Knowledge that Transforms

Organizational learning (OL) is a critical organizational capability. Yet designing management control (MC) that effectively supports OL is challenging, as learning outcomes are often intangible and unfold over extended time horizons. Employing situational strength theory, we examine combinations of MC practices that affect OL contingent on environmental uncertainty. Drawing on a survey of 210 senior business unit controllers, we use fuzzy-set Qualitative Comparative Analysis (fsQCA) to identify multiple combinations of MC practices that achieve high OL in different uncertainty contexts. In a subsequent step, we examine whether the situational strength of certain combinations of MC practices is associated with OL. Results show that in a low-uncertainty environment, the combined use of diverse performance measures and social controls, as well as performance pay and a mechanistic administrative structure, have a synergetic effect on OL. In a high-uncertainty context, the combined use of measure diversity and deliberate formal strategic planning is beneficial for achieving OL. Our results suggest that the effectiveness of MC practices for OL depends on aligning MC practices with the internal as well as the external context.

Once a good idea comes to mind, it is hard to avoid wondering why no one else has already taken advantage of it. Is it because the idea is not as good as it initially appears? This concern gives rise to a dilemma over whether to pursue the idea or abandon it despite its apparent promise, a dilemma we call “the good idea dilemma”. Paradoxically, the more compelling an idea appears, the more puzzling it becomes that others have not exploited it, thereby deepening the dilemma. We study this dilemma in a continuous-time game with multiple players, analyzing idea adoption dynamics and their economic implications. The dilemma yields both under-implementation of good ideas and over-implementation of bad ideas. Its adverse consequences equally affect trivial ideas that arise frequently and creative ideas that rarely do, but intensify for ideas accessible to larger audiences or with riskier outcomes, even under risk neutrality.

Based on a comprehensive visual deception score constructed from China’s mandatorily disclosed IPO roadshow videos using computer vision and machine learning, we find that visual cues embedded in these videos predict IPO financial fraud. The predictive power is incremental to financial, textual, and audio indicators. Further analyses show that these cues are well grounded in psychology research and focusing on the psychology-based deception-cue-area features improves fraud predicting performance. Furthermore, decomposing each video into five topics, we find that only the deception score of the topic on financial performance is positively associated with financial fraud. We further show that insiders of firms with higher visual deception scores are more likely to sell shares shortly after lock-up periods expire, and these firms experience significantly lower subsequent stock returns. Our study demonstrates the feasibility and potential value of using video information for fraud detection in accounting and finance.

We show that leading investor disagreement proxies have near-zero cross-correlation – making disagreement pricing inferences challenging. We develop a frictionless model that generates overpricing from latent disagreement, jointly rationalizes major proxies, and generates new testable predictions. Equilibrium interrelationships motivate a new disagreement measure, DIS, which is more predictive of returns cross-sectionally than major proxies and more consistently predictive across macroeconomic regimes. We provide evidence that the friction-based channel of Miller (1977) and a frictionless mechanism coexist and are empirically separable. DIS also provides a micro-founded, disagreement-based account of the IVOL puzzle, absorbing IVOL’s predictability while revealing its regime and friction dependence.

We develop a model to study the efficiency of socially responsible investing (SRI) as a mechanism to control firms' externalities. When SRI is not too popular, responsible investors favor strategies that lead to a concentration of SRI in a subset of firms in the economy. This concentration can mitigate coordination issues in adopting green technologies, but it can also crowd out the green investments of excluded firms and increase the price of green products. In equilibrium, responsible investors continue to favor concentration even as SRI becomes more popular, and concentrate the most when concentration is least desirable.

Litigation risk is an important source of motivation for auditors to conduct high‐quality audits, but theory suggests that certain lawsuits will have a more salient disciplining effect on auditor behavior. To this end, we identify lawsuits naming an individual partner as a co‐defendant along with the audit firm. We then examine how these lawsuits affect subsequent behavior of other auditors in the office of the sued partner. Relative to lawsuits naming only the firm, our results indicate that lawsuits naming individual partners as co‐defendants are significant office‐level events that motivate a meaningful response from non‐sued audit partners in the form of higher quality and fees on existing clients and more careful client portfolio management. These results have practical implications about how auditor litigation incentivizes individual auditors to fulfill their professional duties. For regulators and audit firms seeking to promote audit quality, these findings highlight the disciplining effect of auditors' concern for their personal reputation and litigation exposure. Furthermore, audit committees, clients, and investors may observe elevated audit quality, effort, and fees following partner‐level litigation in the local office.

Auditor-client negotiations over contentious accounting issues can shape reported financial outcomes, yet little is known about how communication dynamics between audit committee (AC) members and auditors influence client negotiation behavior. We conduct an experiment in which experienced financial executives, assuming the role of chief financial officer, negotiate a disputed inventory obsolescence allowance with a simulated audit partner in the presence of an AC member; the AC member's distributive communication style (offensive vs. defensive) and the audit partner's reflective empathy (high vs. low) are manipulated between participants. Drawing on relational framing theory in interpersonal communication, we predict and find that a distributive-offensive AC communication style leads clients to establish their reporting positions and concede less to the auditor's proposed adjustment, unless it is accompanied by high reflective empathy from the audit partner, which neutralizes this resistance. This pattern emerges in the client's initial negotiation position and persists through the final negotiated allowance. Our findings suggest that auditors can use empathetic communication as a strategic tool to defuse the competitive posture that an assertive governance signal may provoke. Overall, our results provide insights into how AC members' and auditors' communication styles jointly shape client negotiation behavior, highlighting the importance of communication strategies in achieving effective audit negotiation outcomes.

We examine how private foundations allocate charitable capital in response to recipient need. Using financial shocks to peer foundations (who fund the same recipients), we isolate exogenous changes in the marginal value of grants. Foundations respond to need by reallocating grants across recipients, particularly for scientific causes and longer donor–recipient relationships. However, their annual grantmaking budgets show little intertemporal flexibility, instead prioritizing capital preservation. Among governance characteristics, founder involvement predicts both cross-sectional responsiveness and intertemporal conservatism. Our findings highlight a tension: founders’ charitable intent supports effective allocation, but their inclination toward capital preservation can hinder impact maximization.

We explore whether bank regulatory oversight affects the ability of environmental enforcement to reduce industrial emissions. A major objective of environmental enforcement is to reduce industrial emissions by encouraging firms to employ greener production processes and technologies. However, such changes often require external financing obtained from banks, and prior research shows that regulatory oversight of banks can affect bank lending. We find that, on average, the reduction in air pollution in response to county‐level environmental enforcement is attenuated in counties exposed to increased bank regulatory oversight, as measured by severe enforcement actions. Furthermore, we show that the negative impact of bank regulatory oversight on small business lending to affected counties is the likely mechanism behind this on‐average effect. However, when bank regulatory oversight targets banks with stronger capitalization, we find that the negative effect of bank regulatory oversight on environmental enforcement is mitigated. Collectively, our findings suggest that bank regulation has a nuanced effect on the extent to which environmental enforcement reduces emissions, indicating that one regulator's mission can impact the objectives of another.

Prevailing theories of financial intermediation assume an integrated financial sector with frictionless risk‐sharing. However, we identify substantial risk‐sharing frictions linked to intermediary specialization using currency derivatives markets as a laboratory. Using confidential supervisory data covering $25 trillion in daily bank exposures, we document imperfect hedging in banks' FX‐swap intermediation: banks rarely hedge their synthetic dollar lending with maturity‐matched foreign safe assets. Intermediaries specialize in markets in which they have expertise in managing the associated exposures, giving rise to cross‐market variation in deviations from covered‐interest parity. Our results highlight the importance of intermediary specialization and its impact on risk premia.