Steed SOA Faculty Generate Business Insights

Brad Blaylock and co-authors B. Lawson and M. Mayberry published “Taxable Income, Future Profitability and Stock Returns” in the Journal of Business, Finance, and Accounting recently. The study’s findings indicate that estimates of taxable income from a firm’s financial statements are positively related to future cash flows and income. The bottom line is that knowing something about a firm’s taxable income is useful to investors and others when predicting how a firm will perform in the future.

A study by Brant Christensen and co-authors Nate Newton and Mike Wilkins, “Archival Evidence on the Audit Process: Determinants and Consequences of Interim Effort,” is forthcoming in Contemporary Accounting Research. Using a unique set of archival data, the research finds that allocating relatively more work to the interim period is associated with a reduced likelihood of late 10‐K filings and decreased total audit hours. Although increasing interim period effort is not, on average, associated with improved audit quality, the study indicates that current period material weaknesses are less likely with greater interim work. Overall, the study highlights the benefits of reduced hours for auditors, earlier identification of control deficiencies for clients and more timely financial reports for investors.

In a study supported by a KPMG research grant, Brant Christensen and co-authors Aasmund Eilifsen, Steve Glover and Bill Messier examine the effect of audit materiality disclosures, or lack thereof, on professional investors’ decision making across different investment contexts (debt vs. equity, public vs. private). Among a sample of 246 professional investors in their main experiment and 91 professional investors in two supplemental experiments, no consistent evidence is found that investors incorporate materiality disclosures into their investment decisions. Most importantly, the evidence suggests that investors fail to make consistent connections between the amount of disclosed audit materiality and the level of auditor effort. In sum, their findings suggest that disclosures of audit materiality are not well understood by professional investors and are not viewed as decision relevant. The research is forthcoming in Accounting, Organizations, and Society.

In research investigating whether Public Company Accounting Oversight Board inspection reports increase auditors’ litigation risk by Brant Christensen and co-authors Nate Newton and Nate Lundstrom, forthcoming in The Accounting Review, the authors find that inspection reports with audit deficiencies are positively associated with the number of lawsuits subsequently filed against the inspected auditor. These results are strongest when client-level lawsuit triggering events have already occurred and when PCAOB inspection content is arguably more persuasive. 

In “Cultivating Evidence-Based Pathways for Cannabis Product Development: Implications for Consumer Protection,” forthcoming in American Business Law Journal, Kaimee Kellis and co-authors Aubree Walton, William E. Tankersley IV and Rikikumar S. Patel focus on the legal and operational risk in the cannabis industry. The authors note that the inconsistent nature of federal and state regulation and mixed federal enforcement priorities have facilitated the proliferation of a multi-billion dollar industry that operates in the shadows of the FDA drug safety regulations. This paper provides a review of existing medical findings on potential health risks of cannabis use, summarizes how FDA regulations for prescription drugs, over-the-counter medicines and dietary supplements apply to cannabis products, and discusses the implications of recent FDA and FTC consumer protection efforts on the viability of existing cannabis industry practices. Earlier this year, the authors presented a related paper, “The Potential Health Risks and Legal Implications of Cannabis," at the Legal Strategy, Ethics, and Compliance for Business Symposium, sponsored by Oklahoma State University and the American Academy of Legal Studies in Business.

Research by audit faculty member Chenxi Lin and co-authors F. Guo, A. Masli and M.S. Wilkins, “Auditor Responses to Shareholder Activism,” is forthcoming in Contemporary Accounting Research. The study examines how auditors respond to shareholder activism against their clients. The research indicates that activism targets pay higher audit fees and also are more likely to receive adverse internal control opinions and first-time going concern opinions. Shareholder activism campaigns increase public attention of a company and companies are more likely to be involved in accounting-related lawsuits following a campaign. More importantly, the study finds that auditors react to activism events by increasing audit efforts in order to provide more accurate financial information and to avoid public attention.

A study by Richard Price and co-authors Steve Crawford, Garen Markarian and Volkan Muslu, “Oil Prices, Earnings, and Stock Returns,” was recently published in Review of Accounting Studies. Results from this study, a further examination of prior research that has failed to find a consistent relationship between oil prices and stock prices, suggest that the effect of oil prices on companies’ earnings and stock prices varies, depending on whether the firm is an oil producer or oil consumer.

Richard Price and co-authors Mary Hill and George Ruch explored “An Alternative Approach to Distinguishing Liabilities from Equity” in a recent paper published in Accounting Horizons. Also, the trio shared their views on the topic in a comment letter to the FASB.

Research by Wayne Thomas and co-author and 2014 Ph.D. alum Mark (Shuai) Ma, “Legal Environment and Corporate Tax Avoidance: Evidence from State Tax Code,” is forthcoming in The Journal of the American Taxation Association. The study, an examination of the effect of the legal environment on corporate state income tax avoidance, finds that states with stronger penalties on corporate officers have less state tax avoidance, though penalties assessed on the corporation itself were not found to influence tax avoidance.