with more volatile stock prices. The documented effects are economically meaningful, with an average post-ASU reduction of 21.7% in the earnings response coefficient for firms impacted by ASU 2016-09. Our results are important to understanding the unintended consequences of the FASB’s Simplification Initiative.
Chuchu Liang Co-authors: Ben Lourie, Alex Nekrasov and Il Sun Yoo
We examine the managerial incentives to voluntarily disclose the gender diversity of a firm’s workforce. When examining voluntary disclosures, one key challenge is the difficulty of observing the underlying performance for nondisclosers. We overcome this challenge by using novel data extracted from employees’ online profiles to gauge the underlying gender diversity. After controlling for industry gender diversity, we find that firms are more likely to disclose when they are more gender diverse. This finding is consistent with managerial incentives to disclose favorable information. However, disclosure is more prevalent in industries with low gender diversity, which suggests that investor demand for disclosure is higher when firms operate in a poor gender diversity environment. Firms disclose their gender diversity when (a) their gender diversity is expected to improve, (b) the firm has more female managers, (c) institutional ownership is high, and (d) proprietary costs are low. Regarding the potential benefits firms may receive from disclosure, we find that the disclosure of gender diversity is associated with (a) increases in diversity CSR ratings, (b) improvements in the tone in media coverage of the firm’s diversity, and (c) increases in the number of CSR-oriented funds investing in the firm’s stock. Overall, our study broadens our understanding of the evolving corporate disclosure landscape by providing evidence on firms’ incentives to disclose the gender diversity of their workforce.
Effects of the 2021 Expanded Child Tax Credit
Ben Lourie Co-authors: Devin Shanthikumar, Chenqui Zhu and Terry Shevlin
We examine the effects of the 2021 expansion of the Child Tax Credit (CTC). Analyzing detailed transactions data for 2019 through September 2021, utilizing a difference in difference design, and controlling for state-time specific conditions, we examine the effects of CTC on employment, consumption, financial position, and financial distress. We find that lowerincome recipients of expanded CTC monthly payments do not significantly leave the workforce. They increase their total consumption, including increasing spending on groceries, education, and healthcare. Families put more money towards reducing debt and incur fewer overdraft fees. However, we find weak or insignificant results regarding savings and extreme financial distress, as measured by payments towards debt collection agencies. The consumption effects of the expanded CTC are strongest for families with more children, and for the lowest-income families. We also examine the impacts on higher-income recipients of monthly payments, and find some differences between the two groups. Our results provide largescale empirical evidence on the realized effects of the 2021 changes to the CTC, and suggest that families significantly benefited from the expanded CTC payments, without significant costs to employment.
The persistence and pricing of changes in multinational firms’ foreign cash holdings
Terry Shevlin Co-authors: Novia X. Chen, University of Houston and Peng-Chia Chiu, The Chinese University of Hong Kong, Shenzhen
Using a hand-collected sample of U.S. multinational firms’ foreign and domestic cash holdings, we evaluate the earnings persistence implications of changes in foreign and domestic cash and whether stock prices reflect such implications. Building on the earnings decomposition approach in Dechow, Richardson, and Sloan (2008), we find that, in the overall sample, changes in foreign cash are as persistent for future earnings as changes in domestic cash. In the cross-section, we find that foreign cash changes have higher persistence when foreign operations offer better growth opportunities and when repatriation taxes are lower. We then examine whether investors correctly price the persistence implications of foreign and domestic cash changes. We find a positive association between current foreign cash changes and one-year-ahead stock returns, suggesting that investors underreact to foreign cash changes, or equivalently, underestimate the earnings persistence of foreign cash changes. We further document that investors are more likely to misprice foreign cash changes when information processing costs are higher and when firms have poorer information environments. Our study sheds light on a recent paper, Harford, Wang, and Zhang (2017), who find that investors discount foreign cash changes, which they attribute to agency costs and investment inefficiencies. Our findings suggest that the discount is more likely due to investor mispricing of foreign cash changes.
Devin Shanthikumar Co-authors: Ben Lourie and Il Sun Yoo
The revised Markets in Financial Instruments Directive, known as MiFID II, requires the unbundling of research payments from trading execution. Using a difference-in-differences research design, we examine whether this regulation impacted the research–trading relation. We find that MiFID II weakened the link between the brokerage share of trading and analyst research. Forecast frequency, optimism, and accuracy are less likely to be associated with the brokerage trading share after MiFID II. These results do not subside in the years following the passage of the regulation. Analysts appear to respond to these changes. Analysts who earned the highest brokerage trading share due to forecast frequency, optimism and accuracy prior to MiFID II change their forecasting behavior the most after MiFID II goes into effect. We find similar results throughout for recommendations. Overall, our evidence suggests that MiFID II is at least partially successful in unbundling research from execution.
All Losses Are Not Alike: Real versus Accounting-Driven Reported Losses
Chenqi Zhu Co-authors: Feng Gu, University at Buffalo and Baruch Lev, New York University
We examine the value relevance of accounting-driven losses that result from the immediate expensing of firms’ internallygenerated intangible investments vs. losses occurring irrespective of intangible investments. Contrary to the longheld view that losses are irrelevant for valuation, we find that once the accounting bias of intangibles-expensing is undone, earnings of firms reporting intangibles-related losses are as informative as earnings of profitable firms. Contrary to the view that persistent losses decrease earnings relevance, our evidence shows no decrease in the relevance of earnings for firms reporting persistent intangibles-related losses. We also find that firms reporting intangibles-related losses outperform other loss firms and even profitable firms in value creation from investments in technological innovation and human capital. Our evidence further shows that firms reporting intangibles-related losses have stronger future performance than other firms. Taken together, the results of this study demonstrate the fundamental differences between losses driven by the immediate expensing of internally-generated intangible investments and losses reflecting genuine business performance shortfalls.
Are Key Audit Matter Disclosures Useful in Assessing the Financial Distress Level of a Firm?
Patricia Wellmeyer Co-authors: María-del-Mar Camacho-Miñano, Complutense University of Madrid, Madrid, Nora Muñoz-Izquierdo, CUNEF University, Madrid and Morton Pincus, UCI
This study examines the usefulness of new expanded audit report key audit matters (KAM) disclosures in assessing the level of financial distress present at a firm. Using KAM disclosures from a hand-collected sample of UK Premiumlisted firms for 2013 to 2018, we explore the association between firm financial distress and the number, risk level, financial statement impact, and nature of disclosed KAMs. Our study expands on recent literature examining the use of audit report disclosures on financial distress prediction models as well as literature examining the utility of expanded auditor reporting. We find the greater the number of KAMs disclosed, the higher the financial distress level of a firm. Results also show the usefulness of KAMs in assessing financial distress levels increases when considering the level and nature of KAM(s) disclosed. Specifically, certain types of entity-level and individual account-level KAMs, as well as KAMs with a primary impact on a firm’s profitability and solvency, are more likely to be disclosed when firms face higher levels of financial distress. Our findings also suggest KAMs have predictive ability in assessing subsequent period financial distress levels. In all, evidence from this study suggests expanded auditor reports can help financial statement users assess and predict one of the main risks associated with a firm - the risk of failure.
