Knowledge that Transforms

Abstract We investigate whether credit default swap (CDS) trading results in managers learning new information through stock prices that is relevant to their investment and forecasting decisions. We argue that the CDS market structure, the sophistication of CDS market participants, and the cleanness of CDS spreads as a signal of default risk together produce and convey information that is new to managers of firms referenced in CDS contracts. We consider two measures for managerial learning: (1) the sensitivity of managerial investments to share prices and (2) the sensitivity of changes in management forecast accuracy to stock returns. We find that both sensitivity measures increase significantly when firms are referenced in any traded CDS contracts, indicating that CDS trading improves managerial learning. We also find that the improvement in managerial learning is more pronounced for firms that are subject to higher uncertainty in industry‐specific and economy‐wide prospects, consistent with the view that CDS market participants have informational advantages with respect to the industry‐level and macroeconomic environments. We further find that the improvement in managerial learning is more evident for firms with higher credit risk. Our findings provide large‐sample evidence on a positive consequence of CDS trading in the context of managers' ability to learn from outside investors.

ABSTRACT This study examines how the design of incentive contracts for tasks defined as workers' official responsibilities (i.e., standard tasks) influences workers' propensity to engage in employee‐initiated innovation (EII). EII corresponds to innovation activities that are not formally assigned to workers but are nonetheless encouraged and considered to be important for the company's success. Like other extra‐role behaviors, EII is difficult to incentivize directly. Therefore, it is important to understand whether and how explicit incentive contracts designed for the workers' standard tasks may indirectly influence their EII activity. We use field data from a manufacturing company that uses a dedicated information system to track workers' EII idea submissions. We find theory‐consistent evidence that, compared to workers receiving fixed pay, employees rewarded for their standard tasks with variable compensation contracts exhibit a lower propensity to engage in EII. This result is concentrated among ideas benefiting other constituents and activities beyond the proponents' standard task (i.e., broad‐scope ideas). In contrast, we find no difference attributable to standard task incentive design in the proposal of innovation ideas narrowly focused on the proponent's standard task (i.e., narrow‐scope ideas). Our findings suggest that variable pay narrows employees' conceptual focus around the standard task and hinders employee engagement in broad‐scope innovation activities compared to fixed compensation contracts. We contribute to the literature on incentives for innovation by showing that standard task compensation contracts have spillover effects on EII behavior. We also contribute to the nascent literature on EII by showing that innovation types , defined based on their relation with the proponent's standard task, matter. Our results are relevant for practitioners in that managers relying on variable pay contracts to incentivize standard task performance should expect lower employee engagement in broad‐scope EII.

Contemporary Accounting ResearchVolume 40, Issue 1 p. E1-E11 LIST OF REVIEWERS CAR Ad Hoc Reviewers 2022/RCC Réviseurs ad hoc 2022 First published: 16 March 2023 https://doi.org/10.1111/1911-3846.12854Read the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat Volume40, Issue1Spring 2023Pages E1-E11 RelatedInformation

Abstract We examine how metric intensity—that is, the quantity, frequency, and extent to which performance metrics are tracked and used—varies with a firm's dependency on innovation for business success. Although performance metrics are essential in an organization's management control system, little is known about how the use of metrics differs in organizations with varying dependencies on incremental and radical innovation. Drawing on data from a sample of small‐ and medium‐sized enterprises (SMEs), we hypothesize and find that firms' dependency on incremental (radical) innovation is positively (negatively) associated with metric intensity. Furthermore, we find that (1) the positive relationship between the dependency on incremental innovation and metric intensity is stronger when the organizational culture is focused more on “control” and (2) the negative relationship between the dependency on radical innovation and metric intensity is mitigated when the organizational culture is focused more on “flexibility.” Additional analysis shows that the positive (negative) relationship between incremental (radical) innovation dependency and metric intensity can be mitigated by greater use of metrics for decision‐facilitating purposes. Our findings suggest that metrics‐based formal controls are designed to match the types of innovation dependencies and pre‐existing informal controls such as organizational culture. This study highlights the importance of distinguishing different types of innovation dependency in studying management control systems.

Abstract Every analyst will experience stock recommendation failures during their career. Unlike many other professions, these pivotal moments occur in the full glare of clients, colleagues, equity‐sales teams, and the media. This research explores the practices of analysts up to and beyond the point where, faced with a failing recommendation, they contemplate “throwing in the towel” on their recommendation. Based on empirical evidence gathered from interviews with sell‐side analysts and their key interlocutors—equity‐sales specialists, investors, and investor relations officers—this paper uncovers several new empirical insights into the recommendation practices of analysts. The main argument made in the paper is that capitulation practices emerge from the specific contextual framework of individual recommendations and the analyst's conduct as a knowledgeable, emotional human agent. We identify several contextual contingencies of stock recommendations that underpin how a capitulation episode unfolds, including the temporal proximity of the capitulation to the original recommendation; the importance and profile of the stock to the analyst's reputation (“franchise intensity”); the level of interest/reaction from clients, equity‐sales teams and corporates; the nature/cause of recommendation failure; and recommendation boldness. Our study provides evidence that what an analyst does when faced with a failing recommendation cannot be reduced to a predictable, rational process and informs our understanding of observed practices such as the reluctance of analysts to capitulate and why “recommendation paralysis” often follows a recommendation capitulation.

Abstract Although information technology (IT) plays an essential role in financial reporting, many companies today lack sufficient human capabilities to utilize IT competently. We examine the association between a firm's access to IT‐capable labor and financial reporting quality (FRQ). We proxy for access to IT‐capable labor using workforce measures in the metropolitan statistical area (MSA) where the firm operates, including (1) the number of IT‐related college degrees relative to the total active workforce, (2) the level of education of IT graduates, (3) the income level of IT graduates, and (4) a composite measure. We find that firms in MSAs with a higher IT‐competent labor force are associated with fewer financial reporting misstatements and internal control issues. This study contributes to the emerging literature stream examining the influence of geographic labor characteristics on firm‐level outcomes and the research on the impact of IT capability on financial reporting processes. We also inform the current movement of integrating IT knowledge into the education curriculum.

Abstract Customer referencing is a strategy that firms can use to disclose their connections with reputable customers as a means of enhancing their own reputations. We study the capital market benefits of naming reputable nonmajor customers in firms' financial reports to provide empirical evidence on whether this form of customer referencing has important practical implications. We predict and find that firms enjoy a lower cost of equity when they engage in customer referencing in their financial reports, consistent with the argument that this form of voluntary disclosure increases investor attention and customer certification. In cross‐sectional analyses, we predict and find that the benefits of customer referencing are more pronounced for firms that (1) lack major customers or reputable major customers, (2) name customers whose reputations exceed their own, and (3) face higher competition. Overall, our study provides evidence that communicating certain interorganizational connections can generate capital market benefits for disclosing firms.

ABSTRACT We investigate labor market consequences for CFOs employed by fraud firms, focusing on reputational contagion for those who are not implicated. These individuals provide an opportunity to understand reputational contagion and the nuanced meaning of “guilt” because the labor market may suspect complicity or infer negligence regardless of whether that is truly the case. We compare these CFOs to a matched sample of non‐fraud CFOs and track both turnover and subsequent employment positions. Non‐implicated CFOs are more likely to experience turnover compared to non‐fraud CFOs, driven in particular by the public revelation of fraud to the labor market. We further find that non‐implicated CFOs are more likely to obtain comparable subsequent employment than non‐fraud CFOs before the fraud is publicly revealed, but not after. In supplementary analyses, we find that turnover rates are highest for non‐implicated CFOs who started their employment with the firm before the fraud began as compared to non‐implicated CFOs who started their employment after the fraud began. These results highlight the labor market significance of the public revelation of fraud and imply that the labor market does not fully distinguish between fraud firm association and general firm performance when making executive hiring decisions.

ABSTRACT Clinical labs belong to a mature industry and fulfill a critical function in the health‐care value chain. We examine factors that influence the opportunity, motivation, and ability to learn in clinical labs. We hypothesize that with respect to learning about cost: (i) organizational design, such as the extent of outsourcing can impede the opportunity to learn, (ii) quality focus (measured by mortality rates and length of stay (LOS)) can reduce the motivation to learn, and (iii) related task variety (measured by product‐mix breadth) and information technology investments can enhance the ability to learn. Our empirical tests calibrate learning effects on disaggregate (technical and supervisory hours and cost) and aggregate (salary and total direct cost) cost and time pools. Using longitudinal data from clinical labs in California for the period 1997–2015, we find that clinical labs with greater cumulative output have lower average costs, consistent with learning effects in clinical labs. We also find results consistent with our hypotheses about the contextual factors that influence learning rates in clinical labs. Our findings contribute to a better understanding of learning rates with implications for budgeting, forecasting, and performance measurement. The results highlight that learning can be a crucial source of cost reduction in health‐care settings.

Abstract We examine the relation between voluntary disclosure and the value of analysts' research by studying the change in the informativeness of analysts' research after managers stop providing quarterly guidance to investors. We find that the market reaction to analysts' recommendation revisions increases significantly after guidance stoppage, controlling for confounding factors as well as for firm and time fixed effects. The increase in market reaction is greater for firms with more opaque information environments and for firms that previously provided disaggregated guidance. Further, the effect of guidance stoppage on the informativeness of analysts' research reverses after managers resume guidance. Finally, textual analyses of analysts' reports before and after guidance stoppage reveal that analysts issue longer, more frequent, and more detailed reports that convey more forward‐looking information after stoppages. These findings collectively shed light on the relation between the supply of voluntary disclosure and the value that sell‐side analysts add to price discovery in capital markets.