Thursday, September 26
Making Talk Less Cheap: The Intrinsic Verifiability of Losses
Conditional conservatism is interpreted as accountants requiring greater verification to recognize “good news” as gains than “bad news” as losses. We devise a cheap-talk communication game in which a manager receives an uncertain private “news” signal for two states of nature and reports either a gain or a loss to an investor, who decides whether to invest. We develop an analytical model in which managers are either deceptive or trustworthy; when all managers are deceptive, the traditional “babbling” equilibrium emerges under which there is no information transmission. However, if investors believe that at least one manager is trustworthy, then information transfer takes place, because when the manager reports a loss (gain), the investor believes the manager is trustworthy (may be trustworthy) and they decline to invest (choose to invest). We randomly and anonymously match participants in an experiment and use the quantal response framework, which assumes agents make random evaluation errors, to model investors’ behavior. The results largely align with predictions – e.g., there is significant information transfer – with one key exception: investors derive significant utility from investing when their manager reports a loss, which appears consistent with some investors providing a costly reward to reciprocate trustworthy managers’ pecuniary sacrifice. Our findings highlight the social value of trustworthy managers and suggest that investors require lower verification for losses because they believe the conveying managers are inherently trustworthy.
Navigating the spectrum of aggressiveness: Social dynamics and anxieties in tax planning
This qualitative inquiry investigates how tax professionals understand aggressiveness in tax planning and how they position themselves on the spectrum of aggressiveness. Based on semi-structured interviews with 33 experienced Canadian tax professionals from top-10 accounting and law firms, we find that tax professionals understand aggressiveness through a web of inter-related considerations. These include creativity, complexity, exploiting ambiguities in tax law, and lucrativeness, associated with risks of tax audits, technical errors, disputes with tax authorities over legal interpretations, and reputational damage for the client, the tax professional, and their firm. These considerations and related risks are often a source of anxiety for tax professionals. Drawing on contemporary philosopher Charlie Kurth's distinction between “punishment anxiety” and “practical anxiety,” we identify an intricate
interplay between these two forms of anxiety and a collective negotiation process involving clients and colleagues, each bringing their own risk-reward preferences, which shapes professionals’ decisions of how aggressive they should be. The socio-affective conceptualization of aggressiveness that we propose in this study contributes to the tax literature by deepening our understanding of the elusive concept of tax aggressiveness. It also enriches the broader literature on accounting and finance professionals' emotions at work by documenting the analytical value of a nuanced understanding of anxiety. Furthermore, it advances the professional ethics literature by highlighting the moral significance of practical anxiety in professional judgment about risky, ethically sensitive issues.
Shedding Light on Bias: Consumer Complaint Disclosure and Racial Equity in Financial Services
We examine the impact of the Consumer Financial Protection Bureau’s 2015 disclosure of complaint narratives on racial disparities in financial services. Using a triple-differences approach, we find that, post-disclosure, minority consumers see improved outcomes at financial institutions under CFPB oversight. In the savings market, this includes higher deposit rates, lower maintenance fees, and increased household account ownership. In the lending market, improvements are seen in reduced interest rates on auto loans and credit cards, as well as increased auto ownership. The research emphasizes the broad impact of service quality disclosure in mitigating racial disparities in savings and lending markets.
Capital market pressure and racial inequality: An examination of workplace safety and wage theft∗
Managers generally face capital market pressure to report higher earnings, especially when doing so allows them to meet an earnings benchmark. Cost-cutting strategies to increase earnings, such as pressuring employees to work at unsafe speeds or off the clock to increase production, also increase the likelihood of safety violations and wage theft. We examine whether these incidents—which benefit the firm’s managers and shareholders to the detriment of the employees—are evenly distributed across low-wage frontline employees. We predict and find that within low-wage frontline employees, non-white frontline employees are at greater risk, on average, of facing unsafe work environments and wage theft, and this risk increases even further when their employer is under heightened capital market pressure to meet an earnings benchmark. We conclude that capital market pressure appears to have a disproportionate impact on non-white employees, increasing racial inequality in the workplace through safety violations and wage theft.
Friday, September 27
Corporate Social Responsibility and Goodwill Impairment: Charitable Donations of Chinese Listed Companies
We study the effect of corporate social responsibility (CSR) on timeliness of goodwill impairment and explore the driving motives of firms with delayed goodwill impairment to engage in CSR. Goodwill is the premium paid when a business is acquired. If the value of the business declines, goodwill impairment should be disclosed timely. Deliberately delaying goodwill impairment is a widespread ethical issue. Based on all the mergers of Chinese listed companies during 2010–2019, we study the motivation of corporate charitable donations when facing the risk of goodwill impairment. Our results suggest that long-term (consistent) charitable donations reflect more altruistic social responsibility than short-term (suddenly increased) donations. In particular, firms that make more long-term donations tend to report goodwill impairment timely, while firms making excessive short-term donations are more likely to delay goodwill impairment. We further find that short-term donations are motivated not only by covering up the goodwill impairment delay but also by providing insurance-like protection when delayed impairment is announced. The results also suggest that moral licensing plays a role in inducing such opportunistic behaviors. To address the endogeneity problem, we use the number of provincial charitable funds and the number of provincial deaths due to natural disasters as instrumental variables for short-term donations.
The ethics of tax adjudication: Initial evidence on the name-letter effect in judicial decision-making
Tax adjudication is an important governance function in a tax system, as tax authorities and taxpayers will sometimes disagree on the application of tax rules. Effective tax adjudication requires that judges be free from bias, including unconscious bias. One potential source of unconscious bias is the name-letter effect, which is the tendency for individuals to evaluate the alphabetical initials in their name particularly favorably. We investigate whether the name-letter effect influences judicial decision-making in a tax setting. If it does, judges would not be impartial but more favorably disposed to appellants who have initials similar to their own. We construct datasets from decades of tax court data for two types of taxpayers (individuals and corporations) in two jurisdictions (Canada and the United States). Our total sample size is 11,370 cases. Using all possible combinations of first letter matches between taxpayers’ and judges’ names, we do not find that the likelihood of a taxpayer achieving a favorable outcome is significantly higher than if there is no name-letter match. Our results suggest that a psycholinguistic phenomenon with considerable empirical support in extra-legal contexts is unlikely to unconsciously bias judges.
Communicating Norms of Conduct: The Semantics of Professionalism
This paper explores how American and Canadian public accounting associations conveyed norms of conduct to members and students in their editorials from 1916 to 1973, with a focus on the use of profession-related terms. Drawing on Bakhtin's concept of stylistic aura and employing advanced textual analysis techniques, the study reveals that profession stem words such as "profession," "professional," and "professionals" played a key role in communicating these norms. The semantic meanings of sentences containing these terms varied over time and across different journals. Additionally, the study finds that utterances with profession stem words were more pervasive and better at highlighting competing concerns than ethics stem words, suggesting that these terms more effectively convey that norms of conduct are situational and require balancing competing interests. This study contributes to our understanding of accounting association communication processes, specifically communication via professional narratives.