Kohlbeck, Mark

I investigate the link between real earnings management and customer satisfaction. Following the passing of the Sarbanes-Oxley Act, which requires public companies to ensure the accuracy of their financial reporting, the use of non-accrual based methods to achieve financial earnings targets has become commonplace. Nonaccrual-based methods consist of decisions that curtail firm activities, which increase net income; however, these methods come at the cost of future operations. These opportunistic behaviors in the service, retail, and hospitality industries impact customers and a firm's long-term value. I hypothesize that the outcome will be lower customer satisfaction and service quality.
I use firms’ publicly available financial information to detect real earning management (REM) of selling, general, and administrative (SG&A) expenses to understand how firms operate. Physical changes to a firm’s operating environment through these financial actions are immediately observable, generating negative electronic word of mouth. I use text analysis software to determine if the comment is positive or negative and the strength of the customers' sentiment, allowing me to observe the harmful effects of reducing SG&A expenses through the lens of the customer. In addition, I use American Customer Satisfaction Index (ACSI) scores to provide an overall assessment. I regress my customer satisfaction and service quality measures on the REM measure to test the hypotheses on the impact of REM. Further, I analyze and establish the link between REM's impact on the firm's sales growth rates.

I examine the relationship between environmental regulation stringency and the extent of voluntary environmental disclosures by firms. The study draws on theoretical frameworks including legitimacy theory, stakeholder theory, and information asymmetry, to explore how different mechanisms influence firm behavior in the context of environmental transparency.
My empirical analysis shows a positive relationship between the stringency of environmental regulations and the level of voluntary environmental disclosures. This relationship is weakened by factors such as board independence and institutional ownership. I further confirm the positive effect of national level of environmental regulation stringency on the environmental voluntary disclosure. However, I fail to find supporting evidence on the positive moderating role of national level of environmental regulation stringency and corporate governance. In contrast, I find evidence that external institutional ownership and independent directors, who represent interests of external blockholders, have a preventive and monitoring effect on the main relationship to reduce the threat of misleading voluntary information and proprietary cost.

This study examines whether emerging growth company (EGC) investors respond to the annual required internal control disclosures over financial reporting (ICFR). I develop three hypotheses to test across the EGC lifecycle. Specifically, I investigate whether the first year ICFR disclosure, the remediation of a previously reported material weakness ICFR disclosure and the EGC exit are associated with the firm’s cumulative abnormal return over a three-day event window. Prior literature has observed that ICFR disclosures by management and the ICFR audit opinion can be shown to be informative to investors. However, I am not aware of any study investigating whether the EGC investors respond to this type of information. I find that the reported ICFR disclosures are not associated with cumulative abnormal returns during their initial ICFR report disclosure or upon exit as informative but do respond to the reporting of material weakness remediation.

I examine the importance of corporate scientific research. It is crucial to understand the role of corporate scientific research because such a knowledge could form an appropriate response to the current decline of corporate scientific research amidst the evolving innovation ecosystem featured with growing university research and tech companies’ research. R&D is often treated as a single construct in accounting and finance research for firm innovation. However, corporate scientific research (“R”) has different implications for firm innovations, “R” creates new knowledge, and reduced investment in "R" may lead to a loss of internal research capability, disrupting the speed and quality of innovation. As such, it is necessary and meaningful to examine "R" separately from "R&D."
Historically, corporate scientific research has played an important role in driving breakthrough innovations. Beginning in the 1980s, there has been a decline in corporate scientific research in favor of university research and tech companies’ research. Consequently, this raises a question: if corporate scientific research was important, is it still important? This is a fundamental question because if corporate scientific research is still important, declining or even stagnant corporate scientific research would present an issue of concern for firms and the economy.

Since 2005 corporate managers must discuss their firm’s significant risk factors that may materially and unfavorably affect corporate outcomes in the Item 1A Risk Factor Disclosure (RFD) section of their 10-K filings. However, there is limited research on whether firms change the sentiment of their mandatory disclosures after a significant economic event. I use bankruptcy announcements as a unique setting in this study to assess non-announcing firms’ responses to these events as a bankruptcy announcement generates significant concern to non-announcing industry peer firms. I explore whether industry peers change four measures of sentiment (i.e., length, negative tone, specificity, forward-looking statements) of Item 1A RFDs after a rival firm’s bankruptcy filing. Using textual analysis methodology, I find that industry peer firms have shorter, less negative, and less forward-looking RFDs after another firm’s bankruptcy announcement. These results imply that industry peers are likely to adjust their tone of mandatory filings (i.e., Item 1A RFDs) in response to a rival firm’s bankruptcy announcement. I further provide evidence that firms do not use separate subsections to disclose their firm- and industry-specific risks within their Item 1A RFDs. Lastly, the lengths of financial, litigation, other-idiosyncratic, and other-systematic topic disclosures significantly decrease for non-announcing industry peers while the length of tax relevant risk topic does not significantly change after a bankruptcy filing. This study adds to mandatory research by identifying the spillover effect of a bankruptcy announcement on Item 1A RFDs. This research also contributes to accounting literature by providing evidence that non-announcing industry peers significantly adjust the sentiment of their risk factor information. Market participants including investors, shareholders, and financial analysts can improve investment decision accuracy by analyzing the industry peers’ risk factor information.

Many CEOs are philanthropists and express their passion for social welfare through service to various charities and foundations. However, it is unclear whether these behaviors are driven by intrinsic motivations, such as prosocial value and altruism, or by extrinsic and egoistic motivations like reputation and social network building. To understand the underlying motivations and consequences of these behaviors, I build on the self-determination theory and investigate how CEO charitable inclination, defined as CEO sitting on charity boards, affects corporate tax avoidance. I further examine how CEO charitable inclination impacts firm value through corporate tax policies.
I find that CEO charitable inclination is negatively associated with corporate tax avoidance. Specifically, firms with charitable-inclined CEOs pay higher cash taxes and are less likely to engage in aggressive forms of tax planning, such as tax shelters. The results are robust to different model specifications and alternative measures. Further, I conduct additional analysis examining the underlying motivations of CEO charitable inclination and find it positively associated with intrinsic motivations, such as prosocial values and high moral standards. These results provide strong evidence that charitable-inclined CEOs, driven by their intrinsic motivations, are concerned about social welfare and government revenue. These CEOs are less likely to engage in unethical or immoral behaviors, such as aggressive tax planning and tax evasion. However, I do not find evidence that CEO charitable inclination has a moderating effect on the relationship between corporate tax avoidance and firm value.

The addition of Key Audit Matters (KAM) to standard audit reports is one of the most significant changes to the audit report in decades. However, research on the informativeness of KAMs to investors is mixed. I add to this literature by examining whether variation in how goodwill impairment KAMs (GIKAM) are determined influence their informativeness. I first develop a determinants model to predict when an audit client would receive a GIKAM and find that auditor quality (Big 4) and auditor independence (fee ratio) are negatively associated with the likelihood a client receives a GIKAM. I then use this model to create measures of unexpected GIKAMs to test the relationship between unexpected GIKAMs and market outcomes (price and volume). Using annual report date and three-day cumulative abnormal returns and abnormal trading volume, I find no relationship between unexpected GIKAMs and price or volume reactions. In my third hypothesis, I predict and find that GIKAMs are positively associated with goodwill impairment recognition using pooled and propensity score matched samples. These findings contribute to the growing literature on the usefulness of expanded audit reports as well as audit literature in general.

In essay 1, I investigate the association of place attachment and financial reporting quality. Management characteristics affect a wide range of corporate decisions, including decisions affecting financial reporting quality; however, the influence of managerial place attachment on corporate decision-making has received relatively little attention - even though place attachment is thought to play a significant role in forming individual identity. Place attachment affects the decisions that individuals make with regards to social and environmental policies, lifestyle, and, in the corporate context, firmlevel policies. Because firms hire local CEOs and CFOs five to eight times more often than expected if geography were irrelevant to the matching process, the question of how managerial place attachment affects financial reporting outcomes is an important one. I investigate the effect of managerial place attachment on financial reporting quality in a sample of publicly traded U.S. firms. My findings indicate that firms with place attached CEOs display higher financial reporting quality, indicating a significant caretaking bond between CEO and stakeholders. CFOs, on the other hand, are marginally associated with lower financial reporting quality, indicating that they are more likely than CEOs to extract personal gain when they are local to their firm headquarters.

Government spending is essential for the US economy, and the amount of capital that flows from the government to US firms has increased substantially in recent years. Despite the economic importance of the corporate-government contracting relationship, we know little about the firm-level financial outcomes associated with government contracts. In this study, I investigate whether the corporate government contracting relationship affects firm-level financial reporting quality. Using a sample of 58,988 US publicly-traded firms from 2001 through 2017, I find that federal government contracting firms are associated with a lower level of discretionary accruals, lower probability of internal control material weaknesses, and lower probability of restatement and fraud as compared to non government contractors. However, this association is weaker when industry competition on government contracts are lower, and government switching costs in which the cost to find new suppliers are higher. Collectively, my empirical results suggest that having the government as a customer has a positive impact on the quality of financial reports.

I investigate whether a firm’s social capital with investors impacts its non-GAAP reporting decisions. Critics of non-GAAP reporting suggest that non-GAAP earnings are incomplete, inaccurate, and can be misleading (Derby, 2001; Dreman, 2001; Elstein, 2001; Black et al., 2007). Firms might be hesitant to provide non-GAAP information if other means are available to transfer information. Social capital provides an alternate method of informing investors. However, social capital might also play another role in the information environment by building trust between managers and investors (Gabarro, 1978; Gulati, 1995). This trust may reduce investor skepticism of non-GAAP information, enhancing the value of non-GAAP disclosures. Additionally, I examine what impact social capital might have on investors’ investment decisions with respect to non-GAAP reporting. Despite critics’ concerns over non-GAAP reporting, prior literature suggests investors’ reactions are more aligned with the non-GAAP definition of earnings (Bradshaw and Sloan, 2002; Bhattacharya et al., 2003), suggesting other factors might influence investors’ decisions. I investigate whether social capital plays a role in reducing skepticism in non-GAAP information leading to reduced information asymmetry and increased investor reaction to non-GAAP disclosures. I find that non-GAAP reporting is increasing in social capital with investors. However, I find no evidence that investor reactions to non-GAAP earnings information differ based on firms’ social capital with investors. I also find information asymmetry around earnings announcements is higher for non-GAAP reporting firms with greater social capital with investors in comparison to non-GAAP reporters with lower social capital. Taken together, my results suggest social capital impacts the decisions of firms in reporting non-GAAP earnings information, but not the decisions of investors. My results are relevant to the current disclosure environment in that non-GAAP reporting is a current topic of interest for regulators with several updates to non-GAAP guidance having recently occurred.