"The Impact of Audited Financial Statements on Local Governments: Evidence from U.S. School Districts" (solo-authored; R&R at Journal of Accounting Research)
This paper investigates whether the audited financial statements of US independent school districts affect the districts' public provision of education services. Exploiting an increase in the regulatory threshold that exempts the school districts from preparing audited financial statements after 2015, I compare the newly-exempted school districts with those that have never been exempted and those that have always been exempted. I find that the newly-exempted school districts experience deteriorating financial and academic performance, population outflows, housing price decreases, and shrinking local tax revenues after the threshold increase. The evidence suggests that audited financial statements enhance the functioning of school districts.
"The Impact of Financial Reporting Mandates on Labor Unions" (with Anthony Le; R&R at Journal of Accounting Research)
Labor unions in the United States are subject to financial reporting mandates, requiring them to disclose detailed financial information annually. This paper studies the effects of the reporting mandate on unions' representation elections and union charges. Exploiting a regulatory threshold that determines the amount of information publicly disclosed by unions, we document that unions just above the threshold, who are required to disclose more information, file fewer election petitions, are less likely to win elections, and receive fewer votes during those elections than unions just below the threshold. These effects are the strongest when employers hire labor relations consultants during elections. Additionally, we find that unions above the threshold have significantly fewer charges and grievances filed against them. This result is primarily driven by a decrease in non-meritorious charges. Collectively, our results suggest that mandated financial reporting imposes a substantial proprietary cost on unions during representation activities.
"When Do Firms Deliver on the Jobs They Promise In Return for State Aid?" (with Aneesh Raghunandan and Shivaram Rajgopal; Review of Accounting Studies)
US state governments frequently provide firms with targeted subsidies. In exchange, recipient firms promise to create or retain a certain number of jobs in the subsidizing state. In this paper, using novel hand-collected data, we address three questions: (i) the extent to which firms meet job creation targets promised in the application process, (ii) the factors that determine which firms meet job creation targets, and (iii) the benefits to firms from meeting promised job targets. We find that 63% of subsidies awarded to publicly traded U.S. firms between 2004 and 2015 actually meet their ex-ante promised job creation targets. Firms with poorer labor practices are less likely to meet job targets, as are politically connected firms that receive subsidies in election years. Conversely, promised job targets are more likely to be met for subsidies accompanied by government press releases, highlighting potential signaling by awarding governments. In terms of consequences, firms that meet job targets are more successful in obtaining subsequent subsidies both in- and out- of subsidizing states and are more likely to make subsequent political contributions in subsidizing states. However, firms’ success in meeting job targets is not rewarded by ESG rating agencies, even on scores specific to community impact. Our results should be of interest to both academics and policymakers interested in the design of state-level economic incentive programs.
"Regulatory Capital Manipulation Through Shadow Insurance by U.S. Life Insurers" (with Sehwa Kim and Stephen G. Ryan)
We examine whether and how U.S. life insurers exercise discretion to mitigate the adverse impact of a statutory accounting rule change on their regulatory capital. Capital regulation is key to the stability of individual financial institutions and the financial system. However, discretionary actions taken by financial institutions to circumvent capital regulation may undermine the effectiveness of the regulation and yield unintended consequences for the institutions’ real activities and financial health. We employ Actuarial Guideline 43 as a regulatory shock to the regulatory capital adequacy of the insurers that sell variable annuities. Using a DID approach around the 2009 effective date of the rule change, we find that affected insurers are more likely to cede insurance coverage to unauthorized captive reinsurers subject to lax regulation via reinsurance contracts, referred to as “shadow insurance,” and to delay other-than-temporary impairments of investment securities. Lastly, we show that affected insurers that engage in these forms of regulatory capital management mitigate the decrease in their variable annuity sales, likely an unintended consequence of the rule.