Occupational Licensing and Accountant Quality: Evidence from the 150-Hour rule

I examine the effects of occupational licensing on the quality of Certified Public Accountants (CPAs). I exploit the staggered adoption of the 150-hour rule, which increased the educational requirements for a CPA license. My analysis shows that the rule reduces the number of entrants into the profession and increases their wage premium. The same premium is enjoyed by grandfathered accountants, suggesting it is not a return to higher quality. Labor market proxies for quality find no difference between 150-hour rule CPAs and the rest. These findings are consistent with the theoretical argument that the rule reduced the supply of new CPAs and increased rents to the profession with little impact on quality.

Journal of Accounting Research

Risk Perception Through the Lens of Politics in the Time of the COVID-19 Pandemic

Even when, objectively speaking, death is on the line, partisan bias still colors beliefs about facts. We show that a higher share of Trump voters in a county is associated with lower perceptions of risk during the COVID-19 pandemic. As Trump voter share rises, individuals search less for information on the virus, and engage in less social distancing behavior, as measured by smartphone location patterns. These patterns persist in the face of state-level mandates to close schools and businesses or to “stay home,” and reverse only when conservative politicians are exposed and the White House releases federal social distancing guidelines.

Journal of Financial Economics

Civic Capital and Social Distancing during the Covid-19 Pandemic

The success of non-pharmaceutical interventions to contain pandemics often depends greatly upon voluntary compliance with government guidelines. What explains variation in voluntary compliance? Using mobile phone and survey data, we show that during the early phases of COVID-19, voluntary social distancing was higher when individuals exhibit a higher sense of civic duty. This is true for U.S. individuals, U.S. counties, and European regions. We also show that after U.S. states began re-opening, social distancing remained more prevalent in high civic capital counties. Our evidence points to the importance of civic capital in designing public policy responses to pandemics.

Journal of Public Economics

A New Era of Midnight Mergers: Antitrust Risk and Investor Disclosures

Antitrust authorities search public documents to discover anticompetitive mergers. Thus, investor disclosures may alert them to deals that would otherwise escape scrutiny, creating disincentives for managers to divulge transactions. We study this behavior in publicly traded US companies. First, we estimate a regression discontinuity that exploits mandatory disclosure thresholds stipulated by securities law. We find that releasing information to investors poses antitrust risk. Second, we present a method for measuring undisclosed merger activity that relies on financial accounting reporting requirements. We find that undisclosed mergers total $2.3 trillion between 2002 and 2016.

Forthcoming: AEJ: Micro

This Figure plots the share of Item 2 reports and horizonal mergers around the cutoff. The "cutoff" corresponds to a transaction-value-to-acquiror-assets ratio of 10\%. The top panel plots the share of mergers with Item 2 reports, while the bottom  panel plots the share of mergers that are horizontal. In each, we assign observations to one of 6 evenly spaced bins on either side of the cutoff and plot averages within the bins on the y-axis. Bandwidths determining support of the running variable are MSE-optimal. Panel A reveals incomplete compliance. Panel B shows that mandatory investor disclosures deter mergers between competitors.

In Living Color: Does In-Person Screening Affect Who Gets Hired?

How are hiring decisions affected by a reduction in the cost of in-person job screening? In theory, this innovation could improve both efficiency and equity by reducing employers' use of stereotypes and imperfect quality signals (e.g., educational pedigree) that favor certain groups. But since greater weight might be placed on attributes like speech, appearance, or social skills, biases could be introduced or magnified. We examine the introduction of a labor-market intermediary, the Accounting Rookie Camp ("ARC"), that greatly facilitated in-person screening in the academic market for PhD accountants. Using 11 years of data on the supply, demand, and market outcomes for new PhDs, we estimate models that leverage variation in the timing of ARC adoption across both recruiting and degree-granting institutions. We find that ARC adoption reduced the importance of degree-school rank and adviser connections for obtaining a high-quality job, without lowering the bar for research productivity. However, ARC's equalizing effect occurred only within the predominant demographic group: males with English-sounding names. Between groups, ARC penalized candidates with non-English names and exacerbated placement gaps by gender. It also created a premium to physical attractiveness.

This Figure plots the likelihood of placing at a highly ranked first job by ARC participation for each of the groups relative to white individuals. 

Launching with a Parachute: The Gig Economy and Entrepreneurial Entry

The introduction of the gig economy creates opportunities for would-be entrepreneurs to supplement their income in downside states of the world and provides insurance in the form of an income fallback in the event of failure. We present a conceptual framework supporting the notion that the gig economy may serve as an income supplement and as insurance against entrepreneurial-related income volatility, and utilize the arrival of the on-demand, platform-enabled gig economy in the form of the staggered rollout of ridehailing in U.S. cities to examine the effect of the arrival of the gig economy on new business formation. The introduction of gig opportunities is associated with an increase of ~5% in the number of new business registrations in the local area, and a correspondingly-sized increase in small business lending to newly registered businesses. Internet searches for entrepreneurship-related keywords increase ~7%, lending further credence to the predictions of our conceptual framework. Both the income supplement and insurance channels are empirically supported: the increase in entry is larger in regions with lower average income and higher credit constraints, as well as in locations with higher ex-ante economic uncertainty regarding future wage levels and wage growth.

Journal of Financial Economics

The Cost of Convenience: Ridehailing and Traffic Fatalities

We examine the effect of the introduction of ridehailing in U.S. cities on fatal traffic accidents. The arrival of ridehailing is associated with an increase of approximately 3% in the number of fatalities and fatal accidents, for both vehicle occupants and pedestrians. Consistent with ridehailing increasing congestion and road usage, we find that introduction is associated with an increase in arterial vehicle miles traveled, excess gas consumption, and annual hours of delay in traffic, as well as new car registrations. These effects persist over time. Back-of-the-envelope estimates of the annual cost in human lives range from $5.33B to $13.24B.

Journal of Operations Management

This figure shows the level of accidents for treated cities in event time. The red vertical line at event time zero indicates the quarter of ridehailing entry.

Informing Entrepreneurs: Public Corporate Disclosure and New Business Formation

We examine the relationship between public firm disclosure and aggregate new business formation. Consistent with the notion that public company disclosures provide information spillovers that reduce the extent of uncertainty about new investment opportunities, we find that increased public firm presence is positively associated with new business formation in an industry. Furthermore, using plausibly exogenous information shocks generated by new IPOs in a geographic area, we find that post-IPO, new business registration in the public company's geographic area rise by 4 to 10%, consistent with soft information channels serving to reinforce hard information in public disclosures. Both public firm presence and new IPOs are associated with significant increases in Edgar downloads of company filings by new firms, consistent with the notion that public firm disclosures are providing important investment opportunity information that facilitates new business formation.

Revision Requested at Journal of Accounting Research

This figure plots the regression coefficient estimates of Model (3) in 8 quarters around the IPO event window. Each dot is a point estimate of  in equation (3) by shifting IPO quater in event time . The shaded region represents two-tailed 95% confidence intervals based on standard errors clustered at the county level.

Tax Planning Knowledge Diffusion via the Labor Market

We examine the extent to which the labor market facilitates the diffusion of tax planning knowledge across firms. Using a novel dataset of tax department employee movements between S&P 1500 firms, we find that firms experience an increase in their tax planning after hiring a tax employee from a tax aggressive firm. This finding is robust to various research designs and specifications. Consistent with tax planning knowledge driving this result, we find that the tax planning benefit of hiring an employee from a tax aggressive firm is stronger when the employee has more tax experience and is hired into a senior tax department role, and when the hiring firm likely had less tax planning knowledge prior to the hire. Further tests suggest that tax planning knowledge is highly specific in nature: the increase in tax avoidance is larger when the hiring and former firms are similar (i.e., operating in the same sector or having similar foreign operations), and firms are more likely to hire tax department employees from firms with similar characteristics. Our study documents the first-order role of the labor market in the diffusion of tax planning knowledge across firms, and suggests that tax department human capital is a central determinant of tax planning outcomes.

Management Science

This figure examines the pre-treatment and post-treatment dynamics in corporate tax planning around hiring tax department employees from tax aggressive firms. We estimate a simple difference-in-differences model (similar to equation 1), where we saturate the model with event-time indicator variables interacted with Hire from TA Firm, using year t-1 (the year prior to the hire) as the base period. We plot the coefficients on the interactions of Hire from TA Firm and the following time periods: year t-3, year t-2, year t (the hire year), year t+1, and year t+2. We also present 90 percent confidence intervals using standard errors clustered by firm.

Ethical Noise

Despite the widespread view that ethics is critical to ensure well-functioning capital markets, our understanding of its interactions with earnings management is limited. In this paper, we theoretically explore a potential adverse economic consequence of ethical motives in the reporting context, that heterogeneity in ethical preference may introduce uncertainty or "ethical" noise, which could confound the process of accurately inferring predictable bias in reporting. We empirically examine the insights of our theoretical model using a laboratory implementation of the classic single-period misreporting framework augmented to include an ethical statement signature by the seller. We provide reduced-form results regarding the lack of change in sellers' behavior when an ethical statement signature is offered. In contrast, bidders tend to give higher bids when given reports that are accompanied by an ethical statement signature. We then use a simple structural model to infer the sellers' true ethical preferences and the buyers' perceived ethical preferences. Overall, our study shows that ethical statements do little to change sellers' actions but serve to reduce buyer skepticism and create the perception of a more trustworthy reporting environment.

Misaligned Measures of Control: Private Equity's Antitrust Loophole

Agencies and legislators have raised concerns that acquisitions backed by private equity (PE) threaten competition, but few, if any, have offered explanations as to why they pose a unique threat. In this article, we argue that PE-backed acquisitions may avoid antitrust enforcement because they escape detection. Under the Hart-Scott-Rodino Antitrust Improvements Act, parties intending to merge must notify federal authorities and wait for clearance. However, various exemptions exist based on the size of the transaction, parties involved, and proportion of control conferred by the merger. Recent work demonstrates that to police mergers effectively, agencies must be informed about transactions in their incipiency, meaning that in many economically important industries, the contours of the premerger notification program under the Act are, in practice, the same as the contours of the substantive legal standard. We show that when the Act’s exemptions are applied to PE’s standard investment structure, which use an array of intermediate special purpose vehicles to minimize taxes, share risks, and distribute fees, many PE-backed acquisitions that would otherwise be reportable are exempt. We support our argument with merger and filing data. 

Forthcoming at Virginia Law & Business Review

Boards of a Feather: Homophily in Foreign Director Appointments Around the World

We examine whether similarities in legal, sociological, and cultural characteristics between countries (country-pair homophily) affect foreign director appointments. Our results from estimating a gravity model, which includes economic and geographic country characteristics, indicate that country-pair homophily is associated with foreign director appointments to corporate boards. Country-pair homophily plays a more significant role in the foreign director market than in other cross-border exchange, such as trade, migration, and foreign investment, consistent with homophily being more important in bilateral voluntary human exchange. We use the international IFRS adoption and the gender-quota adoption in Norway as regulatory interventions to assess the role of country-pair homophily in new foreign director appointments. We find that both events led firms to appoint directors from countries that were, prior to the regulation, less institutionally, socially and culturally similar, attesting to the importance of homophily in foreign director appointments. Overall, we identify an impediment to the effectiveness of foreign director appointments driving global governance practice convergence.

Journal of Accounting Research

This Figure shows a world map of foreign directors in 2013. Values are expressed as percentages of the total number of directors in a country-year.

Rugged Entrepenuers: The Geographic and Cultural Contours of New Business Formation

How do geographic and historical-cultural factors shape new business formation? Using novel data on new business registrations, we document that 75% of the variation in new business formation is explained by time-invariant county-level factors and examine the extent to which such variation is driven by historical, cultural, and geographic factors. Current-day new business formation is positively related to historical attributes that presage individualist culture: frontier experience and historical birthplace diversity as well as the county’s topographical features. The relation holds when we exploit plausibly exogenous variation in frontier experience driven by historical shocks to the settlement process that arise from historical immigration flows. Our study points to the fundamental role of geographic and historical-cultural features, especially rugged individualism, in explaining contemporary new business formation in the U.S.

This figure plots the log of New Business Starts per capita against the county’s TFE. The plot includes controls for demographic characteristics of the county (population density, per capita income, republican vote share and per capita property tax) and geographic characteristics (log of a county’s surface area in square miles, the absolute latitudinal distance from the equator in decimal degrees, the absolute longitudinal distance from the Greenwich Meridian in decimal degrees, the county-level average terrain elevation, the minimum distance to the coastline, rivers, and lakes in meters).

Staggeringly Problematic: A Primer on Staggered DiD for Accounting Researchers

This paper presents the staggered difference-in-differences (DiD) method in an accessible language to a broad accounting research audience from an applied researcher's perspective. Specifically, the paper examines DiD design problems when multiple units are treated and when the treatment is conducted at staggered periods in time. Using the Goodman-Bacon decomposition, I show how heterogeneous treatment effects can bias the estimated treatment effect in a staggered DiD when estimated using a two-way fixed effect regression. Finally, using the staggered adoption of the 150-hour Rule as an example, I briefly review several proposals to adjust for the bias and correctly implement staggered DiD designs that a bourgeoning literature has put forward in econometrics.

Revision Requested at Journal of Financial Reporting

The figure plots each 2×2 DiD component from the decomposition theorem against their weight from the 150-hour analysis. The open circles are terms in which one timing group of states acts as the treatment group and the pre-1980 150-hour states act as the control group. The closed triangles are terms in which one timing group acts as the treatment group and the states that never adopted the 150-hour Rule in the sample act as the control group. The x’s are the timing-only terms. The figure notes the average DiD estimate and total weight on each type of comparison. The two-way fixed effects estimate, -1.07, designated by the red line, equals the average of the y-axis values weighted by their x-axis value.

More Regulators, More Tax Monitoring: Regulatory Fragmentation and Corporate Tax Burdens

Regulatory fragmentation, or the regulation of a single area by multiple federal agencies, has emerged as a new area of concern for firms. In this study, we investigate the impact of regulatory fragmentation on corporate tax burdens using a sample of publicly traded U.S. firms. Our findings reveal a positive association between regulatory fragmentation and corporate tax burdens, with this relationship strengthening as the overall amount of regulation increases. Furthermore, we find that the presence of external non-government monitors and firm organizational complexity mitigates the negative impact of regulatory fragmentation on corporate tax burdens. Additionally, we observe a negative association between regulatory fragmentation and IRS attention, indicating that the monitoring efforts of the IRS are influenced by monitoring activities of other government agencies. Finally, we find that the impact of regulatory fragmentation on tax burdens is mitigated during GOP administrations, suggesting that the political party in charge of regulatory oversight is important for understanding how regulatory fragmentation shapes firm behavior. These results highlight the unintended consequences of regulatory fragmentation on corporate taxes and emphasize the interconnectedness of different government agencies in monitoring firms. By shedding light on these issues, our study contributes to the ongoing debates surrounding the role of regulation in fostering economic growth and prosperity, underscoring the importance of considering the unintended consequences of regulatory overlap.

The figure displays a bin scatter plot that examines the relationship between tax planning, as measured by the cash-based effective tax rate over the window of [t-2, t], and regulatory fragmentation. Year fixed effects are controlled for in the analysis.

Measurement Matters: Financial Reporting and Productivity

We examine the relation between financial measurement practices and firm-level productivity. Using two proprietary data sets, including a comprehensive panel of firm tax returns, we find that financial measurement quality explains 10-20% of the intra-industry dispersion of total factor productivity (TFP), a magnitude similar to that of other structured management practices identified in prior studies. We provide evidence of two mechanisms for this result. First, cross-sectional and panel analyses are consistent with high-quality measurement as a management practice causing higher productivity. Second, using plausibly exogenous differences in misreporting incentives, we show that external auditors attenuate reporting biases in administrative data. Thus we show that a portion of measured productivity heterogeneity is the direct result of reporting differences across firms. While short of identifying causal treatment effects, the economic magnitude of our results suggests that firms’ accounting practices are an important area for explaining the vast heterogeneity in reported productivity.

This figure plots the portion of the 10/90 TFP-VA spread explained by financial reporting quality for both the IRS (black) and Sageworks (gray) data sets.