Knowledge that Transforms

ABSTRACT While managers' career concerns have been shown to be influential in shaping their decisions, there is little evidence of the impact such concerns may have on managers' tax avoidance incentives. This study examines the causal effect of managers' career concerns on tax avoidance using the staggered recognition by state courts of the inevitable disclosure doctrine (IDD), a trade secret protection doctrine that places greater restrictions on managers from joining or forming a rival company. We argue that the IDD recognition increases the cost of job loss for managers whose current jobs may be in jeopardy, thereby increasing their incentive to avoid taxes in order to positively change their current employer's evaluation of their ability. The IDD recognition also reduces outside opportunities for high‐ability managers, and thereby reduces their incentive to avoid taxes in order to positively change external employers' evaluation of their ability. Using a difference‐in‐differences design, we provide evidence consistent with these predictions. We further show these effects are stronger for CEOs in their early years of service in the focal firms when the market is more uncertain about their ability. Our findings suggest that managers take into account the impact of tax avoidance on their career outcomes when making tax avoidance decisions.

ABSTRACT We investigate whether short interest affects supply chain partners' investments. This investigation is important for understanding the real effect of short sellers in facilitating stakeholders' investment decisions. Prior research suggests that short interest conveys negative news in a timely manner, which predicts future deterioration in firm fundamentals. We predict and find that a supplier's future investments decrease with its major customers' short interest. Consistent with predictions, this result is more pronounced when customers' short interest is more informative about their future performance, when customers have a more opaque information environment, and when suppliers incur lower customer switching costs. The results are robust when we use various approaches to address endogeneity concerns and establish causality. Our findings suggest that short sellers provide valuable information to supply chain partners when making investment decisions.

ABSTRACT Academics and practitioners agree that there are substantial barriers to systematically transferring audit research knowledge to policy‐makers. We adopt a design science approach to investigate the efficacy of employing a research synthesis, embedded in an interactive process with audit standard setters, to transfer such knowledge. We identify a standard‐setting issue that, we argue, is typical of the class of problems encountered by both parties when attempting knowledge transfer. Following design science prescriptions, we evaluate the pragmatic validity of our prototype research synthesis and its creation process. We provide initial evidence (“proof of concept”) that a research synthesis process can effectively and efficiently facilitate academic research knowledge transfer to inform audit standard setters' deliberations. Finally, we provide evidence that the problem of academic research knowledge transfer in accounting standard setting and evaluation continues. Our study and findings reflect how design science facilitates change in real‐world problem contexts through research‐based proofs of concept.

ABSTRACT We examine whether restricting managers' discretion through GAAP impacts the usefulness of accounting information in debt contracting. Our study informs standard setters and regulators regarding the debt contracting implications of limiting managers' discretion via accounting standards. We predict and find that under more restrictive standards, lenders make more non‐GAAP modifications to GAAP‐based performance measures, suggesting that restrictions of managers' discretion reduce the usefulness of accounting information. We perform two additional analyses to enhance identification. First, in line‐item‐level analysis, we document a positive relation between the exclusion of specific nonrecurring items from contractual definitions of earnings and the number of restrictions in the GAAP standards that apply to each specific item each year. Second, using difference‐in‐differences tests around standard changes, we find that the propensity to exclude items varies positively with changes in the restrictiveness of related standards. Moreover, we predict and find that restrictive standards are also positively associated with loan spreads but significantly less so when lenders adjust GAAP numbers in loan contracts. Overall, this study improves our understanding of how attributes of accounting standards impact the usefulness of accounting information.

ABSTRACT In this study, we examine auditors' claims of professional disempowerment and strategic responses to Canadian Public Accountability Board (CPAB) inspections. Our research is based primarily on 27 semistructured interviews with audit partners (23) and managers (4) of large accounting firms. Drawing on key insights from institutional theory, we show that the tensions between inspectors and auditors reflect an intraprofessional tug‐of‐war between two competing but legitimate logics of professionalism. More specifically, our findings indicate that CPAB inspections have given rise to a mechanical logic of audit professionalism that is driven by the efforts of inspectors to promote a generalizable theoretical ideal of auditing that revolves around best practices and attention to technical minutiae. This mechanical logic competes with a clinical logic of audit professionalism that is driven by the efforts of audit partners and managers to promote a more relativistic, applied form of expert knowledge. To manage this dynamic of intra‐institutional complexity, quality experts (QEs) have emerged in firms' organizational structures as ambidextrous third parties—that is, professionals who master both logics and are capable of bridging the institutional divide by influencing the relationships between inspectors and auditors through a variety of brokering strategies. By considering inspectors as insiders rather than outsiders to the profession, we argue that auditors' claims of professional disempowerment should be interpreted carefully and critically. We also suggest that the professional autonomy and judgment of engagement partners and managers has been displaced significantly within firm boundaries into the hands of QEs. Our analysis offers a richer conceptualization of institutional ambidexterity by examining it as a relational process of social influence rather than as a set of individual characteristics.

ABSTRACT We investigate whether hedge funds (HFs) undertake activism in the corporate bond market. Although there is a growing empirical literature investigating HF activism in the equity market, we know little about the role of HF activists in the corporate bond market. The empirical setting is the active enforcement of bondholders' rights during 2003–2007, triggered by issuers' violation of a standard bond covenant requiring timely financial reporting. Using HF holding data of convertible bonds in Form 13F filings, we identify HF interventions. The patterns of HF ownership suggest that HFs actively purchased convertible bonds to increase their ownership before the issuance of default notices. Relative to other interventions, HF interventions are more likely to target companies with higher levels of cash holdings but less likely to target companies with a greater amount of private debt outstanding. Furthermore, we find that HF interventions are associated with elevated bond trading frequency before late filing notifications and issuances of default notices, as well as a wealth transfer from stockholders and non‐intervening bondholders to intervening bondholders. Taken together, the empirical evidence demonstrates that HFs take actions to force the issuance of default notices in response to delay in financial reporting, suggesting that the primary objective of HF activism in this setting is to extract short‐term profit from bond issuers.