Cybersecurity risk and corporate innovation
Cybersecurity risk and corporate innovation
With Gabriele Lattanzio, Journal of Corporate Finance (2023)
Presentations: University of Oklahoma, AFA 2020, AAA Annual Meeting 2021, 2021 Deloitte Ph.D. Consortium. Italian Conference on Cybersecurity*, European Financial Management Association*.
(* presented by co-authors)
Media Mention: Columbia Law School Blue Sky Blogs
Using a text-based metric of firms’ ex-ante exposure to cybersecurity risk, we document that the rise of cyber threats is redesigning corporate innovation and appropriation strategies. As firms’ exposure to cybersecurity risk increases, managers’ reliance on trade secrets declines, as they seek to protect their firms’ intellectual capital under the umbrella provided by patent and intellectual property laws. In particular, we document that firms exposed to cyber threats file for simpler patents to accelerate their innovation cycle. This strategic adjustment is not costless, as it causes firms’ returns to research and development (R&D) investments to decline significantly.
Presentations: University of Oklahoma, Rutgers University - Camden, University of Wyoming
Dissertation, Defended in Spring 2024. Underreview at JAE
I investigate the impact of complex financial statements on accounting comparability. I employ XBRL-based measures of accounting reporting complexity and find that complex financial statements reduce financial statement comparability. I utilize staggered adoption of inline XBRL reporting to address endogeneity issues. I also show that the usage of custom XBRL tags is linked to data vendors’ processing difficulties as evidenced by a higher frequency of missing key variables, and the complex financial information is driving investors to adopt automated trading strategies to follow traders who have the capacity to process complicated financial information. The collective results suggest that the financial statement customization permitted by the XBRL reporting scheme may inadvertently lead to difficulties comparing firms. This study, therefore, underscores the potential consequences of complex financial reporting and provides insights into how accounting practices and regulatory frameworks can influence financial statement comparability.
With Agnes Cheng, Yehuda Davis, Henry He Huang.
Available at SSRN
Presentations: University of Oklahoma, 2022 BYU Accounting Consortium, Yeshiva University*.
Under review at RAST
With cryptoassets increasingly becoming part of companies’ financial reports, we document what types of firms are involved with such assets and the audit costs they face. We find smaller, less-profitable, international, and restructuring firms tend to get involved with cryptoassets, and a large majority of these involved firms engage with small audit firms. We find audit fees increase for firms involved with cryptoassets, and especially for firms incurring valuation adjustments of cryptoassets, suggesting that accounting treatments of the new assets affect audit efforts. We also find auditor turnover, mainly driven by auditor dismissal, increases significantly. The effect is stronger when firms have heavier involvements with cryptoassets and for firms whose auditors have no prior experience auditing cryptoassets, suggesting involving such a new class of assets affects the optimal matching of auditors with clients. Our novel evidence contributes to our understanding of firms’ involvement with cryptoassets—an important, new, and unique class of assets.
With Agnes Cheng, Aloke Ghosh
Presentations: University of New Orleans*.
Under review at the Accounting Horizons
Although evidence suggests that larger audit firms provide better audit services than smaller audit firms, there may be systematic differences in audit quality within the larger firms and these differences may also decline with time because of the heightened regulatory environment since the financial crisis (2007-2008), the establishment of PCAOB and its subsequent inspections, and enhancements in internal controls. Using restatements as a proxy for audit quality, we examine restatements trends over time and across the six major audit firms (PWC, DT, EY, KPMG, BDO, and GT). We find that the restatement rates are lower for Big 4 clients than for the two mid-tier clients. Within the Big 4, PWC (KPMG) clients tend to be associated with the highest (lowest) restatement rates. However, these differences reduce over time. Our trend analyses show that the frequency of restatements first increases and then starts declining rapidly (a curvilinear trend) for PWC, E&Y and DT. For KPMG and GT, there is a secular decline in the frequency of restatements, while for BDO clients restatements have increased over the last eleven years. In sharp contrast, there is a secular decline in material or Big R restatements for all the audit firms other than BDO. Our study provides initial empirical evidence on the evolution and the heterogeneity of audit quality for the past eleven years within the six largest audit firms.
With Agnes Cheng, Aloke Ghosh
Presentations: University of Oklahoma*.
Previous research has documented a positive relationship between PCAOB-derived Internal Control Audit Deficiency Rates (ICADR) and subsequent adverse Internal Control Audit Opinions (ICAO) over the period from 2010 to 2013. However, we do not find this relationship to persist from 2014 to 2019. Upon closer examination, we find that during the earlier period, ICADR was associated with fewer instances of inaccurate ICAO, but not with an increase in accurate ICAO. In the later period, we find that ICADR continued to be associated with fewer instances of inaccurate ICAO. In addition, we find that it is associated with an increase in accurate ICAO, suggesting a growing positive impact from PCAOB inspections. Interestingly, this improvement in the later period does not solely rely on ICADR, as we find fewer inaccurate and more accurate ICAOs independently of ICADR. This suggests that other factors are positively influencing ICAO. This novel evidence warrants further attention.
With Meng Li, Lei Ma, Jing Pan
We examine how remote working arrangements of CEOs and CFOs affect corporate voluntary disclosure. We find that firms with remote CEOs and/or CFOs issue annual management forecasts less frequently. These forecasts tend to be less specific, less accurate, and issued closer to fiscal year-end. We use the reductions in flight time from CEOs’ primary residency to corporate headquarters to identify exogenous ease of travel. We find that the reductions in flight time lead to a significant improvement in management forecast quality. Additionally, long-distance CEOs and CFOs profit less from trading their own companies’ stocks, suggesting that they are less informed. Taken together, our results suggest that remote arrangements lead to a reduction in both quantity and quality of management forecasts due to diminished access to information in the absence of face-to-face interactions.