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Faculty of Management, Economics and Social SciencesProfessorship of Empirical Accounting

Current Research Projects

 

All abstracts and papers (with additional background information and data) of current research papers are available at the SSRN-account: 315 84 49:

 

Auditees’ awareness of adequate audit fees: Evidence from a natural field experiment

  • Team: Michael Stich
  • Abstract: This paper examines whether auditees’ awareness of adequate audit fees in auditor-auditee negotiations influences the likelihood of future audit firm and audit partner changes, audit and non-audit fees, and ultimately audit quality. To provide evidence for these research questions, I conduct a natural field experiment with German firms. In a first step, I study the determinants of their audit fees from 2010 to 2014. Then, in April 2015, I informed auditee representatives in charge for the auditor-auditee negotiation whether the auditee has so-far paid inadequately high audit fees. Finally, I observe the audit engagement characteristics from 2015 to 2019. The results suggest that auditees’ increased awareness of adequate audit fees reduces future audit fees while non-audit fees remain unaffected. I find no evidence for an increased likelihood of audit firm changes but a higher likelihood that audit partners with high managerial skills take over the audit engagement. I provide evidence that the reduction of audit fees lowers future accruals quality, increases the likelihood of meeting/beating earnings targets, raises the likelihood of external enforcement sanctions, but also enhances the threshold for issuing an unmodified audit opinion. These effects are stronger when the auditee representative has lower accounting expertise.

 

Does quarterly reporting thwart corporate social responsibility? Evidence for managerial myopia and the role digital accounting tools

  • Team: Iko McCartney and Michael Stich
  • Abstract: This paper examines the association of quarterly reporting and corporate environmental and societal investments. We develop a theoretical model that generalizes the conditions which lead to myopic management decisions even in a scenario of efficient markets and rational decision makers. Using the European setting where the statutory reporting frequency was increased in 2007 and reduced in 2015, we conduct difference-in-differences analyses for matched samples. Our analyses suggest that quarterly reporting vis-à-vis semiannually reporting firms have lower sustainability-related investments. Our results are consistent with the notion of management myopia induced by accounting standards. We evaluate several viable paths to reduce such inefficiencies. Out of a wider range of accounting and governance tools, enhanced automatized management decision making and higher internal reporting frequency turn out to be the most promising ways to reduce myopic management decisions.

 

Does the audit contract type affect audit quality?

  • Team: Michael Stich
  • Abstract: This study examines whether and how the audit contract type (ACT) ‒ either fixed-fee or cost-reimbursement contract ‒ is associated with audit quality (AQ). While there is broad, but inconsistent, evidence that the amount and composition of fees paid to an auditor for audit and non-audit services influence AQ, there is limited evidence regarding whether ACT has an impact on an audit engagement and ultimately on AQ. Thus, this paper specifically investigates which ACT results in higher AQ. Because the disclosure of contractual agreements is neither mandated by regulation nor commonly published on a voluntary basis, I approximate ACT using a new empirical measure that incorporates the continuous nature of ACT. Relying on the German setting which is characterized by a substantial variation in the ACT, I provide empirical evidence that a fixed-fee contract is associated with higher AQ. I take advantage of this setting to evaluate the validity of the ACT measure and to study the role of individual auditors prior to and during the audit engagement.

 

 

Earnings management around the ‘Tax Cuts and Jobs Act’ of 2017

  • Team: Dan Lynch, Max Pflitsch, and Michael Stich
  • Abstract: This paper examines earnings management around the reduction in the corporate tax rate from 35% to 21% as enacted by the ‘Tax Cuts and Jobs Act’ (TCJA) of 2017. Building on a theoretical model that considers a higher level of book-tax conformity of ‘real earnings management’ (REM) in relation to ‘accrual-based earnings management’ (AEM), we hypothesize that firms concertedly use these manipulation techniques for different purposes. Specifically, we predict and find that firms engage in REM to shift income from the high-tax period prior to the TCJA to the low-tax period after of the TCJA to realize tax benefits. In contrast, we predict and find that firms use AEM, which has a lower degree of book-tax conformity, to simultaneously increase book income. Consistent with intertemporal income shifting, we also find that these effects reverse in 2018. Overall, our results document a potential unintended consequence of the TCJA on firm behavior that should be useful to policymakers, regulators, and researchers to evaluate the largest tax reform since 1986.

 

Integrated reporting, analyst forecast accuracy, and integrated reporting expertise

  • Team: Maria Stich and Michael Stich
  • Abstract: This study examines the usefulness of voluntary integrated reporting (IR) for analyst forecasting. We argue that the strategic focus and the connectivity of information are distinct characteristics of IR which favorably affect analyst forecast accuracy. Using a sample from countries where IR is voluntary, we find only weak evidence for an overall favorable effect of IR on short, medium, and long horizon analyst forecast accuracy. However, we document important heterogeneity in the sign and magnitude of the association of IR and analyst forecast accuracy when we consider different levels of analyst IR expertise. More specifically, the forecast accuracy of analysts with high IR expertise is improved when a firm issues an IR while analysts with low IR expertise have a noteworthy decrease in forecast accuracy when a firm issues an IR. Our findings suggest that the overall weak evidence on the informational benefits of voluntary IR might be driven by a currently prevailing lack of IR expertise of information intermediaries.

 

Ist die digitale Transformation von Unternehmen (bereits) ein Key Audit Matter?

  • Team: Maria Stich and Michael Stich
  • Abstract: Der Bestätigungsvermerk des Abschlussprüfers fasst die zentralen Schlussfolgerungen der Jahres- bzw. Konzernabschlussprüfung zusammen. Das im März 2016 verabschiedete Abschlussprüfungsreformgesetz erweiterte die bisherigen Berichtspflichten des Abschlussprüfers bei Unternehmen von öffentlichem Interesse insb. um eine mandatsspezifische Berichterstattung von sog. „Key Audit Matters“ (KAM). Hierbei dominieren „klassische“ Risikogebiete der Abschlussprüfung. Demgegenüber legt eine automatisierte Textanalyse der Bestätigungsvermerke für die Geschäftsjahre 2016 bis 2019 nahe, dass Aspekte im Kontext der digitalen Transformation kaum als KAM diskutiert werden. Die sehr geringe Quote der Nennung dieser Aspekte als KAM steht in bemerkenswertem Widerspruch zur von den Wirtschaftsprüfungsgesellschaften artikulierten zunehmenden Bedeutung der digitalen Transformation. Der Beitrag entwickelt eine Reihe von Best Practice-Empfehlungen zum Umgang mit Aspekte der digitalen Transformation im Rahmen der Abschlussprüfung und der diesbzgl. Berichterstattung des Abschlussprüfers.

 

Prohibition of interim goodwill impairment loss reversals: Evidence on unintended consequences from IFRIC 10

  • Team: Michael Stich
  • Abstract: Due to an apparent conflict between International Accounting Standard 34 on interim reporting and IAS 36 on the impairment of assets, Interpretation 10 of the International Financial Reporting Interpretations Committee (IFRIC 10) prohibits the reversal of interim goodwill impairment losses in subsequent financial reports. Building on explorative survey-evidence, I examine whether this prohibition induces mispricing of firms with higher interim reporting frequency. Only for firms with strong oversight mechanisms, I document that firms with higher interim reporting frequency have higher goodwill impairment losses, leading to lower earnings and lower book values of equity. These effects are more pronounced when a firm has mature governance mechanisms. Then, I provide evidence that quarterly reporting firms do not have differing price-to-earnings ratios and price-to-book ratios. Taken together, these findings suggest an undervaluation of quarterly reporting firms relative to semiannually reporting firms because investors do not fully consider the systematically lower earnings and equity resulting from IFRIC 10.

 

Relaxing quarterly reporting requirements: Early evidence on market and real business effects

  • Team: Michael Stich
  • Abstract: This paper takes up the debate about the consequences of relaxing quarterly reporting (QR) requirements. I apply difference-in-differences analyses in the German setting to study the market and real effects, first, of firms that continue to issue QR and second, of firms that reduce the reporting frequency, respectively, relative to mandatory QR firms. I find that about half of the firms continue to issue QR. I provide evidence that these firms have decreased information asymmetry, lowered cost of equity capital, and ultimately experience higher market valuation. For the firms that reduce their reporting frequency from quarterly to semiannual reporting, I find increased information asymmetry and higher cost of equity and debt capital. Referring to the real effects, I provide evidence that firms which reduce their reporting frequency have improved managerial investment decisions, reduced preparation cost, but higher audit cost. These effects lead to a lower market valuation of these firms.

 

Stocks and flows of corporate social responsibility and investment performance

  • Team: Michael Stich
  • Abstract: This paper provides a conceptual discussion of the opposing effects of stocks and flows of corporate social responsibility (CSR) on a firm’s cost of equity capital and total shareholder return. I argue that a firm’s CSR activities have, by trend, the characteristics of stocks (i.e., sustainability-related position of a firm) rather than the characteristics of flows (i.e., improvements of a firm’s position towards a given corporate objective). Consequently, given semi-efficient capital markets and a preference of investors for sustainable value creation, a CSR stock is considered as a signal for lower investment risk, thus leading to lower cost of equity capital and ultimately to lower total shareholder return. In contrast, an unanticipated CSR flow can impact total shareholder return though both an unanticipated increase in investors’ cash flow expectations and a reduction of the cost of equity capital. The empirical findings for a large international sample support these interpretations. I conclude that the mixed evidence of the prior literature is partly driven by the imprecise consideration of the accounting content of CSR stocks and flows.

 

Tailoring sustainability assurance services: A provider’s risk management perspective

  • Team: Maria Stich and Michael Stich
  • Abstract: This study examines assurance providers’ rationales and their effects on assurance quality in a voluntary reporting and voluntary assurance setting. An assurance provider can utilize the flexibility arising from the absence of a regulatory corset to manage engagement-related risks specifically by rejecting clients and/or by tailoring the scope and level of its assurance services. We explore whether and how litigation and reputation risks related to voluntary sustainability assurance engagements affect an assurance provider’s decisions regarding engagement acceptance and tailoring of the assurance services. Using a unique dataset on sustainability assurance practices of firms in 20 countries around the world over the period 2006 to 2011, we find that despite the lack of regulatory requirements an assurance provider’s decision on client acceptance or tailoring of services depends on the assessment of engagement-related risks. Our findings suggest that providers address reputation risks predominately through their engagement acceptance decision whereas they react on litigation risks by tailoring the scope and level of assurance services.