Faculty News

"Boardroom gender diversity reforms and institutional monitoring: Global evidence." at Review of Accounting Studies, Forthcoming (with Larry Fauver, Alvaro Taboada)

Abstract

We examine how boardroom gender diversity reforms impact the monitoring role of institutional investors. Using reforms from 25 countries that aim to improve gender diversity on boards, we find that the reforms increase the association between institutional ownership and subsequent female directorships for foreign investors, but not for domestic investors. This result is driven by foreign institutional investors from countries with a high social equity norm and by foreign pension funds and independent institutions. Furthermore, firms experience improved valuation and profitability following reform compliance. Overall, our findings suggest that boardroom gender diversity reforms empower socially conscious foreign institutional investors to drive value-enhancing governance change.

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"Do depositors respond to banks' social performance?" at The Accounting Review, Forthcoming. (with Yi-Chun Chen and Lynn Wang)

Abstract

We study whether and how banks’ social performance affects depositors, who hold demandable debt with pervasive government protection. Exploiting the regulatory releases of bank performance ratings for community development and a difference-in-differences design, we find a decline in deposit growth following the release of negative bank social performance. In addition, deposits that are impacted by the negative events flow to nearby banks with high social performance. Further analyses find that the results hold similarly among insured and uninsured deposits and are primarily driven by banks with a large proportion of deposits from high-trust and pro-social counties, and in poor information environments. Overall, we contribute to the literature by documenting the importance of social performance to non-shareholder stakeholders and providing implications for bank stability.

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"FinBERT—A Large Language Model for Extracting Information from Financial Text" at Contemporary Accounting Research, Forthcoming. (with Yi Yang and Hui Wang)

Abstract

"Cross-Industry Information Sharing among Colleagues and Analyst Research." at Journal of Accounting and Economics, April 2022. (with An-Ping Lin)

Abstract

“The Long-Term Consequence of Short-Term Incentives." at Journal of Accounting Research, Forthcoming. (with Alex Edmans and Vivian Fang)

Abstract

This paper studies the long-term consequences of actions induced by vesting equity, a measure of short-term concerns. Vesting equity is positively associated with the probability of a firm repurchasing shares, the amount of shares repurchased, and the probability of the firm announcing a merger or acquisition (M&A). However, it is also associated with more negative long-term returns over the 2-3 years following repurchases and 4 years following M&A. A potential driver of the negative M&A returns is subsequent goodwill impairment. These results are inconsistent with CEOs buying underpriced stock or companies to maximize long-run shareholder value, but consistent with these actions being used to boost the short-term stock price and thus equity sale proceeds. CEOs sell their own stock shortly after using company money to buy the firm’s stock, also inconsistent with repurchases being motivated by undervaluation.

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“Market Power and Credit Rating Standards: Global Evidence." at Journal of Accounting and Economics, Forthcoming. (with Pepa Kraft and Gwen Yu)

Abstract

We examine how the market power of credit rating agencies (CRAs) affects their rating standards. Using a global sample across 26 countries from 1994 to 2019, we find that greater market power of global CRAs, measured by their country-level market shares, is associated with stricter corporate ratings. In addition, the increase in global CRAs’ market shares contributes to the tightening trend in their credit ratings worldwide. Exploiting the NRSRO designation of local CRAs in Japan, we find that global CRAs issue more inflated ratings following a decline in their market power. Further, global CRAs’ greater market power is associated with timelier ratings, fewer missed defaults, but more false warnings. Collectively, our findings suggest that global rating agencies’ market power leads to stricter rating standards and timelier ratings by strengthening the agencies’ reputation concerns, but at the expense of increased false warnings.  

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“Non-GAAP Earnings and Stock Price Crash Risk " at Journal of Accounting and Economics, Forthcoming. (with Rencheng Wang and Benjamin Whipple)

 Abstract

We investigate whether non-GAAP earnings disclosures increase stock price crash risk. Consistent with non-GAAP disclosures allowing managers to inflate investors’ perceptions about firm performance, our results indicate that income increasing non-GAAP reporting increases crash risk. We also find that managers can use non-GAAP reporting as a substitute for earnings management to withhold bad news from investors (the traditional explanation for crashes). Finally, we find a positive association between non-GAAP reporting and the likelihood of subsequent events that can trigger a crash. Overall, our evidence is consistent with some non-GAAP disclosures exposing investors to risks of large and sudden price declines.

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“Auditors under Fire: The Association between Audit Errors and the Career Setbacks of Individual Auditors.” at Journal of Accounting Research, Forthcoming. (with W.F. Han and H. Yuan)

Abstract

This paper examines whether and how individual auditors are disciplined for audit errors.  Taking advantage of the long history of auditor identity data from China, we find that signing auditors with client restatements are likely to lose the privilege of signing the audit reports of public clients.  However, auditors can avoid this consequence by issuing a modified audit opinion to warn of the potential misstatement.  We show that auditors are more likely to be disciplined when their firms operate in less concentrated audit markets.  Finally, we find positive outcomes from the disciplinary action of the audit firms.  Firms that discipline their auditors for restatements have a larger decrease in the rate of client restatements and a larger increase in market share, compared to nondisciplining firms.  Their clients have a higher earnings response coefficient after the disciplinary action. In summary, our results suggest that individual auditors in China can face career setbacks when they produce poor quality audits.

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"Does Product Similarity of Audit Clients Influence Audit Efficiency and Pricing Decisions?" Journal of Business Finance & Accounting, Forthcoming (with Hsihui Chang and Zhiming Ma)

Abstract

We examine how client product similarity within an auditor’s portfolio affects audit efficiency and pricing decisions.  Using a unique set of intra-portfolio client-level data, we find that clients with product offerings more similar to those of other clients in the auditor’s portfolio are charged lower audit fees and experience a shorter audit reporting lag, suggesting that product similarity contributes to audit efficiency.  In a cross-sectional analysis, we also find that the effect of product similarity on fee reduction is greater when knowledge transfer across clients is more useful in improving audit efficiency.  Finally, we find that industry specialists reduce fee premiums for clients whose products are more similar to those of other clients in their portfolios, consistent with the conjecture that client product similarity helps specialists build up their market positions while improving their audit efficiency. 

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“Uneven Regulatory Playing Field and Bank Transparency Abroad” at Journal of International Business Studies 53, 379-404  (with Y.C. Chen)

Abstract

Restrictive home-country regulations lead to degraded transparency abroad and exert negative externalities on the global banking system.  Our finding that the negative externalities primarily exist in countries with weak supervisory power highlights the importance of bank supervision when regulators consider using lax regulations to attract foreign capital.  Tighter home-country regulations reduce the transparency of banks’ foreign subsidiaries.  Our result highlights the importance of monitoring the disclosure practices among banks’ foreign subsidiaries.

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Dr. Kelvin P. MAK has been elected as a Council Member of The Taxation Institute of Hong Kong for one year, starting September 2021.  The Taxation Institute of Hong Kong is a professional body that has been established since 1972.  It is committed to represent its members in the tax profession through the advancement of tax knowledge and advocacy.  At present, the Institute has around 3000 members who are licensed “Chartered Tax Adviser” practitioners.

"Does Industry Competition Influence Analyst-level Coverage Decisions and Career Outcomes?" Journal of Financial and Quantitative Analysis, Forthcoming (with Xi Li, Zhiming Ma and Gordon Phillips)

Abstract

We analyze whether industry competition influences analyst coverage decisions and whether analysts benefit from covering product market competitors.  We find that analysts are more likely to cover a firm when this firm competes with more firms already covered by the analyst.  We also find that the intensity of competition among these competitors is additionally important to the coverage decision.  Moreover, we find that analysts who cover product market competitors are more likely to obtain analyst star status.  These results are consistent with the importance to analysts of industry competition and product market knowledge accumulated through covering product market competitors.

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Dr. Kelvin P. MAK has been appointed as a committee member of Qualification and Examinations Board (“QEB”) of the Hong Kong Institute of Certified Public Accountants (“HKICPA”) for one year, beginning January 2021.  The QEB is one of the statutory boards of the HKICPA.  As an advisory board, the QEB is delegated with the authority to conduct and control the professional examinations of the HKICPA and approve the appointment and remuneration of examiners.