Jiani Wang

Research Question/Issue: This study investigates the impact of an underexplored dimension of board characteristics, that is, the divergence between ownership concentration and board composition (hereafter, OB divergence), on corporate innovation. Research Findings/Insights: Using a sample of Chinese listed firms from 2007 to 2021 and firm‐ and year‐fixed‐effects regressions, we find that OB divergence is negatively associated with corporate innovation output. Mechanism analyses provide evidence consistent with financial reporting opacity and managerial agency costs as channels through which OB divergence impedes corporate innovation. Cross‐sectional analyses demonstrate that the adverse effect of OB divergence is more pronounced in geographically dispersed firms and in firms with weaker market power, consistent with the view that lower information transparency and weaker access to external capital amplify this adverse effect. We also find that such divergence is more detrimental to innovation when large shareholders have stronger monitoring incentives, when independent directors have less influence, and when other governance mechanisms are relatively weaker. Theoretical/Academic Implications: Our study uncovers the negative impact of an underexplored dimension of board structure on corporate innovation and provides novel evidence on the governance role of large shareholders, a role that has received relatively less attention in prior research emphasizing large shareholders' expropriation of minority shareholders. Practitioner/Policy Implications: Our paper highlights the need to reassess the governance role of large shareholders and avoid an overemphasis on minority investor protection that may unintentionally weaken large shareholders' incentives and ability to monitor management. Policymakers should also strengthen the monitoring capacity and influence of independent directors, particularly in emerging markets.

Purpose: This paper explores the impact of imitative innovation, a strategic pathway for firms in emerging economies to achieve technological leadership, on audit pricing. Design/methodology/approach: Based on a sample of Chinese listed firms from 2007 to 2022, this study employs the ordinary least squares (OLS) regression as a baseline methodology, supplemented by instrumental variable (IV) estimation, propensity score matching (PSM) and Heckman two-stage analysis to address potential endogeneity concerns. Findings: The results demonstrate that audit fees are lower for firms imitating innovation practices of the auditor’s other clients. We further uncover a positive relationship between clients’ imitative innovation and both audit efficiency and audit quality. Cross-sectional analyses show that the negative relationship between imitative innovation within auditor portfolios and audit fees is more pronounced for non-state-owned firms and low-status firms. We also find that audit fee premiums charged by industry specialists and auditors with heavy workloads are reduced for firms engaged in such imitative innovation. Practical implications: This study offers valuable insights for both firms and auditors. Firms engaged in imitative innovation may benefit from a more informed assessment of appropriate audit fees. Auditors, in turn, should leverage this knowledge spillover to enhance their expertise and consider clients’ innovation features when seeking to expand their client base. Originality/value: This paper uncovers the bright side of imitative innovation and a new form of knowledge spillover from clients’ imitative innovation activities, which results in audits that are not only less expensive but also of higher quality.

Purpose: This study examines the relationship between internal control and corporate environmental responsibility. Design/methodology/approach: Unlike US studies that concentrate solely on internal control over financial reporting, this study uses a comprehensive index that encompasses internal control over financial reporting, operations, and compliance. Corporate environmental responsibility is measured by environmental investments. Our research sample comprises Chinese listed firms from 2010 to 2018. Findings: The results demonstrate a positive correlation between internal control and corporate environmental investments. Furthermore, we find that firms with high-quality internal control can improve their financial and environmental performance through environmental investments. After decomposing internal control into its five components, we show that the control environment, control activities, and information and communication components exhibit stronger effects on environmental investments than the risk assessment and monitoring components. Finally, the cross-sectional analyses reveal that the positive effect of internal control is more pronounced in private firms and in firms that are subject to weaker environmental regulation. Originality/value: By focusing on the effect of a comprehensive internal mechanism on corporate environmental responsibility in China, this study contributes to the literature in developed-country settings that overwhelmingly focuses on the impact of external stakeholders and regulations.

When reporting after-tax non–generally accepted accounting principles (GAAP) earnings, firms are required to adjust for the tax effects of exclusions. Since 2010, the Securities and Exchange Commission (SEC) has issued and updated compliance and disclosure interpretations (C&DIs), which specifically require firms to disclose the tax effects of exclusions. We assemble a detailed, hand-collected data set of S&P 1500 firms’ disclosures to provide the first large-sample evidence on the reporting of the tax effects of non-GAAP exclusions. We find three key results. First, echoing the SEC’s concern, a significant proportion of non-GAAP reporting firms do not follow the C&DI guidelines (i.e., they do not disclose the tax effects of exclusions). Second, among firms that disclose the tax effects of exclusions, we find that managers strategically select the tax rates applied to exclusions to achieve after-tax earnings targets. Third, manager-reported non-GAAP earnings are less persistent for future operating earnings and cash flows relative to non-GAAP earnings calculated by applying various benchmark tax rates to exclusions. This evidence suggests that managers’ strategic behavior in selecting the tax rates applied to exclusions pollutes reported non-GAAP earnings and reduces their usefulness for predicting future performance. Overall, our results shed light on a specific channel through which firms use non-GAAP reporting to meet or beat earnings expectations. This paper was accepted by Brian Bushee, accounting. Funding: N. (X.) Chen appreciates financial support from the University of Houston. T. Shevlin acknowledges financial support from the Paul Merage School of Business at the University of California–Irvine. P.-C. Chiu acknowledges the financial support received from the Hong Kong Research Grant Council [Grant RGC14522716]. Supplemental Material: Data files and the online appendix are available at https://doi.org/10.1287/mnsc.2022.4433 .

We examine how local air quality shapes firm innovation. Using a panel dataset of Chinese listed firms from 2014 to 2017, we find significant decreases in R&D expenditure and patents for firms located in cities with severe air pollution. Moreover, we find that firms tend to mitigate the adverse effects of air pollution by shifting innovation activities to their subsidiaries located in areas with better air quality. Cross-sectional analyses reveal that the decreases are more pronounced for non-SOEs, financially constrained firms and firms in high-tech industries. We provide causal evidence using the instrumental variable method, a discontinuity regression design, and propensity score matching. Overall, our study highlights that air pollution is an important local environmental factor that affects firm innovation.

This study examines the relationship between the carbon emissions trading scheme (ETS) and corporate environmental investments. Using a panel data set of Chinese listed firms from 2010 to 2018, we find that the ETS implementation leads to a significant increase in corporate environmental investments. Furthermore, our path analysis shows that the ETS can help improve corporate environmental and financial performance through its impact on environmental investments. Finally, we find that the positive effect of the ETS is more pronounced for firms participating in carbon markets with higher liquidity, for firms facing higher regulatory pressure, and for those that are less able to pass through emissions costs to customers. Overall, the results provide evidence on the effectiveness of China’s ETS in driving environmental investments.

This study assumes that the severity of local COVID‐19 spread can capture the short‐run fluctuation of macro‐level uncertainty in business environments. Given capital‐market pressure and incentives to obtain favourable considerations from the government and lenders, we hypothesise that COVID‐19‐induced uncertainty can lead managers to release (delay) preexisting firm‐specific bad (good) news. Our baseline results show that firms are more likely to disclose unfavourable (favourable) 2019 forecasts in days when recent COVID‐19 cases in headquarter provinces increase (decrease). Results in further analyses provide evidence on the aforementioned reporting incentives by showing that the opportunistic timing behaviour is more prominent in firms with higher managerial ownership, non‐state ownership, and in firms under financial distress. In addition, we uncover the role of local marketisation level and medical resources in mitigating the opportunistic timing behaviour. Finally, the analysis of market reactions shows that the manipulation of disclosure dates can influence the market price in a favourable direction for firms. Overall, our paper presents a comprehensive picture of corporate opportunistic timing behaviour amid the COVID‐19 crisis.