Knowledge that Transforms

ABSTRACT Prior literature extensively documents that financial analysts obtain information from interactions with firm managers; however, the reciprocal information flow from financial analysts to firm managers during these interactions remains underexplored. This paper examines whether managers learn from face‐to‐face interactions with analysts to increase the precision of management earnings range guidance. Using a unique dataset of analyst site visits in China, we find that firms hosting more analyst site visits issue more precise management earnings range guidance. This effect is stronger among firms with greater uncertainty, which is consistent with the concept of managerial learning. Importantly, our evidence contradicts the arguments of social transmission bias and firm managers' impression management. We further demonstrate that firm managers can learn from interactions with both buy‐side analysts and sell‐side analysts to improve their guidance precision. Overall, this study provides robust evidence that firm managers can acquire valuable insights from interactions with financial analysts to issue more precise earnings range guidance to market participants.

ABSTRACT This article studies how the mandatory disclosure of audit risk and targeted regulatory inspections influence audit quality. We develop a model in which the auditor tests a firm's internal control over financial reporting before auditing the financial report and must issue an opinion on both. Due to higher regulatory scrutiny received by audits with weak internal control opinions, we show that targeted inspections generate countervailing effects: they reduce the auditor's internal control audit effort while increasing substantive testing effort. We show that a positive level of targeted inspections can improve audit quality when the level of random inspections is high. Furthermore, we show that targeted inspections are not always consistent with risk‐based inspections, due to the auditor's strategic response to the oversight measures. Nevertheless, such targeting can still result in higher audit quality. Our results suggest the need to exercise caution when using audit risk disclosures as a basis for enforcement.

ABSTRACT We study how analysts' inherited cultural attitudes to time orientation affect their production of long‐term information and the profitability of their stock recommendations. We find that analysts from long‐term‐oriented cultures exhibit a longer forecast horizon and issue more long‐term forecasts. They also produce more accurate long‐term forecasts and ask more long‐term‐focused questions during conference calls, eliciting greater long‐term disclosure from managers. In addition, they are more likely to use discounted valuation models that explicitly incorporate expectations about firms' long‐term prospects. Further, their stock recommendations are more profitable, consistent with their production of long‐term information enhancing valuation. Our findings highlight the role of cultural long‐term orientation in shaping analysts' information production in capital markets.

ABSTRACT This paper examines the association between CEOs' prosocial tendency and their firms' likelihood of accounting manipulation. We measure CEOs' prosocial tendency based on their involvement with charitable organizations. We find that prosocial CEOs are less likely to engage in accounting manipulation, as proxied by material non‐reliance restatements and SEC or US Department of Justice enforcement actions. The effect is more pronounced when CEOs are involved with charities that directly aim to improve the welfare of others and when they face stronger incentives to misreport. These results continue to hold in analyses of changes in CEOs' prosocial tendency around turnover events. Taken together, our findings suggest that CEOs' prosocial tendency, a fundamental personal trait, plays a significant role in shaping the quality of accounting information.

ABSTRACT We document that firms held by mutual fund managers who have public accounting experience earlier in their careers exhibit higher‐quality financial reporting, as evidenced by a lower likelihood of financial statement restatements. Additional evidence shows that fund managers with public accounting experience are more likely to conduct site visits to their portfolio firms and discuss accounting policy–related topics during those visits. Moreover, the restatement likelihood falls after fund managers' site visits, particularly when they raise accounting policy–related issues during their visits. In cross‐sectional results consistent with expectations, we find that the role that fund manager public accounting experience plays is amplified when the firm suffers more severe agency problems, firm information asymmetry is worse, fund managers are more risk averse, fund managers have prior work experience at larger accounting firms, fund managers hold a larger proportion of the firm's shares, or there is coordination among mutual funds. Collectively, our evidence suggests that fund managers with public accounting experience impose stricter external monitoring on their portfolio firms' financial reporting choices.

ABSTRACT Path analysis has become increasingly popular, but many studies do not show a deep understanding of how path analysis works or the assumptions on which it relies. In this paper, we explain that path analysis is statistically equivalent to either OLS when the researcher assumes uncorrelated errors, or instrumental variable (IV) estimation when the researcher allows correlated errors and obtains identification using exclusion restrictions. We then identify two problems with the way path analysis is used. First, studies claim that they use path analysis to provide evidence on the causal process, but they assume away endogeneity by imposing the unrealistic assumption of uncorrelated errors. Second, many studies do not explicitly disclose their key assumptions, including the assumptions of uncorrelated errors or exclusion restrictions. This nondisclosure makes it difficult for a reader to determine whether endogeneity is assumed away or whether the study is attempting to address endogeneity. We conclude with detailed guidance for researchers who are considering whether to use path analysis in their research.

ABSTRACT We conduct two experiments to examine whether and how the framing (bonus vs. penalty) of a target‐based incentive contract affects knowledge sharing and knowledge seeking. In the first experiment, we predict and find that penalty‐framed contracts increase employees' stress due to the fear of potential loss, which in turn reduces their willingness to share knowledge. Additionally, consistent with loss aversion, employees under penalty‐framed contracts are more likely to seek knowledge than those under bonus‐framed contracts. The second experiment corroborates our theoretical arguments by demonstrating the crucial role of stress in reducing knowledge‐sharing behavior. The results show that, when stress is alleviated through an informal control mechanism, penalty‐framed contracts no longer reduce knowledge sharing. The implications of our findings for research and practice are discussed.

ABSTRACT This paper examines private meetings between company managers and institutional investors as part of the broader financial reporting environment. Using direct observations of 39 such meetings across four large, listed companies—complemented with the study of preparatory work and internal documents—the paper investigates how these meetings help build and maintain relationships between companies and investors. The analysis shows that the importance of these meetings lies not primarily in the exchange of new information but in the creation of familiarity, focused engagement, and exclusivity, which strengthen social ties and reinforce participants' positions in the capital market. Drawing on interaction ritual theory, the paper identifies three forms of ritual work through which these outcomes are produced: assembly work, conversational work, and bodily work. The study contributes to research on the social embeddedness of capital markets and suggests that private reporting meetings should be understood not only as informational events but also as relational mechanisms that shape access, trust, and network persistence.

Abstract This mixed‐methods study investigates whether individual auditors' career advancements to more prestigious audit firms can predict their audit quality. Using hand‐collected data on more than 2,000 audit partners from professional networking website profiles, I identify audit partners with advancements from less to more prestigious audit firms and empirically test whether these upward trajectories predict audit partner quality. I find that these audit partners provide higher‐quality audits, as evidenced by discretionary accruals and going‐concern opinions. These results are robust to audit partner changes, entropy balancing, and other sensitivity analyses. Moreover, clients of these partners report more conservative financial statements. The qualitative results from 10 semistructured audit partner interviews indicate that audit partners enter the auditing labor market at less prestigious firms due to both internal factors (e.g., late entry into the job market, location preferences) and external factors (e.g., poor market conditions/recessions or lack of Big N recruitment). In fact, their choice to make upward advancements results from both work considerations, such as limited growth opportunities, feeling unchallenged in their previous roles, and the desire to specialize, alongside nonwork considerations, such as audit firm culture and reducing commute/travel time for client work. Taken together, the evidence suggests that these significant upward career transitions represent market corrections of initial auditing labor markets and that such transitions may be of interest to investors, regulators, audit committees, and academics.

ABSTRACT Accounting is often thought of in terms of numbers and abstract models, yet it is sustained in practice by a host of ordinary objects. This paper demonstrates how seemingly mundane items—blackboards, cue cards, flipcharts, sticky notes, envelopes, and boxes—can play quiet yet decisive roles in extending and connecting accounting into new settings. Borrowing from literature on everyday surface aesthetics, we introduce the notion of geometric mediation to denote how certain arrangements of mundane objects can draw us in, appearing so compelling that they invite us to connect the abstract logics associated with them. We illustrate this process through a study of the Logical Framework, a performance tool for nongovernmental organizations, and its transformation when adopted by a German development agency in the 1970s. Although the tool initially met resistance from an agency whose logics conflicted with the use of managerial devices, the simple materials used to operationalize the tool helped these differences feel less stark. Their shapes and arrangements made the framework look naturally compatible with other approaches, leading to a new version of the tool, known as ZOPP. Our study contributes in two ways. First, it shows how everyday aesthetics can quietly help accounting spread and adapt. Second, it offers a new view of how accounting brings together competing aspirations, not only through explicit negotiation or compromise, but also through subtle, often unnoticed material connections that make things feel “right” before they are fully thought about.