Hsihui Chang

This study examines whether strategic alignment between participants in the same supply chain is associated with supplier audit fees. We hypothesize that strategic alignment between suppliers and customers can mitigate the business and audit risk associated with auditing a supplier firm, which will be associated with lower audit fees. We utilize disclosures about major customers to construct a dataset of supplier-customer dyads and then compare the relative strategies of the two parties. The empirical results support our hypothesis that strategic alignment between suppliers and their major customers is associated with lower audit fees for the supplier. We also find that the negative association between strategic alignment and supplier audit fees is more pronounced when auditors are industry specialists. Our results remain robust when using alternative measures of strategic alignment, testing for functional form misspecification, and addressing potential endogeneity.

We examine whether auditors’ knowledge of clients’ related industries impacts audit quality and audit fees. Identifying related industries based on the Input–Output “Use Table” from the Bureau of Economic Analysis, we construct an absolute, nonrelative measure to capture auditors’ knowledge in their clients’ related industries. Our results show that a greater level of knowledge in related industries is associated with higher audit quality and lower audit fees after controlling for the auditor's expertise (specialization) in the client's industry. Further analyses indicate that the quality effects are more salient for an auditor who is not an expert in the client's industry, whereas the fee effects are prevalent across focal client engagements. The evidence suggests that non‐specialist auditors’ cross‐industry knowledge developed via economic links can, to some extent, substitute for specialization in the client industry. In view of advanced technologies that spur increasing interdependence between industries, our findings deliver an important message: Auditors can improve audit efficiency and offer higher quality audits by expanding economies of scope and leveraging their knowledge across clients’ interrelated industries.

We examine whether sharing similar business strategies between suppliers and customers increases suppliers' investment efficiency. Using a data set of U.S. supplier-customer dyads, we posit and find that sharing strategic objectives with major customers is associated with higher-quality supplier investment decisions. Specifically, strategic similarity between supply chain partners is associated with a lower likelihood of underinvestment and overinvestment by suppliers. We also find that strategic similarity improves supplier investment decisions when the customer's information environment is weak. In addition, our cross-sectional analyses show that strategic similarity is associated with higher investment efficiency for suppliers in durable goods industries and for those with customers who are likely to switch to other suppliers.

This study introduces a measure of organization capital for nonprofit foundations and uses it to predict their performance in generating future donations. Using financial and operational data from 3,531 unique nonprofit foundations in China from 2011 to 2021, we find that higher organization capital consistently leads to increased donations across various donor types over the subsequent three years. These findings indicate that organization capital persists over time and significantly affects the future performance of nonprofit foundations in attracting donations. Moreover, cross-sectional analyses reveal that organization capital plays a more prominent role in attracting donations when political connections are limited, revenue streams are diversified, and financial reporting quality is low. Additionally, we find that organization capital is not affected by CEO departures, suggesting that it represents an inherent organization-specific measure rather than a manager-specific characteristic.
JEL Classifications: M41; L31.

We investigate whether simultaneous audit partner rotations are associated with capital market outcomes. Our results show that companies disclosing simultaneous rotations experience lower market reactions to unexpected earnings (i.e., lower earnings response coefficients), higher costs of equity, increased risk of future stock price crashes, and reduced earnings predictability. These findings are consistent across various measures and model specifications, including comparisons with companies that have no rotations, staggered rotations, or staggered voluntary rotations. Our findings support regulators’ claims that disclosing audit partner names can be valuable to capital markets and suggest that revealing the names of additional audit partners provides unique insight. Data Availability: Data are available from the public sources identified in the text. JEL Classifications: M41; M42; M48; P50.

Using dual signature audit opinions, we investigate whether audit quality differs between staggered and simultaneous audit partner rotations. Compared to audits without partner rotations, we find partial support that staggered rotations are positively associated with audit quality and strong support that simultaneous rotations are negatively associated with audit quality. When directly comparing these rotation types, staggered rotations are consistently associated with higher audit quality than simultaneous rotations. The effects on audit quality are concentrated in the first year after rotations occur. The negative impact of simultaneous rotations is mitigated when an incoming partner has industry expertise. We perform exploratory tests on various staggered rotation types and examine a determinants model to understand the driving forces of staggered versus simultaneous rotations.

This study examines whether audit firm office size affects auditors' risk tolerance in making client acceptance decisions. Analyzing publicly traded client portfolios of the Big 4 audit firms from 2003 to 2012, we find that large Big 4 offices are less likely to accept clients with high audit risk. This is particularly true when auditors face temporary capacity constraints arising from the exogenous demand shock by SOX 404 during the post-SOX 404/pre-AS5 period (2003-2007). However, the negative association between office size and risk consideration in client acceptance decisions attenuates when AS5 coupled with the financial recession results in a temporary capacity surplus in the post-AS5/financial crisis period (2008-2012).

We find that firms with preliminary earnings that are expected to just meet analyst forecasts are more likely to only disclose (i.e., not accrue) litigation loss contingencies, claiming that the litigation event falls below the qualitative thresholds necessitating accrual. We also find that this opportunistic treatment of a subjective estimate is reduced when firms’ auditors have expertise in the defendant’s industry or have experience auditing litigation contingencies. Furthermore, we find that opportunistic disclosure usage increases when firms are more economically important to auditors’ client portfolios. Our results are robust to a series of additional tests. We provide evidence to support the Public Company Accounting Oversight Board’s (PCAOB) call for increased auditor professional skepticism toward management bias and opportunism when evaluating subjective estimates.

This study examines how organized labor affects selling, general, and administrative (SG&A) cost behavior. Human capital is emerging as firms' most valuable asset, and we further the understanding of the interaction between employees and SG&A cost behavior. We predict and find that labor cost stickiness is higher for firms facing stronger unions, but the stickiness of SG&A costs is lower. This is consistent with our arguments that in firms with stronger unions, managers' discretionary decision to retain SG&A resources is negatively affected by higher labor adjustment costs that result in the retention of slack labor resources during periods of decreased demand. To assess the robustness of our main findings, we conduct an event analysis of labor union elections and find that SG&A cost stickiness decreases after firms experience new union certification. Cross-sectional tests also show that the effect of labor union strength on SG&A cost stickiness is more pronounced for firms that are in better financial condition, have higher analyst coverage, and have higher net operating assets. We find a similar effect of union strength on discretionary spending when examining R&D costs. Overall, we contribute to the literature by showing that organized labor has a significant effect on cost behavior, which has implications for financial statement users and financial forecasting.