Knowledge that Transforms

Abstract Research Summary Strategic management research often uses accounting data, despite well‐known concerns that earnings management could obscure the link between actual and measured performance. We apply methods from the econometric literature on bunching to estimate that around 15 percent of firm‐year observations in Compustat manipulate accounting earnings to achieve profitability. We show that cash‐based performance measures are less susceptible to manipulation and that the choice of accrual versus cash‐based measures “matters” for two classic strategy research questions: a decomposition of ROA variance and an analysis of persistence in firm performance. These findings underscore the importance of robustness testing and contribute to an emerging literature that reconsiders the link between theoretical constructs and empirical performance measures. Managerial Summary To understand what drives firm performance, researchers and practitioners often rely on reported accounting measures from annual reports. The most commonly used income‐based measures are strategically inflated or deflated through accounting and operational choices (i.e., earnings management). This article finds that approximately 15 percent of the time that ROA is reported for a fiscal year, a loss would have been reported instead of a gain if not for this manipulation. We then analyze the impact earnings management has on two types of profitability analysis by comparing accrual‐based or cash‐based profit.

Abstract Research Summary This paper examines the extent and determinants of internal agglomeration—the spatial clustering of establishments within firms. It introduces a novel methodology that benchmarks a firm's spatial footprint against that of comparable stand‐alone firms, yielding a firm‐level measure of internal agglomeration. Applied across sectors of the U.S. economy, the approach reveals that internal agglomeration is widespread but varies by industry and firm characteristics. It is more prevalent in service, non‐tradable, and labor‐intensive industries, and is especially pronounced among diversified firms. Among potential drivers, labor similarity consistently predicts intra‐firm colocation, while input–output and knowledge linkages are less influential. These findings bring a spatial lens to corporate strategy, showing that when key resources—particularly labor—face geographic frictions, colocating related activities enhances opportunities for sharing and redeployment. Managerial Summary Many firms are known to colocate or cluster with other firms in related industries to reap the benefits of sharing specialized inputs, labor, and knowledge. We study whether multi‐unit firms can generate similar benefits by colocating their establishments. We examine the geographic distribution of establishments of multi‐unit firms using comprehensive data on the U.S. economy. We find that over half of all firms colocate their establishments significantly more than would be expected if these belonged to independent firms. Firms are especially likely to colocate establishments with similar labor requirements, which suggests a deliberate strategy to leverage internal labor synergies. Our findings suggest that managers should consider the potential benefits of internal resource sharing when selecting locations, particularly to capitalize on synergies from resources that are less geographically mobile.

Abstract Research Summary High‐tech startups develop technologies, the market applicability of which can vary widely, enabling startups to target a range of market segments. Using a question‐driven approach to contrast startups with and without academic founders, we investigate the difference in the market applicability between the two groups on a sample of 988 startups in the artificial intelligence (AI) field. Our findings reveal that academics' pursuit of basic research drives the creation of general knowledge, which in turn leads to wider market applicability. With fewer requirements for complementary downstream assets in the AI ecosystem, academics can more easily translate their general ideas to market applications and locate downstream in the value chain. Our findings highlight the role of problem‐formulation and ‐solving in startups and of academic startups within AI. Managerial Summary Using a sample of 988 startups in the Artificial Intelligence field, we find that startups with at least one academic on their founding team are associated with a higher number of verticals (potential market segments for the technology the startups developed) compared to startups without any academics. Teams with academic founders produce more general publications and patents than others, which drives the association with more verticals. Academics formulate and solve more general problems relative to non‐academics, leading to the creation of more general products that are applicable to a broader range of verticals. With fewer requirements for complementary downstream assets in the AI ecosystem, academics can more easily translate their general ideas to market applications and locate downstream in the value chain.

Abstract Research Summary When established firms source technology from specialized technology firms, extant research has typically assumed that this in‐sourced technology is novel . We test this assumption by modeling in‐sourcing decisions using a problem‐solution lens wherein firms choose from available external technological solutions to solve their market problems. Since the locus of identification, evaluation, and selection of external solutions remains internal to the firm's R&D personnel, we argue that they frequently prefer familiar over novel solutions. We identify two factors that help firms overcome this preference for familiarity: when top managers focus their attention on the market problem or when they receive feedback from unexpected failures to solve that problem. Our case control analysis of 715 in‐sourced emerging technological solutions in the biopharmaceutical industry offers broad support to our theoretical framework. Managerial Summary Established firms are commonly advised to source novel technologies externally. Yet since this sourcing process is driven by in‐house R&D personnel, we suggest that a firm's choice of external technology solutions may still tend toward familiar ones. We confirm this preference by examining in‐sourcing events of emerging technological solutions by established firms in the biopharmaceutical industry. Despite this preference, we then show that increased top management attention toward a market problem and experiencing unexpected failures in bringing products to market catalyze a receptiveness to novel technological solutions. Our findings help managers in established firms recognize that their claims or intentions to seek novel technology are not always consistent with actual in‐sourcing choices, and suggest when firms can overcome this tendency.

Abstract Research Summary The growth of corporate activism on contentious social issues creates a puzzle as to why companies would risk engaging on divisive topics. Indeed, a mixed body of evidence identifies that such activism often reduces stakeholder support. We shed light on this puzzle by reversing attention to the costs of not engaging in corporate activism. Grounded in the cognitive model of stakeholder behavior, we theorize whether and when consumers will negatively respond to corporate silence on a social issue based on the visibility of silence. Our theory also suggests that peer activism and market niche are pivotal contingencies that exacerbate or mitigate such negative responses. Using a rigorous within‐company cross‐platform difference‐in‐differences econometric model, we find support for our theory and uncover substantial costs of corporate inaction. Managerial Summary We study stakeholder responses to corporate silence on social issues, using the empirical context of fashion firms and the Blackout Tuesday event in support of the Black Lives Matter movement, which occurred on Instagram but not Twitter. We find that there are sizeable risks to staying silent on a highly salient social issue. For firms that do not participate in the event, follower growth slows 33% and likes on their posts drop 12% in the following month on Instagram as compared to Twitter. In addition to issue salience, managers should closely attend to peer activism, which exacerbates these negative reactions. They should also consider their market niche, as a narrow niche offers protection while firms with a wider market experience larger declines in stakeholder support.

Abstract Research Summary There is considerable debate about how firms should adapt to environmental dynamism. Theoretically, some scholars suggest that with increasing dynamism, firms should explore more, whereas others argue that firms should explore less. Empirical evidence remains mixed. We attempt to reconcile these mixed findings by (a) distinguishing between two facets of exploration—exploration propensity versus exploration breadth, and (b) recognizing that firms may make these two decisions using different decision‐making processes. Using a computational model we show that with increasing environmental dynamism, for high performance, (a) firms' exploration propensity may increase, decrease, or stay the same depending on their decision‐making process, but (b) firms' exploration breadth always increases. Our results help explain the mixed findings in this domain and have implications for future empirical work. Managerial Summary Responding to dynamic environments is challenging for managers. There is limited support for the intuition that firms should explore more in more dynamic environments. We recognize that exploration decisions in firms are temporally and hierarchically separated—senior managers first decide how much to explore and middle managers then decide which projects to fund. In this research, we use a computational model to unpack how these two facets of exploration may change in dynamic environments for firms to maintain high performance. We find that as dynamism increases, how much firms explore depends on how sensitive their decision‐making process is to the perceived attractiveness of the different options, but when they explore, they should always choose options further away from their status‐quo.

Abstract Research Summary Why do some boards of directors dismiss the CEO when a firm performs poorly, while others do not? We argue that military directors—outside directors with military backgrounds—on the board increase the likelihood of CEO dismissal under low‐performance conditions. Military service instills a lifelong system of values and beliefs related to accountability—the obligation to accept responsibility for one's own actions and outcomes—which leads military directors to attribute low performance to the CEO and hold the CEO strictly accountable for such performance. This argument is supported by extensive quantitative data on CEO dismissal in publicly listed firms and qualitative data obtained from interviews with military directors who have served on boards of those firms. Managerial Summary Military directors—outside directors with military backgrounds—frequently occupy seats on the boards of publicly listed firms in the United States. Military service instills an enduring system of values and beliefs rooted in accountability, which, we argue, makes military directors more inclined to attribute performance shortfalls to the CEO and advocate for more rigorous CEO accountability, resulting in CEO dismissal. Our argument is supported by quantitative data on CEO dismissals within publicly listed firms and qualitative data derived from interviews with military directors who have served on boards of those firms. Our findings underscore that principles ingrained via military service may influence corporate governance, particularly one of its core components: executive accountability.

Abstract Research Summary Strategic decisions are uncertain and often irreversible. Hence, predicting the value of alternatives is important for strategic decision making. We investigate the use of generative artificial intelligence (AI) in evaluating strategic alternatives using business models generated by AI (study 1) or submitted to a competition (study 2). Each study uses a sample of 60 business models and examines agreement in business model rankings made by large language models (LLMs) and those by human experts. We consider multiple LLMs, assumed LLM roles, and prompts. We find that generative AI often produces evaluations that are inconsistent and biased. However, when aggregating evaluations, AI rankings tend to resemble those of human experts. This study highlights the value of generative AI in strategic decision making by providing predictions. Managerial Summary Managers are seeking to create value by integrating generative AI into their organizations. We show how managers can use generative AI to help evaluate strategic decisions. Generative AI's single evaluations are often inconsistent or biased. However, if managers aggregate many evaluations across LLMs, prompts, or roles, the results show that the resulting evaluations tend to resemble those of human experts. This approach allows managers to obtain insight on strategic decisions across a variety of domains with relatively low investments in time or resources, which can be combined with human inputs.

Abstract Research Summary Using a novel dataset that provides a comprehensive coverage of U.S. firms' industrial supply chain relationships, we find that firms with innovation specific to a buyer are more likely to share a common director with that buyer. This association is stronger when the buyer has a larger number of alternative suppliers. We further find that when a supplier–buyer pair shares a common director, the supplier's R&D investment is more sensitive to the investment opportunities of its buyer. Moreover, such pairs tend to have longer supply chain relationships. Taken together, our findings demonstrate that board ties serve as a credible commitment mechanism to support exchange along the supply chain and safeguard suppliers' buyer‐specific investments. Managerial Summary Our research shows that suppliers who create products or technologies tailored to a specific buyer are more likely to share a board member with that buyer. This relationship is stronger when the buyer has many other suppliers. Shared board members facilitate better communication and alignment between suppliers and buyers, leading to more effective R&D investments and longer‐lasting business relationships. These ties help reduce the risk for suppliers when investing in customized solutions. For business leaders, strategically leveraging board connections can strengthen supply chain partnerships, promote collaborative innovation, and safeguard investments in buyer‐specific technologies.

Abstract Research Summary Prior research generally suggests that addressing shareholder interests may come at the expense of non‐shareholding stakeholders. Our study challenges this notion by examining how shareholder interests, alongside those of other stakeholders, may align with social issue engagement. Specifically, we explore the relationship between legitimacy challenges (i.e., shareholder activism and social disapproval) and firm strategies in social issue engagement. We find that shareholder activism is positively associated with the materiality of social issue engagement, reflecting a firm's relative emphasis on material social issues over immaterial ones. Conversely, social disapproval is negatively associated with such emphasis. Furthermore, these relationships vary with investor relations officer engagement, the presence of social welfare nonprofits, and SASB standards promulgation. Our findings contribute to the literature on legitimacy management and social issue engagement. Managerial Summary Managing relationships with both shareholders and non‐shareholding stakeholders is complex amid a diverse landscape of social issues. Firms should be aware of the multifaceted nature of legitimacy challenges and tailor their response strategies accordingly. This study explores the challenges posed by shareholder activism and social disapproval, revealing that shareholder activism is positively related to a firm's relative emphasis on material social issues over immaterial ones, while social disapproval is negatively related to such emphasis. Furthermore, these dynamics are influenced by factors such as investor relations officer engagement, the presence of social welfare nonprofits, and the adoption of SASB standards. The study enhances the understanding of how firms navigate legitimacy challenges and strategically prioritize social issues to meet stakeholder expectations.