Knowledge that Transforms

We identify sustainability‐focused analysts using recent advances in machine learning combined with conference call transcripts. Sustainability‐focused analysts issue more accurate earnings forecasts, and the stock market reacts more strongly to their revisions. The forecasting advantage of sustainability‐focused analysts is amplified for material sustainability issues, small firms, and growth firms. Consistent with a learning curve in understanding how sustainability issues relate to future performance, we find that less experienced analysts are less likely to focus on sustainability and that they reap fewer benefits in forecast accuracy when they do so. Our results suggest that far from being an inefficient use of time and resources, focusing on sustainability provides a competitive advantage in one of the most pivotal steps in valuation: forecasting earnings.

The digital evolution in auditing has triggered a rapid shift in auditors' required skill sets, with audit firms heavily investing in and extolling advanced data analytics and artificial intelligence (AI) capabilities. However, this strong emphasis on newly required digital skills can lead many experienced auditors, who perceive these competencies as their weaker areas, to feel disaffirmed in their abilities. We predict and find, across two experiments, that auditors who feel disaffirmed in their digital skills more defensively discount specialist advice that places higher versus lower reliance on AI, but that an intervention in which auditors affirm their traditional audit skills mitigates this defensive reaction. Absent self‐affirmation, higher specialist reliance on AI results in auditors denigrating the competence and quality of advice that specialists provide. These findings suggest that disaffirmation escalates AI aversion, offering important insights into how audit firms can foster less defensive decision‐making in the rapidly evolving audit environment.

Auditors are required to raise potential audit issues to their supervisor's attention (i.e., to speak up). Speaking up allows supervisors to adjust audit procedures as needed to protect audit quality. We argue that the act of speaking up may not always be sufficient to protect audit quality— how auditors speak up is critical. Drawing on audit voice theory (AVT), which focuses on whether auditors speak up, we consider the impact of auditors' salient goals on the tactics that auditors use when raising issues. Using a survey, multiple experiments, and an association study, we find that staff auditors with salient public service (vs. self‐serving) goals choose more quality‐enhancing voice tactics when speaking up. Importantly, however, we find that the voice‐related decisions of auditors with salient self‐serving (but not public service) goals respond to rewards for more quality‐enhancing tactics. These results support our theory that auditors approach voice differently depending on their salient goals, and they imply that supervisors can help auditors choose quality‐enhancing voice tactics even when self‐serving goals are salient. Overall, our findings test and extend AVT, identify a potential shortcoming of current audit standards, and suggest ways that firms can improve team communication and audit quality via recruitment strategies, team management practices, and training.

Prior research shows that borrowers are more likely to default when their banks are financially distressed, particularly where contract enforcement is weak. We examine whether regulatory intervention in the form of Prompt Corrective Action (PCA), which seeks to improve bank health through enhanced monitoring, reverses such defaults. To address this question, we exploit the bright‐line entry thresholds in India's PCA regime using a regression discontinuity framework. We first show that such defaults exist in India. Our main result is that PCA intervention significantly reduces such defaults. The result is robust to variation in methodology and alternative definitions of bank health. Our evidence suggests that PCA reduces such defaults by credibly signaling to borrowers the likely restoration of bank health and continuity of lending relationships. Its effectiveness was reinforced by an earlier regulatory reform that improved the timeliness of loan‐loss provisioning, enhancing the credibility of enforcement. Overall, our findings suggest that PCA, when underpinned by credible financial reporting, can serve as an effective policy tool to curb strategic defaults.

We investigate whether foreign tax holiday participation among US multinational companies is associated with offshoring US jobs and other domestic investment activities. We find that foreign tax holiday participation is associated with (1) an increase in offshoring US jobs and (2) a decrease in domestic investment, as proxied by changes in the number of employees, capital expenditures, and R&D activity. Furthermore, we find evidence suggesting that the association between targeted, temporary tax incentives provided by foreign tax holidays and firms' domestic activities is stronger among firms with a smaller foreign presence and is distinct from the impact of foreign statutory tax rate changes. Overall, the results of this study increase our understanding of the firm‐level consequences of foreign tax holiday participation, the influence of various tax incentive structures on the allocation of firm resources, and the potential consequences of international tax competition.

We study the implications of inflation heterogeneity for individuals and firms through the lens of accounting research, applying measurement frameworks to the national accounting measurement of inflation. We first examine the systematic exposure of individuals in low‐income households to higher inflation relative to those in high‐income households. We show that this “inflation gap” is linked with future rising inequality in the form of widening gaps in healthcare insurance, education, homeownership, and credit card debt, as well as in a higher frequency of property crimes. We also provide an economic mechanism connecting the inflation gap with rising inequality, empirically demonstrating the role of basic goods in reducing the ability of individuals in the low‐income group to attain the social and economic implications that we study. In addition, we show a channel that connects the inflation gap to firms' profitability. Indeed, consistent with the inflation gap disadvantaging low‐income households mainly through basic goods, the inflation gap fluctuations are especially strongly connected to the profitability of firms operating in the energy and consumer staples sectors. Finally, we find that market power plays a role in this connection, where this link is even stronger for firms with high market power. Taking its findings together, the paper shows that differential inflation pressures have major implications for household well‐being and corporate profitability.

Regulators are increasingly considering and mandating additional public tax disclosures to enhance transparency and promote scrutiny of corporate tax avoidance. We conducted three experiments to examine how such disclosures influence retail investors' perceptions of firms with identical effective tax rates but different tax avoidance methods. In the first experiment, participants evaluated whether firms were paying their fair share of taxes. We find that additional public tax disclosures reduce retail investors' tendency to differentiate between tax avoidance methods, subsequently affecting their willingness to invest. Specifically, participants use easy‐to‐process summary tax information in the additional public tax disclosure as a heuristic shortcut. The second and third experiments demonstrate that modifying the disclosure format and prompting participants to assess tax aggressiveness rather than fairness can mitigate these adverse effects. However, none of the cases significantly alters participants' perceptions compared to the baseline condition of no public tax disclosure. Overall, our findings provide insights into the design of, and the debate surrounding, additional public tax disclosures.

This study examines whether the ideological orientation of the audit partner and audit committee members—defined as their personal belief systems and inclinations, including their attitude toward risk, ambiguity, and novelty—has an impact on engagement partner selection and the effectiveness of oversight in the financial reporting process. Drawing on prior evidence that the two main US political parties reflect different ideologies, we hand‐collect political donation data to construct ideological scores for audit partners and audit committee members. Our findings highlight several intriguing relationships. First, audit committees are more likely to select an ideologically dissimilar partner. Second, greater ideological dissimilarity between these two key monitors is associated with higher financial reporting quality. The effects of financial reporting quality are most pronounced among more effective audit committees and when audit partners have longer tenure with the client. These effects are incremental to both social connections between the audit partner and audit committee and to ideological differences between these parties and the CEO and CFO. Overall, the results support the notion that ideological dissimilarity between audit partners and audit committees can foster effective oversight of the financial reporting process. Moreover, ideological dissimilarity appears to be a useful and rational cue in audit partner selection decisions.

Corporate tax avoidance is a recurring focus of policy‐makers, the media, activist groups, and researchers. This focus often centers on multinational enterprises' (MNEs) use of tax havens, with a wide body of research utilizing MNEs' tax haven use as evidence of corporate tax avoidance activities. However, the common assumption that MNEs operate in tax havens only for tax avoidance purposes overlooks the role tax havens play as homes for captive insurance entities, which allow firms to secure “self” insurance coverage but do not provide obvious differential federal tax benefits. When we remove the effect of captives on tax haven–based measures, we observe a roughly threefold increase in the magnitude of tax savings specifically associated with haven noncaptive activity. We document that nonfinancial firms' use of captive insurance occurs in approximately 11% of firm‐years and spans nearly all Fama–French 49 industries. We construct a haven captive use determinants model, with strong discriminatory power and compelling out‐of‐sample corroboration tests, that future research can employ to account for firms' use of haven captives. Our findings underscore the importance of separating captive and noncaptive‐related haven activities.

We examine the effects of the 2017 Tax Cuts and Jobs Act's (TCJA) interest deduction limitation on suppliers. Using a difference‐in‐differences design, we find that suppliers with customers subject to the limitation (“affected suppliers”) report increased accounts receivable of between 11.2% and 14.9% relative to their pre‐TCJA average accounts receivable. Using a triple differences design, we provide more granular evidence by documenting that the limitation's effects on affected suppliers' accounts receivable are driven by suppliers with customers that report increased trade credit use (i.e., higher accounts payable). In cross‐sectional analyses, we find that the effects are stronger when suppliers are smaller, have higher peer product similarity, operate in industries with low entry barriers, or are in the early stage of their life cycle, consistent with suppliers with weaker bargaining power providing more trade credit to customers compared to other suppliers. Turning to supplier consequences of increased accounts receivable, we find that affected suppliers' days sales outstanding and operating cycles increase. Next, we use path analyses to find that affected suppliers experience lower cash flows and higher risks due to their increased accounts receivable. Overall, our study provides evidence that the interest deduction limitation yielded externalities on affected firms' supply chains.