Auditor Task Prioritization: The Effects of Time Pressure and Psychological Ownership

Co-authored with Bart Dierynck

Abstract: Auditors have discretion over which task they prioritize. However, the way in which auditors use this discretion, and how this affects effort allocation among tasks is poorly understood. Using Conservation of Resources Theory and a laboratory experiment, we predict and find that auditors prioritize easy tasks over difficult tasks. In addition, we find that easy task prioritization is more prominent when time pressure is high compared to when it is low. This is problematic as we find that easy task prioritization causes auditors to especially reduce effort in difficult tasks, where material misstatements are more likely. We propose psychological ownership as a mechanism that can reduce auditors' tendency to prioritize easy tasks, and find it works in low time pressure conditions. Our study contributes to practice and theory by documenting conditions under which easy task prioritization is more prevalent. Furthermore, we provide preliminary evidence on how easy task prioritization can be mitigated.

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Presentations (includes scheduled): Tilburg University, Tilburg GSS Seminar, Bristol University*, 8th EIASM Workshop on Audit Quality, EAA Annual Congress 2021, Dutch Junior Accounting Meeting, FAR Academic Research Seminar, 11th EARNet Symposium, KU Leuven, 2022 ENEAR Conference .

Learning in the Auditing Profession: A Framework and Future Directions

Co-authored with Bart Dierynck and Kathryn Kadous

Abstract: Rapid changes in capital markets, expanded assurance models, and technological developments have increased the need for auditors to learn in the workplace. Drawing on literature in auditing and workplace learning, this paper develops the Auditor Learning Framework. Based on a general workplace learning framework by Jacobs and Park (2009), the Auditor Learning Framework distinguishes auditor learning processes along three dimensions: the location of learning, the extent of planning involved in the learning process, and the role of the supervisor. We review the auditing literature, classifying papers that directly or indirectly improve our knowledge of auditor learning into our framework to identify gaps in our understanding of the auditor learning processes. Our study provides a comprehensive view of auditor learning processes and provides suggestions for future research aimed at improving auditor learning.

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Public Tax Disclosures and Investor Perceptions

Co-authored with Bart Dierynck, Martin Jacob, Maximilian Müller, and Victor van Pelt

Abstract: To reveal to the public whether firms pay their fair share of taxes, regulators increasingly mandate public tax disclosures. One assumption is that these disclosures help stakeholders, such as retail investors, identify aggressive tax avoiders. However, we find that retail investors become worse at identifying firms using aggressive avoidance methods when they receive designated tax disclosures alongside standard effective tax rate reconciliations. This experimental finding is consistent with our prediction rooted in attribute substitution theory that retail investors fixate on designated tax disclosures when forming perceptions about whether firms pay their fair share and their willingness to invest.

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Presentations (includes scheduled): Tilburg University, WHU - Otto Beisheim School of Management*, EAA VARS*, 10th EIASM Conference on Current Research in Taxation, George Mason University Behavioral Tax Symposium, 44th EAA Annual Congress.

Media coverage: The Financial Times, WHU Knowledge

Corporate Tax Planning and Product Market Competition

Co-authored with John Gallemore, Jesse van der Geest and Martin Jacob.

Abstract: Policymakers and academics have suggested that corporate tax planning can provide a competitive advantage for market leaders, and thus has contributed to the recent rise in market concentration. However, these assertions have received little direct empirical exploration in the literature. The objective of our study is to provide large-sample evidence on the association between tax planning and subsequent product market competition. We first document that tax planning is positively associated with subsequent market share growth, suggesting that firms can gain a competitive advantage through tax planning. However, contrary to conventional wisdom, we find that this competitive advantage from tax planning is not exclusive to market leaders. When comparing the tax planning of market leaders to that of their direct competitors (which we term “market contenders”), we find that market leaders engage in less tax planning than market contenders in approximately half of the product market-years. Furthermore, we find that subsequent changes in market concentration are higher (lower) in markets with greater tax planning by leaders (contenders). Finally, we do not find any evidence that tax planning has contributed to the trend of increased market concentration in recent years. Our findings thus suggest that the relation between tax planning and market competition is more nuanced than conventional wisdom suggests.

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Presentations (includes scheduled): Tilburg GSS Seminar, Tilburg University*, 2nd Norwegian Tax Accounting Symposium*, 44th EAA Annual Congress*, 12th EIASM Conference on Current Research in Taxation (scheduled).

Survival of the Tax Fittest: Path Dependence in Corporate Tax Planning

Co-authored with Jesse van der Geest and Martin Jacob.

Abstract: We investigate the potential of path dependence in explaining cross-sectional variation and persistence in efficient corporate tax planning. Variation in tax planning efficiency among firms is far from being fully understood. We propose that corporate tax planning strategies are path dependent. This implies that once a business strategy is adopted, this narrows the range of tax strategies available to the firm. Once a more efficient tax planning strategy emerges, path dependence hampers firms from adopting that option, potentially resulting in tax planning inefficiencies. We compare new entrants to a market with incumbent firms, and find that new entrants have an Entrant's Tax Edge. That is, new entrants are more efficient in tax planning compared to incumbent firms. Consistent with our predictions and path dependence theory, we find that the Entrant's Tax Edge is amplified when incumbent firms in the market are relatively inflexible. Finally, we explore whether new entrants use their tax edge as a competitive mechanism. We find new entrants only outperform incumbents in tax planning efficiency when competition is high, but not when competition is low.

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Presentations (includes scheduled): 6th Berlin-Vallendar Tax Conference (Early Papers)*, Tilburg University, Tilburg GSS Seminar

Asterisk indicates presentation by co-author.