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Labor Market Effects of Spatial Licensing Requirements: Evidence From CPA Mobility
Abstract
We exploit the staggered introduction of CPA Mobility provisions in the United States to study the effects of spatial licensing requirements on the labor market for accounting professionals. Specifically, we examine whether the removal of licensing-induced geographic barriers affects CPA wages and employment levels, as well as the pricing and quality of professional services. We find that, subsequent to the adoption of CPA Mobility provisions, wages of accounting professionals decrease, whereas employment levels are unaffected. The documented wage effect stems from smaller CPA firms, is more pronounced for CPAs holding senior positions, and persists over time. We also find that service prices decline and that this effect is concentrated in local CPA firms. Moreover, we document that the increased wage and price pressure is not associated with deteriorating service quality. Collectively, our results suggest that the removal of occupational licensing barriers has sizable effects on labor supply and service prices. Our findings inform the current regulatory debate on occupational licensing.
... Second, this paper contributes to a nascent literature at the intersection of accounting and labor economics (e.g., Bloomfield et al., 2017;Barrios, 2019;Cascino et al., 2020). effects (e.g., Gipper et al., 2019). ...
... Additional (untabulated) tests, in which I cluster standard errors at the ZIP code level, yield similar confidence bands and, hence, similar inferences. 70 Prior research uses aggregated AICPA fine data but does not compare individuals receiving fines with those that do not since the latter group is not observable in these settings (e.g., Armitage and Moriarity, 2016;Cascino et al., 2020). ...
... I lag the policy intervention indicator since the aggregate nature of Census data does not allow within year pinpointing. Such design choice is common in the economics literature using aggregated state-year data (e.g., Autor et al., 2006;2016) as well as the accounting literature exploring the effects of state-year regulatory changes using aggregated state-year data on accounting professionals (e.g., Cascino et al., 2020). 82 Note that one might expect revenues to increase if peer review mandates facilitated screening on quality and, thereby, reduced quality uncertainty (Arrow, 1971;Shapiro, 1986). ...
This thesis consists of three studies that investigate how regulation affects Certified Public Accountant (CPA) and financial adviser markets. The first chapter, which is co-authored with Stefano Cascino and Ane Tamayo, investigates whether local occupational licensing regimes create geographical labor market barriers. To study this question, we investigate the labor market consequences of a regulatory change that extended the geographical scope of CPA licenses. Prior to the regulatory change, CPAs required a separate license for each U.S. state they wished to provide services to. With the regulatory change, CPAs can offer services across state lines holding a single CPA license. Our study reveals that local occupational licensing regimes create meaningful labor market barriers. Specifically, we find that CPA wages and service prices decline with the removal of licensing induced geographical barriers. The second chapter, which is co-authored with Zachary Kowaleski and Andrew Sutherland, explores whether the content of exams financial advisers need to take to provide investment advice affects financial adviser misconduct. Specifically, we study differences in misconduct between advisers that are subject to exams with an emphasis on professional ethics and advisers subject to exams with an emphasis on technical material. Comparing two advisers within the same firm and year, we find that advisers subject to more ethics-related topics exhibit lower future misconduct rates. The third chapter, which is solo authored, investigates the relation between firm licensing requirements and entrepreneurship in audit markets. Specifically, I study whether mandatory peer review—that is, CPAs having to monitor each other in an effort to promote service quality—affects CPA entrepreneurship. I find that CPA entrepreneurship declines and entrepreneur exit rates increase with the introduction of mandatory peer review. Increases in exit rates, however, are not pronounced for lowquality service providers, but are concentrated among young female CPA entrepreneurs.
... Existing research on this question is mixed. Several studies have found that increasing or decreasing licensing requirements for CPAs had no meaningful effect on CPA quality [13,22,30]. Another analysis of dental licensing requirements found that more rigorous licensing standards did not improve average dental outcomes of patients [82]. ...
Much attention has focused on algorithmic audits and impact assessments to hold developers and users of algorithmic systems accountable. But existing algorithmic accountability policy approaches have neglected the lessons from non-algorithmic domains: notably, the importance of interventions that allow for the effective participation of third parties. Our paper synthesizes lessons from other fields on how to craft effective systems of external oversight for algorithmic deployments. First, we discuss the challenges of third party oversight in the current AI landscape. Second, we survey audit systems across domains - e.g., financial, environmental, and health regulation - and show that the institutional design of such audits are far from monolithic. Finally, we survey the evidence base around these design components and spell out the implications for algorithmic auditing. We conclude that the turn toward audits alone is unlikely to achieve actual algorithmic accountability, and sustained focus on institutional design will be required for meaningful third party involvement.
We investigate the effects of financial reporting on current employee job search; i.e., whether firms' public financial reports cause their employees to reevaluate their jobs and consider leaving. We develop theory for why current employees use earnings announcements to inform job search decisions, and empirically investigate job search based on employees' activity on a popular job market website. We find that job search by current employees increases significantly during earnings announcement weeks, especially when employees are more mobile and when their information frictions are greater. We also find that employees use earnings announcements to update their expectations about their employers' economic prospects, consistent with learning, and some evidence that positive announcements elicit less search. Our paper contributes to the burgeoning labor and accounting literature by providing among the first evidence closely linking financial reports to employee learning and job search. This article is protected by copyright. All rights reserved
We investigate whether international income-shifting aggressiveness affects local investments. Amid heightened scrutiny of international activities by tax authorities, firms can support income-shifting goals by locating investments consistent with reported income. As a consequence, we predict firms that aggressively shift income will make affiliate-level investment decisions less influenced by local investment opportunities than firms that do not aggressively shift income. We use affiliate-level data from multinational corporations to develop a firm-year proxy for the sensitivity of reported income to cross-border tax incentives. Results suggest firm-years with below-median income-shifting aggressiveness exhibit a typical responsiveness of local investments to investment opportunities, but firm-years with above-median income-shifting aggressiveness exhibit no statistical relation. Consistent with expectations, these results are stronger for firms with better governance or subject to greater tax authority scrutiny. Our tests extend the literature on investment distortions by documenting that multinational corporations’ international tax considerations alter their local tangible investment decisions.
We examine whether supply shocks in the audit partner labor market induce clients to switch audit partners. We argue that audit partners in their early careers (i.e., junior partners) charge low audit fees to attract clients, which induces client firms to switch from senior partners to junior partners when there are more junior partners available. Utilizing the Big4 localization policy, we find that Big4 clients are more likely to replace senior auditors with junior auditors to cut costs after the policy. Furthermore, the results are mainly driven by clients who are charged high fees. Our empirical evidence enriches the understanding of auditor choice determinants and informs the ongoing debates surrounding new regulations for Big4 firms in China.
We study the role of client reputation in auditor-client matching. Using 1.2 million employment records from US broker-dealers, we find that broker-dealer clients of the same auditor have very similar financial adviser misconduct profiles. Misconduct is approximately half as important as client size in explaining auditor-client matches, and misconduct unrelated to misreporting or fraud risk is relevant to this matching. We link these matching patterns to auditors' heterogeneous preferences for client reputation. An auditor's track record for accepting high misconduct clients predicts future client misconduct, even after controlling for the client's misconduct record and characteristics. Additional results reveal that auditor-client reputation matching is widespread and generalizable to firms outside the investment industry. We interpret our results within a positive assortative matching framework, and conclude that auditors' differential reputation concerns relate to their client acceptance and continuance decisions.
The use of evidence and economic analysis in policymaking is on the rise, and accounting standard setting and financial regulation are no exception. This article discusses the promise of evidence-based policymaking in accounting and financial markets as well as the challenges and opportunities for research supporting this endeavour. In principle, using sound theory and robust empirical evidence should lead to better policies and regulations. But despite its obvious appeal and substantial promise, evidence-based policymaking is easier demanded than done. It faces many challenges related to the difficulty of providing relevant causal evidence, lack of data, the reliability of published research and the transmission of research findings. Overcoming these challenges requires substantial infrastructure investments for generating and disseminating relevant research. To illustrate this point, I draw parallels to the rise of evidence-based medicine. The article provides several concrete suggestions for the research process and the aggregation of research findings if scientific evidence is to inform policymaking. I discuss how policymakers can foster and support policy-relevant research, chiefly by providing and generating data. The article also points to potential pitfalls when research becomes increasingly policy-oriented.
The study provides new evidence of the influence of occupational regulations on the U.S. economy. Our analysis, unlike previous studies, was able to obtain a representative sample of the population at the state level, which allowed us to estimate the cross-sectional effects of occupational licensing for each state. The state-level analysis demonstrates considerable variation in percentage of the workforce that has attained a license, and unlike minimum wages or unionization, licensing shows no regional patterns in the distribution of occupational licensing. The analysis also shows considerable variation in the influence of licensing on earnings across the states. The national estimates suggest that occupational licensing raises wages by about 11% after controlling for human capital and other observable characteristics. Finally, our analysis shows the influence of occupational regulation on wage inequality across the income distribution.
We reassess the effect of minimum wages on US earnings inequality using additional decades of data and an IV strategy that addresses potential biases in prior work. We find that the minimum wage reduces inequality in the lower tail of the wage distribution, though by substantially less than previous estimates, suggesting that rising lower tail inequality after 1980 primarily reflects underlying wage structure changes rather than an unmasking of latent inequality. These wage effects extend to percentiles where the minimum is nominally nonbinding, implying spillovers. We are unable to reject that these spillovers are due to reporting artifacts, however.
We define higher audit quality as greater assurance of high financial reporting quality. Researchers use many proxies for audit quality, with little guidance on choosing among them. We provide a framework for systematically evaluating their unique strengths and weaknesses. Because it is inextricably intertwined with financial reporting quality, audit quality also depends on firms’ innate characteristics and financial reporting systems. Our review of the models commonly used to disentangle these constructs suggests the need for better conceptual guidance. Finally, we urge more research on the role of auditor and client competency in driving audit quality.
Building on an idea in Abadie and Gardeazabal (2003), this article investigates the application of synthetic control methods to comparative case studies. We discuss the advantages of these methods and apply them to study the effects of Proposition 99, a large-scale tobacco control program that California implemented in 1988. We demonstrate that following Proposition 99 tobacco consumption fell markedly in California relative to a comparable synthetic control region. We estimate that by the year 2000 annual per-capita cigarette sales in California were about 26 packs lower than what they would have been in the absence of Proposition 99. Given that many policy interventions and events of interest in social sciences take place at an aggregate level (countries, regions, cities, etc.) and affect a small number of aggregate units, the potential applicability of synthetic control methods to comparative case studies is very large, especially in situations where traditional regression methods are not appropriate. The methods proposed in this article produce informative inference regardless of the number of available comparison units, the number of available time periods, and whether the data are individual (micro) or aggregate (macro). Software to compute the estimators proposed in this article is available at the authors' web-pages.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
We estimate the effects on employment and wages of wrongful discharge protections adopted by U.S. state courts during the last three decades. We find robust evidence that one wrongful-discharge doctrine, the implied-contract exception, reduced state employment rates by 0.8% to 1.7%. The initial impact is largest for female and less-educated workers (those who change jobs frequently), while the longer-term effect is greater for older and more-educated workers (those most likely to litigate). By contrast, we find no robust employment or wage effects of two other widely recognized wrongful-discharge laws: the public-policy and good-faith exceptions.
We use policy discontinuities at state borders to identify the effects of minimum wages on earnings and employment in restaurants and other low-wage sectors. Our approach generalizes the case study method by considering all local differences in minimum wage policies between 1990 and 2006. We compare all contiguous county pairs in the U.S. that straddle a state border and find no adverse employment effects. We show that traditional approaches that do not account for local economic conditions tend to produce spurious negative effects due to spatial heterogeneities in employment trends that are unrelated to minimum wage policies. Our findings are robust to allowing for long term effects of minimum wage changes.
Occupational licensure may limit the interstate movement of workers because it adds to the cost of moving between states. We analyze the interstate migration of 22 licensed occupations, proxying for the difficulty of the regulations by comparing state-specific licensed occupations to those with national licensing exams. Our empirical strategy also uses individuals who move a long distance, removing the influence of occupation characteristics and self-selection of migration-averse individuals into licensed occupations. Our estimates show that occupational licensing reduces interstate migration, but the magnitude of the effect can only account for a small part of the overall decline in recent decades. (JEL J44, J61, R23)
We study the role of reputation in auditor-client matching. Using 1.2 million employment records from US broker-dealers, we find that broker-dealer clients of the same auditor have similar financial adviser misconduct profiles. Our estimates indicate that variation in client misconduct behavior is nearly half as important as variation in client size in explaining matches. Auditors adjust their portfolios when presented with new information about client behavior, and those with the most significant reputation concerns are least likely to deal with high misconduct clients. Finally, we find that an auditor’s reputation for accepting high misconduct clients predicts their new clients’ future misconduct. Together, our results present new evidence on how reputation affects audit relationships, and the consequences of auditors’ reputation concerns for client behavior. Our results also indicate an unintended consequence of audit mandates: non-discerning auditors emerge to serve clients with low endogenous demand for auditing.
We find that Sarbanes–Oxley (SOX) had two significant effects on the audit market for nonpublic entities. The first short-run effect stems from inelastic labor supply coupled with an audit demand shock from public companies. As a result, private companies reduced their use of attested financial reports in bank financing by 12%, and audit fee increases for nonprofit organizations (NPOs) more than doubled. The second long-run effect was a transformation in the audit supply structure. After SOX, NPOs were less likely to match with auditors most exposed to public companies, whereas auditors increasingly specialized their offices based on client type. Audit market concentration for NPOs dropped by more than one-half within five years of SOX and remained at this level through the end of our sample in 2013, whereas the number of suppliers increased by 26%. Our results demonstrate how regulation directed at public companies generates economically important spillovers for nonpublic entities.
This paper was accepted by Suraj Srinivasan, accounting.
We examine the effects of financial reporting regulation on firms’ banking. Exploiting discontinuous public disclosure and auditing requirements assigned to otherwise similar small and medium-sized private firms, we document that financial reporting regulation reduces firms’ reliance on concentrated and local bank relationships and increases banks’ reliance on firms’ financial reporting, consistent with a shift in firms’ banking from relationship toward transactional approaches. Our evidence suggests that financial reporting regulation substitutes for banks’ information production role by burdening firms with the disclosure and auditing of their financial statements, consistent with institutional complementarities between reporting and banking systems.
Received October 21, 2016; editorial decision September 15, 2017 by Editor Philip Strahan. Authors have furnished an Internet Appendix, which is available on the Oxford University PressWeb site next to the link to the final published paper online.
Occupational licensing creates a regulatory barrier to entry into licensed occupations, and thus results in higher income for those with permission to work. The empirical literature indicates that licensing generally restricts supply, and raises wages along with prices in health care professions. Unfortunately, there is no evidence that licensing improves the quality of care.
We argue and demonstrate empirically that a firm's institutional and legal context has first-order effects in tests that use state antitakeover laws for identification. A priori, the size and direction of a law's effect on a firm's takeover protection depends on (i) other state antitakeover laws, (ii) preexisting firm-level takeover defenses, and (iii) the legal regime as reflected by important court decisions. In addition, (iv) state antitakeover laws are not exogenous for many easily identifiable firms. We show that the inferences from nine prior studies related to nine different outcome variables change substantially when we include controls for these considerations. This article is protected by copyright. All rights reserved
Extensive debate exists among policy makers and economists about the employment of highly skilled immigrants in the United States. It remains unclear whether these immigrants perform complementary tasks in addition to their substitutive role relative to native graduates. Empirical studies examining these questions in a focused setting are scarce, principally because of the nonavailability of data. We examine these questions using the audit industry as a setting because of the availability of client, city, and office characteristic data at each audit office. This setting also allows us to answer whether immigration can address the growing human capital constraint in the audit industry. We find evidence of a complementary role of highly skilled immigrants. In addition, our results indicate a reputational spillover of client restatements at the audit office level to the labor markets. Our findings have immigration and education policy implications.
This paper was accepted by Shivaram Rajgopal, accounting.
I use the staggered state-level adoption of the 150-hour Rule (the Rule) as a natural experiment along with the career histories of professional accountants’ from LinkedIn to examine the effects of mandatory occupational licensure on the individual quality of Certified Public Accountants (CPAs). Using a difference-in-difference and synthetic control research design, I document that the Rule marginally increases CPA exam pass rates and reduced the candidate supply, leading to an overall decline in the number of successful candidates. My analysis of LinkedIn data shows that individuals subject to the Rule are more likely to be employed at a Big 4 public accounting firm and specialize in taxation. However, Rule individuals have the same likelihood of promotion, the same duration until promotion, and exit public accounting at faster rates than their non-Rule counterparts. These findings suggest that restrictive licensing laws reduced the supply of new CPAs while failing to effectively increase the quality of CPAs as measured by their labor market outcomes.
This paper discusses the empirical literature on the economic consequences of disclosure and financial reporting regulation, drawing on U.S. and international evidence. Given the policy relevance of research on regulation, we highlight the challenges with (1) quantifying regulatory costs and benefits, (2) measuring disclosure and reporting outcomes, and (3) drawing causal inferences from regulatory studies. Next, we discuss empirical studies that link disclosure and reporting activities to firm-specific and market-wide economic outcomes. Understanding these links is important when evaluating regulation. We then synthesize the empirical evidence on the economic effects of disclosure regulation and reporting standards, including the evidence on International Financial Reporting Standards (IFRS) adoption. Several important conclusions emerge. We generally lack evidence on market-wide effects and externalities from regulation, yet such evidence is central to the economic justification of regulation. Moreover, evidence on causal effects of disclosure and reporting regulation is still relatively rare. We also lack evidence on the real effects of such regulation. These limitations provide many research opportunities. We conclude with several specific suggestions for future research.
The paper examines whether international regulatory harmonization increases cross-border labor migration. To study this question, we analyze European Union (EU) initiatives that harmonized accounting and auditing standards. Regulatory harmonization should reduce economic mobility barriers, essentially making it easier for accounting professionals to move across countries. Our research design compares the cross-border migration of accounting professionals relative to tightly-matched other professionals before and after regulatory harmonization. We find that international labor migration in the accounting profession increases significantly relative to other professions. We provide evidence that this effect is due to harmonization, rather than increases in the demand for accounting services during the implementation of the rule changes. The findings illustrate that diversity in rules constitutes an economic barrier to cross-border labor mobility and, more specifically, that accounting harmonization can have a meaningful effect on cross-border migration. This article is protected by copyright. All rights reserved
A common approach to evaluating robustness to omitted variable bias is to observe coefficient movements after inclusion of controls. This is informative only if selection on observables is informative about selection on unobservables. Although this link is known in theory (i.e. Altonji, Elder and Taber (2005 —, —, and —, “Selection on Observed and Unobserved Variables: Assessing the Effectiveness of Catholic Schools,” Journal of Political Economy, 2005, 113 (1), 151–184.)), very few empirical papers approach this formally. I develop an extension of the theory which connects bias explicitly to coefficient stability. I show that it is necessary to take into account coefficient and R-squared movements. I develop a formal bounding argument. I show two validation exercises and discuss application to the economics literature.
David Card and Alan B. Krueger have already made national news with their pathbreaking research on the minimum wage. Here they present a powerful new challenge to the conventional view that higher minimum wages reduce jobs for low-wage workers. In a work that has important implications for public policy as well as for the direction of economic research, the authors put standard economic theory to the test, using data from a series of recent episodes, including the 1992 increase in New Jersey's minimum wage, the 1988 rise in California's minimum wage, and the 1990-91 increases in the federal minimum wage. In each case they present a battery of evidence showing that increases in the minimum wage lead to increases in pay, but no loss in jobs. A distinctive feature of Card and Krueger's research is the use of empirical methods borrowed from the natural sciences, including comparisons between the "treatment" and "control" groups formed when the minimum wage rises for some workers but not for others. In addition, the authors critically reexamine the previous literature on the minimum wage and find that it, too, lacks support for the claim that a higher minimum wage cuts jobs. Finally, the effects of the minimum wage on family earnings, poverty outcomes, and the stock market valuation of low-wage employers are documented. Overall, this book calls into question the standard model of the labor market that has dominated economists' thinking on the minimum wage. In addition, it will shift the terms of the debate on the minimum wage in Washington and in state legislatures throughout the country.
Combining administrative data from the US Army, Department of Veterans Affairs, and Social Security Administration, we analyze the effect of the VA's Disability Compensation (DC) program on veterans' labor force participation and earnings. We study the 2001 Agent Orange decision, a unique policy change that expanded DC eligibility for Vietnam veterans who served in theater but did not expand eligibility to other veterans of this era, to assess the causal effects of DC enrollment. We estimate that benefits receipt reduced veterans' labor force participation by 18 percentage points, though measured income net of transfer income rose on average.
States' requirements that lawyers obtain a license to practice law, as well as American Bar Association (ABA) regulations of legal practice, constitute barriers to entry to the legal profession. In this paper, we argue that eliminating entry barriers in legal services would generate benefits that are similar to those resulting from deregulating U.S. network industries (i.e., transportation, communications, and energy.) Specifically, prices would fall as competition from incumbent firms and new entrants intensifies; in the long run, competitive forces and operating freedom would incentivize firms to produce innovations that significantly benefit consumers and the broader economy.
This study examines trends in the disciplinary sanctions imposed by the American Institute of Certified Public Accountants (AICPA) over the 35-year period 1980-2014. It reveals that the sizable increase in the number of sanctions that followed the 1988 revision to the Institute’s Code of Professional Conduct has mostly stabilized. However, there is still growth in the number of sanctions being imposed for substandard professional service. The sanctions imposed for substandard professional service have also become more stringent. In combination these actions confer assurance that continuing members of the Institute provide superior professional service. A 2003 bylaw change that imposes automatic sanctions for members disciplined by approved bodies has resulted in a substantial decrease in the number of investigations undertaken by the AICPA. However, there is a high incidence of noncooperation with the remaining investigations, the reasons for which are not established by the current study.
This paper discusses the empirical literature on the economic consequences of disclosure and financial reporting regulation, drawing on U.S. and international evidence. Given the policy relevance of research on regulation, we highlight the challenges with: (i) quantifying regulatory costs and benefits, (ii) measuring disclosure and reporting outcomes, and (iii) drawing causal inferences from regulatory studies. Next, we discuss empirical studies that link disclosure and reporting activities to firm-specific and market-wide economic outcomes. Understanding these links is important when evaluating regulation. We then synthesize the empirical evidence on the economic effects of disclosure regulation and reporting standards, including the evidence on IFRS adoption. Several important conclusions emerge. We generally lack evidence on market-wide effects and externalities from regulation, yet such evidence is central to the economic justification of regulation. Moreover, evidence on causal effects of disclosure and reporting regulation is still relatively rare. We also lack evidence on the real effects of such regulation. These limitations provide many research opportunities. We conclude with several specific suggestions for future research. This article is protected by copyright. All rights reserved
All states in the U.S. regulate the practice of public accounting. An important part of the regulatory apparatus is the state accountancy board (SAB). SABs implement the laws that govern public accounting. State societies of CPAs (SSCPAs), in contrast, are advocacy mechanisms that can potentially be used by members of the profession to achieve their regulatory objectives. Economic theory raises the possibility that regulatory bodies such as SABs might be captured by the profession that they regulate. We examine the composition of SABs and find that the majority of members are CPAs. A survey of CPA SAB members reveals that nearly one-third of the respondents are past leaders of their SSCPAs. We further find that the percentage of board members who are CPAs and the percentage of our respondents who are past leaders of their SSCPAs are positively associated with the rapidity with which states adopt two important accountancy laws (interstate mobility and the 150-hour education requirement) that can be viewed as being in the best interest of the profession. These findings support the hypothesis of regulatory capture and suggest that states may benefit from reconsidering the qualifications of SAB members.
How large are the gains from product market integration-or, equivalently, from a reduction in barriers to trade over space? This article surveys recent work on this question in the context of both international and intranational trade.
This paper exploits intertemporal variations in employment protection across countries and finds that rigidities in labor
markets are an important determinant of firms' capital structure decisions. Over the 1985–2007 period, we find that reforms
increasing employment protection are associated with a 187 basis point reduction in leverage. We interpret this finding to
suggest that employment protection increases operating leverage, crowding out financial leverage. This result does not appear
to be due to pretreatment differences between treated and control firms, omitted variables, unobserved changes in regional
economic conditions, and reverse causality. Heterogeneous treatment effects are consistent with our economic intuition.
The audit market's unique combination of features – its role in capital market transparency, mandated demand, and concentrated supply – means it receives considerable attention from policymakers. We explore the effects of two market scenarios that have been the focus of policy discussions: a) further supply concentration due to one of the "Big 4" auditors exiting and b) mandatory audit firm rotation. To do so, we first estimate publicly traded firms' demand for auditing services, treating services provided by each of the Big 4 as differentiated products. We then use those estimates to calculate how each scenario would affect client firms' consumer surplus. We estimate that, conservatively, exit by one of the Big 4 would reduce client firms' surplus by $1.2-1.8 billion per year. These estimates reflect only firms' lost options to hire the exiting auditor; they do not include the likely fee increases resulting from less competition among auditors. We calculate that the latter could result in audit fee increases between $0.3-0.5 billion per year. Such losses are substantial; by comparison, total audit fees for public firms were $11 billion in 2010. We find similarly large impacts from mandatory audit firm rotation, estimating consumer surplus losses at approximately $2.4-3.6 billion if rotation was required after ten years and $4.3-5.5 billion if rotation was mandatory after only four years.
We show that deterioration in household balance sheets, or the housing net worth channel, played a significant role in the sharp decline in U.S. employment between 2007 and 2009. Counties with a larger decline in housing net worth experience a larger decline in non-tradable employment. This result is not driven by industry-specific supply-side shocks, exposure to the construction sector, policy-induced business uncertainty, or contemporaneous credit supply tightening. We find little evidence of labor market adjustment in response to the housing net worth shock. There is no significant expansion of the tradable sector in counties with the largest decline in housing net worth. Further, there is little evidence of wage adjustment within or emigration out of the hardest hit counties.
Entry into licensed professions requires meeting competency requirements, typically assessed through licensing examinations. This paper explores whether the number of individuals attempting to enter a profession (potential supply) affects the difficulty of the entry examination. The empirical results suggest that a larger potential supply may lead to more difficult licensing exams and lower pass rates. This implies that licensing may partially shelter the market from supply shocks and limit the impact of policies targeted at increasing labor supply.
We use a natural experiment in the form of staggered changes in corporate income tax rates across U.S. states and time to show that tax considerations are a first-order determinant of firms’ capital structure choices. Over the period 1990-2011, firms increase leverage by 114 basis points on average (equivalent to $62.1 million in extra debt) when their home state raises tax rates. Contrary to standard trade-off theory, the tax sensitivity of leverage is asymmetric: Firms do not reduce leverage in response to tax cuts. Using treatment reversals, we find this to be true even within-firm: Tax increases that are later reversed nonetheless lead to permanent increases in a firm’s leverage – an unexpected and novel form of hysteresis. Our findings are robust to various confounds due to unobserved variation in local business conditions or investment opportunities, union power, or states’ political leanings. Treatment effects are heterogeneous, with greater tax sensitivity among profitable and investment-grade firms which have a greater marginal tax benefit and lower marginal cost of issuing debt, respectively.
This paper relates quality and uncertainty. The existence of goods of many grades poses interesting and important problems for the theory of markets. On the one hand, the interaction of quality differences and uncertainty may explain important institutions of the labor market. On the other hand, this paper presents a struggling attempt to give structure to the statement: “Business in under-developed countries is difficult”; in particular, a structure is given for determining the economic costs of dishonesty. Additional applications of the theory include comments on the structure of money markets, on the notion of “insurability,” on the liquidity of durables, and on brand-name goods.
We use policy discontinuities at state borders to identify the effects of minimum wages on earnings and employment in restaurants and other low-wage sectors. Our approach generalizes the case study method by considering all local differences in minimum wage policies between 1990 and 2006. We compare all contiguous county pairs in the United States that straddle a state border and find no adverse employment effects. We show that traditional approaches that do not account for local economic conditions tend to produce spurious negative effects due to spatial heterogeneities in employment trends that are unrelated to minimum wage policies. Our findings are robust to allowing for long-term effects of minimum wage changes. (c) 2010 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.
We find that over six hundred auditors with fewer than 100 SEC clients exit the market following SOX. Compared to the non-exiting auditors, the exiting auditors are lower quality, where quality is gauged by: (1) avoidance of AICPA peer reviews and failure to comply with PCAOB rules, and (2) severity of the peer review and inspection reports. In addition, clients of exiting auditors receive higher quality auditing from successor auditors, as captured by a greater likelihood of receiving going concern opinions. Our results suggest that the PCAOB inspections improve audit quality by incentivizing low quality auditors to exit the market.
This paper develops a model in which the rivalry of oligopolistic firms serves as an independent cause of international trade. The model shows how such rivalry naturally gives rise to ‘dumping’ of output in foreign markets, and shows that such dumping can be ‘reciprocal’ — that is, there may be two-way trade in the same product. Reciprocal dumping is shown to be possible for a fairly general specification of firm behaviour. The welfare effects of this seemingly pointless trade are ambiguous. On the one hand, resources are wasted in the cross-handling of goods: on the other hand, increased competition reduces monopoly distortions. Surprisingly, in the case of free entry and Cournot behaviour reciprocal dumping is unambiguously beneficial.
Most papers that employ Differences-in-Differences estimation (DD) use many years of data and focus on serially correlated outcomes but ignore that the resulting standard errors are inconsistent. To illustrate the severity of this issue, we randomly generate placebo laws in state-level data on female wages from the Current Population Survey. For each law, we use OLS to compute the DD estimate of its "effect" as well as the standard error of this estimate. These conventional DD standard errors severely understate the standard deviation of the estimators: we find an "effect" significant at the 5 percent level for up to 45 percent of the placebo interventions. We use Monte Carlo simulations to investigate how well existing methods help solve this problem. Econometric corrections that place a specific parametric form on the time-series process do not perform well. Bootstrap (taking into account the autocorrelation of the data) works well when the number of states is large enough. Two corrections based on asymptotic approximation of the variance-covariance matrix work well for moderate numbers of states and one correction that collapses the time series information into a "pre"-and "post"-period and explicitly takes into account the effective sample size works well even for small numbers of states.
This paper empirically studies the effects of service offshoring on white-collar employment, using data for more than 100
US occupations over the period 1997–2006. A model of firm behaviour based on separability allows derivation of the labour
demand elasticity with respect to service offshoring for each occupation. Estimation is performed with quasi-maximum likelihood,
to account for high degrees of censoring in the employment variable. The estimated elasticities are then related to proxies
for the skill level and the degree of tradability of the occupations. Results suggest that service offshoring is skill-biased,
because it increases employment in more skilled occupations relative to less skilled occupations. At a given skill level,
however, service offshoring penalizes tradable occupations relative to non-tradable occupations.
The economic determinants of audit fees have been examined extensively among public companies, both in the US (e.g. Simunic, 1980; Gist, 1992) and internationally (e.g. Anderson and Zhégal, 1994). These studies have been based on audits of publicly-traded firms, which were surveyed to determine the audit fees. In the US pension plan audit market, audit fees are publicly disclosed, eliminating the potential for response bias present in most other audit fee studies. Additionally, unlike the public company audit market, the pension plan audit market is not dominated by the Big Six accounting firms, and audit fees in the pension plan audit market are smaller than in the public company audit market. This study examines the generalisability of the audit fee model by applying the model in the pension plan audit context. In accord with other audit fee studies, results indicate that client characteristics, including client size and risk, are associated with pension plan audit fees. In contrast with other studies, findings regarding market factors do not suggest a difference in fee structures between Big Six and non-Big Six firms, and the results indicate that auditor changes do not affect pension plan audit fees.