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Evidence from the Italian Experience by Mara Cameran*, Jere R Francis**, Antonio Marra*, and Angela Pettinicchio* *Bocconi University, Italy **University of Missouri, USA Draft Date: October 10, 2013 Contact Author: Jere Francis Email: francis@missouri.edu preprint SUMMARY: Mandatory auditor rotation was recently proposed for the European Union and is also under consideration in the United States There has been little research into either the benefits or costs of rotation in a true mandatory setting that could inform intelligent policy making Our paper helps fill this gap by examining Italy where mandatory rotation of auditors has been required since 1975 We find that outgoing auditors not shirk on effort (or quality), but final year fees are percent higher than normal which may indicate opportunistic pricing The fees of incoming auditors are discounted by 16 percent even though they have abnormally higher engagement hours in the first year (17 percent), which is suggestive of low balling However, subsequent fees are abnormally higher and exceed the initial fee discount Thus the costs of mandatory rotation are nontrivial Higher costs could be acceptable if rotation improves audit quality, but we find evidence of the opposite Namely, the quality of audited earnings is lower in the first three years following rotation, relative to later years of auditor tenure Since rotation is costly and earnings quality improves with longer auditor tenure, the evidence from Italy does not support the case for mandatory rotation accepted manuscript Keywords: auditor rotation, audit fees, earnings quality, audit market regulation Are There Adverse Consequences of Mandatory Auditor Rotation? Evidence from the Italian Experience SUMMARY: Mandatory auditor rotation was recently proposed for the European Union and is also under consideration in the United States There has been little research into either the benefits or costs of rotation in a true mandatory setting that could inform intelligent policy making Our paper helps fill this gap by examining Italy where mandatory rotation of auditors has been required since 1975 We find that outgoing auditors not shirk on effort (or quality), but final year fees are percent higher than normal which may indicate opportunistic pricing The fees of incoming auditors are discounted by 16 percent even though they have abnormally higher engagement hours in the first year (17 percent), which is suggestive of low balling However, subsequent fees are abnormally higher and exceed the initial fee discount Thus the costs of mandatory rotation are nontrivial Higher costs could be acceptable if rotation improves audit quality, but we find evidence of the opposite Namely, the quality of audited earnings is lower in the first three years following rotation, relative to later years of auditor tenure Since rotation is costly and earnings quality improves with longer auditor tenure, the evidence from Italy does not support the case for mandatory rotation preprint Keywords: auditor rotation, audit fees, earnings quality, audit market regulation accepted manuscript Are There Adverse Consequences of Mandatory Auditor Rotation? Evidence from the Italian Experience INTRODUCTION We investigate if there are potential negative consequences of mandatory audit firm rotation in Italy where listed companies have been required by law to rotate their auditors since 1975 The evidence is timely as the European Commission (hereafter EC) has proposed mandatory rotation for all European listed companies (European Commission 2011) The EC proposes a 6-year term limit for the audit appointment, with a 4-year “cooling off” period before an auditor could be re-appointed The Commission has the legal authority to issue a directive requiring auditor rotation, which would then be implemented by each member country However, due to the broad reach of the proposal, including European-wide licensing and supervision of auditors, the Commission has chosen to implement these reforms through a preprint statutory regulation which must be approved by the European Parliament This approach would impose stronger obligations on member countries to comply with auditor rotation as regulations accepted manuscript national parliaments of each European Union country On April 24, 2013, the Legal Affairs are immediately effective in each member state without the need to be approved by the separate Committee approved a proposal for a 14-year rotation rule However, the full European Parliament has not yet acted on the recommendation The United States is also considering mandatory audit firm rotation In June 2011, James Doty, Chairman of the PCAOB suggested that rotation might be a desirable way to strengthen auditor independence and objectivity (Doty 2011) The PCAOB followed this up with a background paper on August 16, 2011 (PCAOB 2011) This document invited public comment through December 14, 2011, with public hearings on March 21-22, June 28, and October 18, 2012 No further action has been taken However, on July 8, 2013, the U.S House of Representatives approved a bill that would ban mandatory rotation The bill must yet be passed by the U.S Senate, and signed by the President, to become law The case for mandatory rotation rests on two assertions (European Commission 2011, p 3; PCAOB 2011, pp 11-12): The Problem: auditors with long tenure can develop close relationships with clients that impair their ability to be independent and which lowers audit quality The Solution: a periodic change of auditors will bring a fresh perspective to the audit, leading to more skepticism, greater auditor objectivity, and improved audit quality While the idea of rotation has intuitive appeal, the European Commission does not cite empirical evidence or make rigorous arguments, nor did the Commission’s earlier “Green Paper” (2010) Instead, the case for rotation is supported by anecdotal assertions like the following: “Situations where a company has appointed the same audit firm for decades seems incompatible with desirable standards of independence” (European Commission 2010, p 11) The PCAOB (2011) preprint presents a more balanced discussion of benefits and potential negative consequences of rotation, accepted manuscript but it too relies entirely on anecdotes to make the case for mandatory rotation For example, the PCAOB report (p 12) cites John Biggs, then CEO of the pension fund TIAA-CREF, who asserts “… auditor rotation is a ‘powerful antidote’ to auditor conflict of interests, which reduces dramatically the financial incentives for the audit firms to placate management.” On p 15, the report also cites concerns of the PCAOB’s Investor Advisory Group: “Key to concern of independence was the level of ‘coziness’ the firm had with management of the company being audited Many of the auditors of large companies had long running audit relationships with those companies.” The alleged independence threat arising from close relations with clients is termed self-serving bias by Bazerman et al (1997) Self-serving bias means that auditors are unable to conduct fully impartial and objective audits because their self-interest is closely tied to clients The bias operates at both a conscious and unconscious level, which leads Bazerman et al (1997) to conclude that it is impossible for auditors to be independent This is a strong claim and has been refuted by Nelson (2006) and King (2002) As is clear from the above quotes, at the heart of the case for mandatory rotation is the belief that “bad things” can happen when auditors have long tenure While there is only limited research in true mandatory settings, there is a large body of research on audit firm tenure in a voluntary setting What have we learned from this research? Lennox (2013) provides a comprehensive review, and concludes that with the exception of one study (Davis et al 2009), the general finding is that longer audit firm tenure (in voluntary settings) does not appear to harm audit quality, and there is some counter-evidence that long tenure may improve audit quality (e.g., Meyers et al 2003) Interestingly, the PCAOB report (p 16) also notes that PCAOB inspection data show no association between long-tenure audits and negative comments in inspection reports On the other hand, it may be the case that “bad things” happen in the short-tenure setting due to a learning curve effect Short tenure occurs when there is a change in auditor, and preprint there is evidence that earnings quality is lower during the first few engagement years, which is accepted manuscript consistent with a learning curve on new audits (Johnson et al 2002) Auditors are also more likely to encounter material irregularities in the initial engagement year, which puts these audits at greater risk (Loebbecke et al 1989; Carcello and Nagy 2004; PCAOB 2011, p 16) Given the existing body of evidence, it appears the European Commission is advocating a major change to the audit market that is not supported by extant research Even, worse, the Commission could cause lower quality audits since there would be more frequent auditor changes under a mandatory rotation rule, and therefore more frequent audits with short tenure and potentially lower quality While acknowledging academic research on tenure and audit quality, the PCAOB (2011, p 17) explicitly cautions that we should be careful in drawing the conclusion that audit quality suffers following an auditor change Their reasoning is that voluntary auditor changes often occur in a broader context of auditor-client disagreements, or other client difficulties such as financial distress and declining performance, and that these circumstances may “overstate” the negative effects on audit quality following auditor changes that has been documented in academic research Lennox (2013) also notes the difficulty in determining causality in a voluntary rotation setting Given these concerns, the purpose of our study is to investigate the potential negative consequences of auditor rotation in a true mandatory rotation setting As Lennox (2013) concludes, there is limited research in such settings Our objective is to provide evidence that could guide intelligent policy making and help regulators to better assess the consequence of fixed-term limits on auditor appointments To so we draw on the Italian experience with the mandatory rotation of auditors of listed companies that has been required since 1975.2 preprint While the EC proposal is silent on negative consequences, the PCAOB (2011) identifies accepted manuscript three potential negative consequences of mandatory rotation that guides our investigation: The PCAOB report (p 38) notes that at the end of the mandatory fixed-term appointment, the outgoing auditor may not have incentives to perform high-quality audits since they cannot be reappointed This may create a moral hazard problem in which the outgoing auditor shirks on effort resulting in lower-quality audits.3 While our focus is on Italy, there has been some research on mandatory audit firm rotation in Spain and Korea Ruiz-Barbadillo et al (2009) examine the effect of the proposed mandatory rotation rule in Spain on the likelihood the auditor issues a going concern audit report While they find no statistical association, the authors point out that the rotation rule was withdrawn before it officially went into effect, so that their study only measures the impact of the "announcement" of a mandatory audit firm rotation rule In Korea, an auditor change can be imposed on Korean companies judged by the Financial Supervisory Commission as having high potential to manipulate accounting results In this setting, Kim and Yi (2009) find that there is less earnings management following a regulator-imposed auditor change However, Kim and Yi (2009, p 207) recognize the uniqueness of the Korean auditor replacement rule and note that their conclusions cannot be generalized to a mandatory rotation setting It is also possible outgoing auditors will be especially careful and put in greater effort because the new auditor will review their work (PCAOB 2011, p 17) We find no evidence of greater effort, but we find evidence of abnormally higher fees in the final year, which suggests there may be opportunistic pricing by the outgoing auditor The PCAOB report (p 11) recognizes that rotation could impose significant switching costs on clients, including larger audit fees if audit start-up costs are large and these costs are passed on to the client The incoming auditor may not be able to initially perform high-quality audits due to learning curve effects (PCAOB 2011, p 13 and pp 16-17) In other words, even though new auditors may bring a “fresh perspective” to the audit, they may not be as competent or experienced as the prior auditor, at least in the short-term Alternatively, if the EC and PCAOB are correct in their assertions, then audit quality could improve following a mandatory rotation Our main findings are as follows First, for the outgoing auditor, there is no evidence of lower-quality audits due to shirking in the final-year engagement However, there is some evidence of abnormally higher fees, as the final-year fees are percent higher than normal This suggests there may some opportunistic pricing since we find no evidence of abnormally higher audit effort in the final-year engagement The PCAOB report does not identify this as a negative consequence, but our evidence suggests it adds to the cost of mandatory rotation Second, for the incoming auditor, audit effort (hours) is abnormally higher by 17 percent in the initial preprint engagement, but initial fees are discounted by 16 percent relative to ongoing engagements accepted manuscript However, we also find that future audit fees following the first-year audit are abnormally higher by approximately 76 percent of first-year fees Interestingly, the PCAOB (2011, p 17) speculates that mandatory rotation might eliminate low balling and subsequent fee recovery which they view as a threat to auditor independence, but our evidence suggests otherwise Third, we document that earnings quality is lower during the first three engagement years relative to later years of auditor tenure (larger abnormal accruals and less timely loss recognition) On average, abnormal accruals are 36% larger in the first three years relative to later years of tenure The results in Italy are comparable to Johnson et al (2002) in a voluntary auditor change setting who find that earnings quality is lower in the first three-years relative to engagements with longer tenure Thus the consequences of mandatory rotation appear to be (1) higher audit fees, and (2) lower quality audited earnings following rotation, which is consistent with the evidence in nonmandatory settings The next section discusses the mandatory auditor rotation requirement in Italy This is followed by the sample, descriptive statistics, and empirical results In the concluding section we discuss how a mandatory rotation rule might affect larger scale audit markets in countries such as the United States AUDITOR ROTATION IN ITALY Mandatory rotation was adopted in Italy in 1975 by Presidential Decree D.P.R 136/1975 which required audit firm rotation for all listed companies in Italy, and was later extended to unlisted companies in some regulated industries such as insurance.4 Prior to the “Legge Draghi” reforms in 1998, the Italian market was considered to be very thin with auditors competing for a relatively small number of statutory audits (Gietzmann and Sen, 2002) Further reforms in 1998 preprint and 2003 substantially increased the number of companies subject to external auditing including accepted manuscript all non-listed companies which are controlled by listed companies, non-listed companies that control listed companies, and some private (limited liabilities) companies Even though the audit market expanded with the 1998 and 2003 changes, the market is still relatively small compared to countries like the United States and United Kingdom The Italian institutional setting also has some distinctive features that make it an attractive research setting with respect to auditor rotation Mandatory rotation is potentially of greater value in a country like Italy with a thin audit market, but we know little about the costs or The law originally stipulated an appointment term of three years, renewable two times, for a maximum of nine years The cooling off period was set at five years, but was later reduced to three years by a Legislative Decree issued in 1998, the so called “Legge Draghi.” The current requirement is a maximum auditor appointment of nine years, with a three year “cooling off period,” as well as the required rotation of the engagement partner every six years (and a three-year cooling off period before an engagement partner can be re-appointed) consequences of the rotation rule.5 In addition, Italian audit regulation prohibits the auditor from providing many types of non-audit services As a result the Big earn approximately 90 percent of their revenues from audit-only services (Cameran et al 2010), which means empirical results are less likely to be confounded by non-audit services/fees Lastly, there has been relatively little research on auditor rotation in Italy, and the results to date are mixed as described below Concurrent Italian Research Cameran and Pettinicchio (2011) document a steady increase over time in the market share in Italy held by large international accounting firms, with an even stronger effect in the Italian market segments subject to mandatory rotation This is ironic because a rationale for rotation was to increase market competition but it appears to have had the opposite effect, which illustrates how unintended negative consequences can occur in audit market regulation They also find more partner suspensions for poor quality work related to the first year of an audit engagement, preprint compared to all other years, and this finding provides some evidence that audit quality may accepted manuscript initially suffer as a result of auditor rotation, consistent with a learning curve effect on new audits (PCAOB 2011, p 16) In other related studies, SDA Bocconi School of Management (2001) surveyed internal auditors, managers, and Big auditors of Italian listed companies and reports that the first-year audit engagement requires more time by both the auditor and the client While mandatory rotation could potentially affect audit quality, there is no evidence the stock market reacts to news of auditor changes (SDA Bocconi School of Management 2001; 2004) Gietzmann and Sen (2002) argue that the mandatory rotation rule would have the most beneficial effects in thin markets like Italy because a few large clients dominate such audit markets As a result, they argue that the risk of collusion between the auditor and a large client is more likely in absence of a mandatory rotation rule or strong legal liability laws Italy is a civil law country and is characterized as having weak legal enforcement and weak investor protection (Choi and Wong 2007) Italy also has low litigation risk based on the index in Wingate (1997) The litigation risk index score is 6.22 for Italy, while Anglo-Saxon countries report scores above 10, with a maximum score of 15 for the US The score assigned to Italy is equal to other non-Anglo-Saxon European countries like France, Germany, Netherlands, Norway, and Switzerland 24 Timely Loss Recognition An alternative measure of earnings quality is tested using Basu’s (1997) model of timely loss recognition, based on changes in earnings: ΔNIt = β0 + β1 ΔNIt-1 + β2DΔNIt-1 + β3ΔNIt-1 * DΔNIt-1 + β4 MANROTt + β5 MANROTt * ΔNIt-1 + β6 MANROTt * DΔNIt-1 + β7 MANROTt * ΔNIt-1 * DΔNIt-1 + εi,t (7) ΔNIt = β0 + β1 ΔNIt-1 + β2DΔNIt-1 + β3ΔNIt-1 * DΔNIt-1 + β4 FTENt + β5 FTENt * ΔNIt-1 + β6 FTENt * DΔNIt-1 + β7 FTENt * ΔNIt-1 * DΔNIt-1+ εi,t (8) ΔNIt = β0 + β1 ΔNIt-1 + β2DΔNIt-1 + β3ΔNIt-1 * DΔNIt-1 + β4 PERIOD_1t + β5 PERIOD_1t * ΔNIt-1 + β6 PERIOD_1t * DΔNIt-1 + β7 PERIOD_1t * ΔNIt-1 * DΔNIt-1+ εi,t (9) These model estimations are reported in Table The baseline model in Basu (1997) is extended by testing how auditor tenure affects the level of timely loss recognition For the model in Column (1), the test is the preprint three-way variable of interest interaction term MANROT*ΔNI*DΔNI, which is insignificant and indicates that auditor rotation has no accepted manuscript Table using abnormal working capital accruals However, the model in Column (2) tests firm differential effect on timely loss recognition This is consistent with the insignificant results in 25 tenure (FTEN) and finds that the level of timely loss recognition increases with years of tenure, as indicated by the negative coefficient on the interaction term FTEN*ΔNI*DΔNI (coef.: -0.095; p-value: 0.046) Moreover, the model in Column (3) which tests the first three years shows that timely loss recognition is lower in the first three years of a new engagement relative to other years, based on the coefficient of the interaction term PERIOD1*ΔNI*DΔNI which is positive and significant (coef.: 0.794; p-value: 0.028) For completeness, we re-run the regression tables 25 The lower number of observations (470) is due by the fact that we miss some observations when computing the change of earnings in t-1 Even by going back to previous years, we have to stop in 2005 as 2004 would be under ITA GAAP 25 in column of Table by adding an additional indicator variable coded for years 7, 8, and of tenure, and its interactions with ΔNI and DΔNI The test variable of interest, the coefficient of the interaction term PERIOD1*ΔNI*DΔNI remains positive and significant (coef.: 0.956; pvalue 0.022), while the additional indicator variable and related interactions are insignificant As with the analysis of abnormal working capital accruals, the results are robust to comparing the first three engagement years with each of the next three-year tenure periods Overall, the results for FTEN and PERIOD_1 are consistent with what we find in Table when using abnormal working capital accruals as a proxy for earnings quality.26 For both measures, earnings quality is not statistically different in the first year, but earnings quality improves with each year of tenure, and, on average, the first three years following rotation are of significantly lower quality relative to other years [Insert Table Here] preprint CONCLUSION accepted manuscript Mandatory audit firm rotation in Italy leads to abnormally higher fees by the outgoing auditor, and to abnormally higher audit fees by the incoming auditor after the initial engagement low balling, which suggests that the mandatory rotation rule is costly to clients Mandatory rotation could impose further costs to clients due to the additional effort required in working with the new auditor during the start-up period, but we have no data on these costs Even if a rotation rule imposes higher costs, these costs could be justified if there is an improvement in audit quality as the pro-rotation argument assumes However, we find the exact opposite; namely, a decline in the average quality of audited earnings in the initial three years following mandatory rotation relative to later years of tenure Our analysis indicates a 36% 26 As an additional robustness test, we estimate the specification using changes in cash flows suggested by Basu (1997), and there is no evidence of timely loss recognition, which is consistent with the results in Basu (1997) 26 increase in abnormal working accruals during the first three years relative to later years, an amount equivalent to 3.1% of assets This finding is consistent with a learning curve effect for the new auditor in which earnings are initially of lower quality following an auditor change (PCAOB 2011, p 13, pp 16-17) The results on mandatory rotations in Italy are consistent with studies around the world documenting lower quality earnings after a voluntary auditor change (Johnson et al 2002; Lennox, 2013) Absent some other compelling reason why mandatory rotation is beneficial, our analysis suggests the quality of audited earnings in Italy is adversely affected by mandatory rotation We must be careful in generalizing from the Italian experience to other countries, particularly given the relatively small number of mandatory rotations in the study However, the evidence should give pause to regulators in other countries that a rotation rule may be both costly and have negative effects on audit quality preprint We conclude with some conjectures on how the negative effects of mandatory rotation accepted manuscript observed in Italy might be even greater in countries with larger audit markets and larger clients such as the United States and other European Union countries The median client size in our sample has assets of 458 million Euros (approx $600 million US dollars) In contrast, Audit Analytics reports the median U.S listed company audited by Big auditors is over twice as large with assets of $1.5 billion in 2011 This suggests there could be even larger learning curve effects on new audits and potentially higher audit fees for such large clients Unlike Italy, auditors in the U.S may be unable to absorb such large start-up costs In addition, if rotation harms earnings quality in Italy, where clients are much smaller, the negative consequences may well be amplified in markets like the U.S where clients are larger and the learning curve is likely to be longer due to client scale and operating complexity 27 Another factor to consider is the overall size of the audit market In Italy around 30 listed companies rotate their Big auditors each year Combined with the relative small size of these companies, it appears to be relatively easy for the Italian market to absorb these client rotations In the United States, the Audit Analytics database indicates there are 6,228 SEC registrants in 2011 that were audited by the Big firms If a nine-year rotation rule were adopted, as in Italy, this would result in 692 SEC registrants changing auditors each year However, in 2011 there were only 140 voluntary Big auditor changes, so a mandatory rotation rule would cause a fivefold increase in annual auditor changes Further, given the decentralized office structure of the Big firms in the U.S., the effect on local offices could be extremely disruptive Audit Analytics indicates that in 2011 the median Big office had listed clients, so a rotation rule means an office would lose on average one client each year, with no assurance of gaining a new client to replace the outgoing client On the flip side, if an office gains one or more new clients from preprint rotation, where will the resources come from to staff the new audits, given an office’s short-term accepted manuscript fixed capacity constraint? This problem would be acute for audit offices (even for the largest offices) involved with the rotation of extremely large companies like General Motors, Walmart, or Exxon Mobil A rotation rule in the U.S., especially for extremely large clients, would force the Big firms to move personnel on an unprecedented scale to meet office-specific staffing needs arising from mandatory rotations Some offices would export staff while others would import staff While this already occurs to some extent, mandatory rotation would institutionalize a large-scale mass relocation of auditors on a yearly basis This would, arguably, be very bad for audit quality because it is the auditor’s local knowledge of clients in specific geographic locales that is the rationale for the decentralized office-based delivery of audits A rotation rule might well change this and eliminate mid-size offices in favor of larger regional offices This in turn 28 would result in the loss of local knowledge by auditors because most would no longer live in the client’s locale This is important because Choi et al (2012) show that audits are of lower quality when performed by an engagement office which is not located near the client’s headquarters, a finding that is consistent with the financial economics literature which documents the importance of geographic proximity in reducing information asymmetry among economic actors (e.g., Malloy 2005; Kedia and Rajgopal 2011) Thus an unintended consequence of mandatory rotation might be to largely eliminate the auditor’s deep local knowledge, given the need for mass relocations of audit staff to accommodate clientele changes Further it might lead to lower quality audits since fewer auditors would be permanently based in the client’s geographic locale Beyond this, the heightened travel to client locations could make accounting a decidedly less attractive career and affect the quality of people attracted to the profession Another unintended consequence of mandatory rotation in the United States would be to preprint reduce an audit firm’s industry expertise Again, in Italy, this is less of an issue given the small accepted manuscript number of client rotations each year At the city level in the U.S., the audit firm which is industry leader has 73 percent of audit fees in those industries compared to only 23 percent for the second-ranked auditor (Reichelt and Wang 2010) The institutionalized large scale rotation of clients would make it difficult (if not impossible) for audit firms to maintain their client base and the industry expertise that derives from that client base, especially at the local office level Just as rotation might erode the auditors’ “local knowledge” it could also erode the auditor’s ability to develop and to sustain industry specialization over time, especially at the office level While mandatory rotation in Italy is costly, and appears to have a short-term adverse effect on earnings quality, it “works” in the sense that it has not disrupted the audit market This is probably due to the relatively small number of annual rotations of moderately sized 29 companies In contrast, a rotation rule in the United States and other large economies could disrupt the market and fundamentally change the way accounting firms are organized for the delivery of audits Beyond the fact that there is no evidence long tenure harms audit quality (and plenty of evidence that short tenure does) it is difficult to imagine how a market disruption of this magnitude would lead to improved audit quality, which is the intent of mandatory rotation preprint accepted manuscript 30 REFERENCES Anderson, R C., S A Mansi, and D M Reeb 2004 Board Characteristics, accounting report integrity, and the cost of debt Journal of Accounting and Economics 37 (3): 315-342 Basu, S 1997 The conservatism principle and the asymmetric timelines of earnings Journal of Accounting and Economics 24 (1): 3-37 Bazerman, M., K Morgan, and G Loewenstein 1997 The impossibility of auditor independence Sloan Management Review 38 (4): 89-94 Cameran, M and A Pettinicchio 2011 The Effect of Audit Firm Mandatory Rotation Rule, in M.A Frison-Roche (Ed.) 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MANROT ? VOLROT ? PRE_MANROT ? PRE_VOLROT ? LN_H + IND_SPEC + SIZE + LEVERAGE + LAG_LOSS ? ROA - INV + REC + NSUB + FOREIGNREV + NSEG + CFO - 3.870*** (0.000) 0.736*** (0.000) 0.036 (0.752) 0.135** (0.019) -0.074 (0.586) -0.025 (0.260) -0.097 (0.544) -0.556 (0.234) 0.244 (0.180) -0.000 (0.711) 0.086 (0.384) -0.014 (0.542) -0.043 (0.342) 3.379*** (0.001) -0.179*** (0.000) 0.026 (0.726) 0.071** (0.011) 0.021 (0.518) 0.754*** (0.000) 0.015 (0.823) 0.151*** (0.004) -0.163 (0.204) -0.031 (0.133) -0.176 (0.297) -0.363 (0.346) 0.308 (0.112) -0.000 (0.598) 0.076 (0.389) 0.000 (0.980) -0.029 (0.466) preprint 1.213 (0.513) 0.158** (0.014) 0.081 (0.506) -0.011 (0.796) 0.166 (0.357) 0.220** (0.042) 0.321*** (0.000) 0.337 (0.136) 0.071 (0.106) 0.168 (0.452) -0.436 (0.443) -0.215 (0.546) -0.000 (0.772) -0.031 (0.896) 0.061 (0.134) -0.044 (0.435) accepted manuscript EXP SIGN (4) ? ? ? ? ? + + - + + + - IND - CEODUAL + BDSIZE ? Observations R-square Number of unique firms Firm and year fixed effects Cluster standard errors 557 0.901 199 YES YES 667 0.899 204 YES YES 667 0.530 204 YES YES AWCA -0.826 (0.274) -0.002 (0.923) 0.015 (0.622) -0.007 (0.626) -0.032* (0.051) -0.039 (0.376) 0.045 (0.216) 0.097 (0.426) -0.023 (0.331) -0.237 (0.246) 0.000 (0.754) -0.046 (0.555) 0.007 (0.585) -0.064 (0.143) -0.041 (0.589) 0.033* (0.070) -0.002 (0.587) 667 0.073 204 YES YES Robust two-tail p-values in parentheses: *** p