Knowledge that Transforms

ABSTRACT This study examines whether competition in the form of emerging threats from rivals' overlapping product strategies has explanatory power for future performance and volatility, beyond existing competition measures and firm life cycle proxies. We proxy for emerging threats using product market fluidity, which captures competitive pressures and instability arising from rivals' evolving product overlap. Specifically, higher fluidity (i.e., higher product market threats) is negatively associated with future profitability and operating cash flows and positively associated with the variability of future profitability and operating cash flows. We also find fluidity is negatively associated with future asset turnover, margins, and expenses, and only moderately positively associated with future sales, shedding light on the mechanisms through which product market threats manifest in future performance. However, capital market participants do not fully incorporate this information, leading to predictable future stock returns and analyst forecast errors. Overall, our findings suggest that the dynamism and fluidity in a firm's product market space convey valuable and distinct information to capital market participants.

ABSTRACT This paper examines whether lenders' risk preferences explain the use of cost‐synergy adjustments in loan contracts. These adjustments represent an aggressive accounting choice that permits borrowers to add expected cost savings and synergy gains from mergers, acquisitions, and restructurings to contractual earnings. Using novel data from loan contracts, I first document an increasing prevalence of these adjustments over the past two decades. Consistent with the notion that these adjustments provide borrowers with greater risk‐taking flexibility and increase the riskiness of lenders' payoffs, I find that lenders with stronger risk‐taking preferences are more likely to use these adjustments. This finding is more pronounced when lenders face lower monitoring costs and when borrowers are led by managers who are less risk‐incentivized. It is also stronger in loan contracts that grant borrowers more flexibility through these adjustments and when lenders face greater pressure to reach for yield. Overall, my findings highlight the importance of lenders' risk preferences in determining accounting choices in debt contracting.

ABSTRACT I use downloads of regulatory filings by SEC employees as a measure of SEC attention and find that SEC employees are disproportionately less likely to review the filings of firms with names later in the alphabet. Additional tests show that alphabetical order determines a firm's priority when the SEC follows up on common shocks among peer firms and that the strength of the SEC's alphabetical bias does not vary with the intensity of resource constraints. Further, the SEC appears to be more surprised by the restatements of end‐of‐the‐alphabet firms. These results are consistent with a cognitive bias that leads SEC employees to pay more attention to firms at the top of alphabetically sorted lists. Last, using shocks to alphabetical order caused by firm name changes, I find that alphabetically induced increases in SEC attention are linked with lower future noncompliance, suggesting that the regulatory effects of alphabetical order are material. Overall, this study highlights the “human” element of regulatory attention.

ABSTRACT In a broad sample of publicly traded firms, we observe that the share of firms annually reporting pre‐tax book losses increased from about 20% to 40% during 1988–2023. We also observe that 68% of those loss firms have positive cash tax payments (taxpaying loss firms). The amount of taxes paid by these loss firms is substantial and increasing over time. Surprisingly, we observe that taxes paid increase with the magnitude of pre‐tax losses. This study seeks to understand the prevalence of taxpaying loss firms. We examine whether both the extensive margin—the likelihood that a loss firm pays taxes—and the intensive margin—the magnitude of taxes paid—are explained by firm characteristics. We find that multinational status, state taxes, consolidation differences, goodwill impairments, asset write‐downs, extraordinary items, discontinued operations, depreciation differences, the frequency and magnitude of losses, and firm size are key determinants of both the likelihood and the amount of taxes paid by loss firms. We find that the decrease in the statutory tax rate included in the Tax Cuts and Jobs Act of 2017 did not decrease the tax burden on loss firms.

ABSTRACT We study how auditors prioritize tasks and how variations in task order influence auditors' performance. Drawing on conservation of resources theory, we develop and test our hypotheses through three experiments involving over 350 professional auditors. The first two experiments assess the impact of task order on performance. Across two settings, we manipulate task order and find that prioritizing an easier task generally results in lower performance compared with prioritizing a difficult task. In the third experiment, auditors are given autonomy over task ordering. We observe a tendency to prioritize easier tasks, particularly under heightened time pressure. We do not find any evidence that psychological ownership weakens the effect of time pressure on easy task prioritization.

ABSTRACT The rise of independent oversight of the accounting profession has attracted considerable research attention. Much of this research has studied how professional accounting bodies and the Big 4 firms have shaped the mandate and capabilities of independent oversight bodies. Less is known about how independent oversight has affected the workings of professional accounting bodies, particularly their capacity to simultaneously govern and represent their members. This paper advances our understanding of this dynamic through a longitudinal, interpretive case study of how the Dutch professional accounting body, the NBA (the Royal Netherlands Institute of Chartered Accountants), adapted and developed its regulatory intermediary role during a lengthy period of intense oversight by the Dutch regulator, the AFM (the Authority for the Financial Markets), and shifting levels of Big 4 firm discord. Drawing on extensive archival materials and insights gained from in‐depth interviews with key participants, the study advances existing theorizations of the work of regulatory intermediaries by highlighting both their functional variability and fragility. In responding to recurring crises and critique, the NBA's intermediary role shifted from facilitation to curation and ultimately to orchestrating the Big 4 firms' regulatory response. Such shifts were neither smooth nor predictable—characterized by a sense of “role limbo” as the NBA battled to bolster its identity and authority when sidelined by the AFM or dictated to or impeded by the Big 4 firms. In examining such shifting intermediation and contesting levels of influence, the NBA's governance and representation functions emerge as more symbiotic than oppositional, with the NBA using its fulfillment of one as a means of strengthening its execution of the other. Overall, the paper's analysis uncovers the functional fragility of the NBA, which questions whether repeated calls for professional accounting bodies to rediscover their public interest mandate have adequately appreciated the complex, contested nature of the regulatory environment in which they operate.

ABSTRACT A concentrated debt structure can facilitate creditor coordination, which reduces the financial distress cost in a liquidity default but also increases the risk of a strategic default. Debt concentration affects the sensitivity of leverage to tax through these two forces. We show that firms with a more concentrated debt structure are more responsive to state corporate income tax rate increases in increasing financial leverage, suggesting that when the tax rate increases, debt concentration's role in reducing the financial distress cost matters more. The impact of debt concentration on leverage is more pronounced when firms are subject to a high default risk, have low asset redeployability, or have a low liquidation value. Additional debt covenants can facilitate low debt concentration firms to increase leverage after tax rate increases. Our findings suggest that debt concentration is an important factor influencing the tax sensitivity of financial leverage.

ABSTRACT We use theory from identity economics, which synthesizes research characterizing how personal identity shapes decisions in domains such as education and career selection, to predict that the process by which people sort into accounting careers produces a population of accountants with a distinctive set of values. Specifically, we hypothesize that two kinds of personal values, called conservation values and self‐enhancement values, are overrepresented among accountants because they are associated with the decision to work as an accountant. Using data from 38 countries in the European Social Survey, we find support for both hypotheses. Given this evidence that accountants' values prioritize stability over change and concern for self over concern for others, we further hypothesize that, motivated by these values, accountants will be relatively skeptical about contemporary targets of social reforms, including those pursued by prominent accounting organizations. We test this prediction using attitudes about climate change and tolerance for minorities and find support for it. Based on our findings, we derive recommendations for an effective design of social reforms in the accounting profession. Our findings are relevant for accounting elites tasked with leading the profession into a dynamic future and contribute to the new and growing literature on accounting's human capital.

We use newspapers to create Equity Market Volatility (EMV) trackers at daily and monthly frequencies. Our headline EMV tracker moves closely with the VIX and the S&P500 returns volatility in and out of sample. We exploit the volume of newspaper text to construct forty category-specific EMV trackers. News about commodity markets, interest rates, real estate markets, aggregate activity, and inflation figure prominently in EMV articles. Policy news is another major source of market volatility: 30 % of EMV articles discuss tax policy, 30 % discuss monetary policy, and 25 % refer to some form of regulation. Combining our newspaper-based trackers with textual analysis of 10-K filings, we obtain monthly firm-level risk exposure measures. These measures help explain the cross-sectional structure of realized volatilities and its evolution over time, even after conditioning on firm and time fixed effects.

We use individual-level credit data to study how recent declines in Appalachian coal mining affected household finances between 2011 and 2018. Using exogenous variation in electricity sector demand for coal, we find declines in coal demand decreased credit scores and increased financial distress within two years of coal shocks. These effects cannot be explained solely by job losses in coal mine worker households. Credit score declines and financial distress were largest among older individuals and people with lower-middle credit scores. Our results suggest the transition away from fossil fuels may impose meaningful costs on other fossil fuel extraction communities.