Knowledge that Transforms

Liao ( ) argues that the monitoring by large outside shareholders (blockholders) exacerbates the conflict between debt and equity and in turn affects the choice and structure of debt financing. The study contends that private debt is more immune to the increase in debt‐equity conflict. Consistent with this argument, companies with outside blockholders are inclined to issue private debt over public debt. Further, private debt exhibits less price protection but relies on more protective covenants than does public debt. The findings are interesting and intuitive. I evaluate the economic arguments in the paper and discuss some of the challenges that the study faces. My conclusion is that the interpretation of the results is more complex than the one the study presents. I offer a broader framework that can be used to shed light on why the governance structure combines equity blockholders and private debt issuance. I also discuss several questions to be addressed by future research.

Research on the Balanced Scorecard ( BSC ) has questioned whether its adoption generates greater integration between financial and nonfinancial performance measures, supports strategy implementation, increases performance and improves strategic decision making. This research has also highlighted how the BSC often generates effects other than these. Building on studies that portray Performance Measurement Systems as intrinsically incomplete practices of representation, the purpose of this article is to investigate how the BSC engages users because of the organizing work that it stimulates around this incompleteness. Our findings allow us to further articulate the power of specific visual elements of the BSC , such as hierarchical trees, wheels, causal and strategy maps. The article provides material that contributes to a better understanding of how the BSC performs multiple roles within organizations beyond a simple representational functionality and unfolds continuously. It contributes to the growing literature on accounting inscriptions, that is, signs producing incomplete representations, by developing an analytical theoretical framework that defines the BSC as a rhetorical machine composed of four key features: (i) a visual performable space (i.e., a schema generating creative engagement); (ii) a method of ordering and innovation; (iii) a means of interrogation and mediation; and (iv) a motivating ritual.

Statement of Financial Accounting Standards 123R suggests that lattice valuation models may improve the estimates of reported employee stock option values relative to the more commonly used Black–Scholes (BS) model. However, lattice model critics have expressed concerns that managers may use lattice models' flexibility to opportunistically understate option values. In this study, we investigate a sample of firms that recently adopted a lattice model to value employee stock options to provide evidence on this issue by identifying the determinants of lattice model adoption and examining the effect of lattice model use on reported option values. We report three main results. First, we find that firms are more likely to adopt a lattice model when it is more likely to produce lower values than the BS model and when managers have incentives to lower stock option expense. Second, we find that firms adopting a lattice model increase understatement of reported option values more than firms that continue to use the BS model and that the incremental understatement is due to use of the lattice model. Third, we conduct several tests to examine whether the valuation effect of lattice model use is consistent with efforts to correct for documented shortcomings in the BS model and find no evidence that this is the case. Taken together, the evidence in this study suggests that firms adopt and implement lattice models primarily to lower reported option values.

This study experimentally tests the hypothesis that investor reaction to favorable investment ratings is influenced by attributes of analysts’ supporting arguments. Specifically, I argue that argument ambiguity and the mix of positive and negative argumentation interact to influence how investors process and, in turn, react to information contained in analysts’ arguments. When positive arguments are unambiguous, I predict and find that investors react to the content of the arguments because they perceive the arguments provide sufficient support for the rating. In this case, investors react more favorably when the report includes strictly positive argumentation (i.e., one‐sided argumentation) than when it includes a mix of positive and negative argumentation (i.e., two‐sided argumentation). In contrast, when positive arguments are ambiguous, two‐sided argumentation acts as a credibility cue and leads to a higher likelihood of investment than one‐sided argumentation. These results provide important insights about the conditions under which investors react to justifications in favorable analyst reports and shed light on how analysts can credibly convey favorable information.

This article uses the Canadian environment, where French civil law (FCL) in the province of Quebec coexists with common law (CL) in the Rest of Canada (denoted as bijural), to test the thesis of the neutrality of the legal system with regard to financial reporting quality (FRQ). This single‐country design allows for a better control over other factors that influence FRQ. The FCL environment appears to encourage firms to publish accounting data of better quality due to the greater liability risk faced by auditors and corporate directors under that regime. These findings, based on 10 years of data and seven attributes of FRQ, are robust to different matching procedures and model specifications. This research contributes to the current debates in Canada as to whether financial market regulation under FCL and CL jurisdictions should be unified under a single CL national securities regulator. At the broader level, the results support claims that a more in‐depth understanding of the implementation of civil law and CL is needed rather than gross generalization about the two systems. These results especially call into question that CL regimes are unambiguously superior to civil law regimes in encouraging high‐quality financial reports.

This paper investigates the effect of CFO gender on corporate financial reporting decision making. Focusing on firms that experience changes of CFO from male to female, the paper compares the firms' degree of accounting conservatism between pre‐ and post‐transition periods. We find that female CFO s are more conservative in their financial reporting. In addition, we find that the relation between CFO gender and conservatism varies with the level of various firm risks, including litigation risk, default risk, systematic risk, and CFO ‐specific risk such as job security risk. We further find that the risk aversion of female CFO s is associated with less equity‐based compensation, lower firm risk, a higher tangibility level, and a lower dividend payout level. Overall, the study provides strong support for the notion that female CFO s are more risk averse than male CFO s, which leads female CFO s to adopt more conservative financial reporting policies.

We examine whether firms with greater financial statement complexity are more likely to meet or beat analysts’ earnings expectations. We proxy for financial statement complexity using the firm's industry and year adjusted accounting policy disclosure length. Firms with more complex financial statements are more likely to just beat expectations than just miss expectations. Firms with complex financial statements appear to use expectations management to beat expectations, but do not use earnings management. Corroborating these findings, we find analysts rely more on management guidance for more complex firms. Firms with complex financial statements are also more likely to have analysts exclude items from actual “street earnings,” but tests suggest this strategy is not specifically used by complex firms to beat expectations. The effect we document is specific to analyst forecasts and not to other alternative benchmarks.

We identify a key role of factor supply, driven by demographic changes, in shaping several empirical regularities that are a focus of active research in macro and labor economics. In particular, demographic changes alone can account for the large movements of the return to experience over the last four decades, for the differential dynamics of the age premium across education groups emphasized by Katz and Murphy (1992), for the differential dynamics of the college premium across age groups emphasized by Card and Lemieux (2001), and for the changes in cross-sectional and cohort-based life-cycle profiles emphasized by Kambourov and Manovskii (2005).