Industry Linkages and Audit Firms' Industry Portfolio Choice: Evidence from Product Language

Audit firms are organized along industry lines and industry specialization is a prominent feature of the audit market. Yet, we know little about how audit firms make their industry portfolio decisions, i.e., how audit firms decide which set of industries to specialize in. In this study, I examine how the linkages between industries in the product space affect audit firms’ industry portfolio choice. Using text-based product space measures to capture these industry linkages, I find that both Big 4 and small audit firms tend to specialize in industry-pairs that 1) are close to each other in the product space (i.e., have more similar product language) and 2) have a greater number of “between-industries” in the product space (i.e., have a greater number of industries with product language that is similar to both industries in the pair). Consistent with the basic tradeoff between specialization and coordination, these results suggest that specializing in industries that have more similar product language and more linkages to other industries in the product space allow audit firms greater flexibility to transfer industry-specific expertise across industries as well as greater mobility in the product space, hence enhancing its competitive advantage. Additional analysis using the collapse of Arthur Andersen as an exogenous supply shock in the audit market finds consistent results. Taken together, the findings suggest that industry linkages in the product space play an important role in shaping the audit market structure.

Essays on Uncertainty, Imperfect Information, and Investment Dynamics

Understanding how imperfect information affects firms' investment decision helps answer important questions in economics, such as how we may better measure economic uncertainty; how firms' forecasts would affect their decision-making when their beliefs are not backed by economic fundamentals; and how important are the business cycle impacts of changes in firms' productivity uncertainty in an environment of incomplete information. This dissertation provides a synthetic answer to all these questions, both empirically and theoretically. The first chapter, provides empirical evidence to demonstrate that survey-based forecast dispersion identifies a distinctive type of second moment shocks different from the canonical volatility shocks to productivity, i.e. uncertainty shocks. Such forecast disagreement disturbances can affect the distribution of firm-level beliefs regardless of whether or not belief changes are backed by changes in economic fundamentals. At the aggregate level, innovations that increase the dispersion of firms' forecasts lead to persistent declines in aggregate investment and output, which are followed by a slow recovery. On the contrary, the larger dispersion of future firm-specific productivity innovations, the standard way to measure economic uncertainty, delivers the ``wait and see" effect, such that aggregate investment experiences a sharp decline, followed by a quick rebound, and then overshoots. At the firm level, data uncovers that more productive firms increase investments given rises in productivity dispersion for the future, whereas investments drop when firms disagree more about the well-being of their future business conditions. These findings challenge the view that the dispersion of the firms' heterogeneous beliefs captures the concept of economic uncertainty, defined by a model of uncertainty shocks. The second chapter presents a general equilibrium model of heterogeneous firms subject to the real productivity uncertainty shocks and informational disagreement shocks. As firms cannot perfectly disentangle aggregate from idiosyncratic productivity because of imperfect information, information quality thus drives the wedge of difference between the unobserved productivity fundamentals, and the firms' beliefs about how productive they are. Distribution of the firms' beliefs is no longer perfectly aligned with the distribution of firm-level productivity across firms. This model not only explains why, at the macro and micro level, disagreement shocks are different from uncertainty shocks, as documented in Chapter 1, but helps reconcile a key challenge faced by the standard framework to study economic uncertainty: a trade-off between sizable business cycle effects due to changes in uncertainty, and the right amount of pro-cyclicality of firm-level investment rate dispersion, as measured by its correlation with the output cycles.

Pathways to adulthood and their precursors: Roles of gender and race

Research on the transition to adulthood dates back nearly four decades, but a growing body of research has taken a new approach by investigating multiple demographic markers in the transition to adulthood simultaneously. Using the life course perspective, this dissertation is built on the literature by first examining contemporary young adults’ pathways to adulthood from ages 18 to 30 and their differences by gender. Data for this study were drawn from the National Longitudinal Survey of Youth 1997; the final sample included 2,185 men and 2,086 women. The college-educated single workers pathway, the college-educated married working parents pathway, and the high-school-educated single parents pathway were identified in both genders. For men, the study also identified the high-school-educated single workers pathway and the high-school-educated married working parents pathway. For women, the study also identified the high-school-educated workers pathway and the high-school-educated married parents pathway. Not only did the definitions of some pathways differ by gender, but even in the pathways with the same definition, gender differences were found in the probabilities of being married, of being a parent, or of being employed full-time. Based on the pathways to adulthood identified, this research examined the family and adolescent precursors and whether race moderates the associations between family structure experiences and young adults’ pathways to adulthood. Parental education, family structure, GPA, delinquency, early sexual activity, and race/ethnicity were the family and adolescent precursors that distinguished among pathways taken by the youth. Two interactions between race and family structure/instability were identified. The positive association between growing up in a single-parent family and the odds of taking the high-school-educated single workers pathway compared to the college-educated married working parents pathway was weaker for Black males than for White males. The positive association between family instability and the odds of taking the college-educated single workers pathway compared to the college-educated married working parents pathway was weaker for Black females than for White females. This dissertation accounted for changes in the multiple statuses related to becoming an adult by following contemporary young adults for 12 years. More research on contemporary young adults’ pathways to adulthood and subgroup differences in the effects of precursors are recommended. Limitations and implications of this study are discussed.