Research Abstracts

Latest Published Work by Merage School Faculty Members

Accounting Abstracts

Professor Chuchu Liang

Title: “Advertising Rivalry and Discretionary Disclosure”

Accepted at: Journal of Accounting and Economics (Journal on Financial Times Top 50 list)

Abstract: Advertising is a critical competitive tool that shapes interactions among firms in the product market. Using third-party tracked data on advertising outlet costs, I find that a nontrivial portion of public firms, even those with intense advertising activities, do not disclose advertising expenses in their financial statements, indicating significant disclosure discretion. I further use product category-level advertising data to develop a firm-specific measure of advertising rivalry. I predict and find that advertising rivalry is negatively associated with the likelihood of disclosing advertising expenses. This negative association is more pronounced when firms advertise on less trackable media outlets or have more mature products. These findings suggest that firms consider their advertising expenses proprietary and that concerns about advertising competition discourage the disclosure of advertising expenses.

Professor Ben Lourie, Professor Devin Shanthikumar, and PhD Student Il Sun Yoo

Title: “MiFID II and the unbundling of analyst research from trading execution?”

Accepted at: Contemporary Accounting Research (Journal on Financial Times Top 50 list)

Abstract: The revised Markets in Financial Instruments Directive (MiFID II) requires the unbundling of research payments from trading execution, fundamentally changing the way in which investors typically pay for analyst research in Europe. We examine the effectiveness of the regulation in changing the link between analyst research and trading, the research-trading link, and the analyst response to this potential change in incentives. Using a difference-in-differences research design, we find that forecast frequency, optimism, and accuracy are less associated with the brokerage trading share after MiFID II, suggesting that MiFID II weakened the link between the brokerage share of trading and analyst research. Following MiFID II, analysts in Europe are less likely than analysts in the United States to continue high forecast frequency, optimism, and accuracy for stocks with high share importance for the analyst’s brokerage house. We find similar results throughout for buy/sell recommendations. Overall, our evidence suggests that MiFID II is at least partially successful in unbundling research from execution, and impacts both the trading effects and the production of analyst research.

Professor Emeritus Mort Pincus

Title: “Enterprise system implementation and cash flow volatility”

Co-authors: Alfred Z. Liu (PhD alumnus) and Sean X. Xu (PhD alumnus)

Accepted at: Contemporary Accounting Research (Journal on Financial Times Top 50 list)

Abstract: This study investigates the financial and operational implications of enterprise systems (ESs) in corporate risk management. Using matched difference-indifferences analyses based on ES implementation events, we document a significant reduction in the volatility of operating cash flows following ES implementation. We further show that ES implementers have better post-implementation operational efficiency than matched non-ES firms and better manage sales, costs, working capital, and expenditures to reduce operating cash flow volatility. Consistent with the benefits of lower cash flow volatility documented in prior literature, we find ES implementers demonstrate higher investment efficiency, lower reliance on external financing, and higher debt capacity post-ES-implementation than the matched non-ES firms. Our study sheds light on the economic benefits of utilizing enterprise systems in corporate risk management and in so doing, responds to the paucity of empirical research in this area.

Professor Terry Shevlin

Title: “Tax knowledge diffusion through shared audit partners: Evidence from China”

Co-authors: Chee Yeow Lim, Kun Wang, and Yanping Xu

Accepted at: Journal of Accounting, Auditing and Finance

Abstract: This study investigates how tax knowledge is diffused through auditors at the individual partner level. We find that firms sharing the same audit partner with low tax firms exhibit lower effective tax rates (ETRs), but not for firms that share the same audit office but with different partners. Using a difference-in-difference (DID) research design, we show that firms’ ETRs decline significantly after their existing audit partners start auditing a low-tax firm. Our findings suggest that the transfer of tax planning knowledge from low tax firms to focal firms occurs mainly through common individual partners. Moreover, benefits to focal firms are stronger when their top executives have a social connection to the shared partners. Further analysis shows that audit partners are more likely to retain existing clients and charge higher audit fees for tax planning diffusion, indicating how audit partners benefit from sharing tax planning knowledge with their clients.

Professor Chenqi Zhu

Title: “Tech-Enabled Financial Data Access, Retail Investors, and Gambling-Like Behavior in the Stock Market”

Co-authors: Taha Havakhor, Mohammad S. Rahman, and Tianjian Zhang

Accepted at: Management Science (Journal on Financial Times Top 50 list)

Abstract: Advancements in technology have reduced information acquisition costs, creating an improved information environment for retail investors. Specifically, new technologies such as application programming interface (API) deliver high-volume, institutional-like raw data directly to Main Street investors. Although greater availability of information should be beneficial, it may also exacerbate retail investors’ existing trading deficiencies. Exploiting the sudden shutdown of Yahoo! Finance API, the largest free API for retail investors, this study examines how access to tech-enabled raw financial data affects retail investment. We find that retail trading volumes in stocks favored by active retail investors dropped by 8.6% to 10.5% within one month of the API shutdown. The remaining retail trades collectively became more predictive of future returns, suggesting less gambling-like behavior after the API shutdown. Moreover, our randomized controlled experiment affirms the underlying mechanism: tech-enabled access to high-volume historical price data increases individuals’ overconfidence, which further leads them to engage in excessive trading. The study reveals an unintended consequence of technology-led, wider data access for retail investors.