Knowledge that Transforms

Abstract This study investigates the association between managerial ability and cost rigidity. Cost rigidity refers to the relative proportion of fixed and variable costs. We expect that high‐ability managers will assess the potential upside congestion and downside default risks and choose an appropriate level of cost rigidity accordingly. Our results show that, on average, high‐ability managers tend to adopt a more rigid cost structure because they are more likely to realize favorable demand, and therefore, they retain higher capacity with more fixed inputs to alleviate potential congestion risk. We further document that firms with high‐ability managers will exhibit a higher (lower) level of cost rigidity when facing higher congestion risk (default risk). Our results are robust to using a propensity score matching method, a CEO turnover subsample, and alternative measures of cost rigidity and managerial ability. Taken together, this study suggests that firms' capacity management choices vary with the level of managerial ability.

Abstract This study examines whether a simple measure of internet search intensity for publicly traded retail firms can enhance the capital market's firm‐level revenue expectations and provide insights into economy‐wide retail sales. At the firm level, the search index is predictive of analyst nowcast and forecast errors after controlling for past sales, deferred revenue, firm characteristics, and firm and time fixed effects. An implementable trading strategy generates abnormal returns of roughly 2% to 3% from the fiscal quarter end through the earnings announcement, well above transaction costs. We also find that approximately two‐thirds of the abnormal returns occur around earnings announcements, with an even greater fraction for firms with coarser information environments. At the macro level, we find that the permanent, seasonal, and transitory components of our search intensity index align with those of the Census Bureau's retail sales data and US real gross domestic product, suggesting our measure is a leading indicator of personal consumption expenditures, a key driver of aggregate output. The aggregated search index nowcasts aggregated publicly traded retail firm sales both within and out‐of‐sample after controlling for past sales.

Abstract We present a case illustrating the pitfalls of insufficient disclosure of commercial databases' coding policies. We replicate the finding in the literature that a nontrivial percentage of firms mandated to adopt IFRS ignore this obligation. Specifically, Pownall and Wieczynska (2018, Contemporary Accounting Research , 35 (2), 1029–1066) report more than 3,000 cases, or 10% of all mandated firms in the European Union. When using primary data sources (applicable local regulations and firms' annual reports), we find that noncompliance with IFRS adoption is nonexistent in the one‐to‐one replication using the same firm‐year observations. We attribute the prior misperception to the commercial database's insufficient disclosure of a misleading coding policy of the consolidation item. We also show that no other data provider correctly captures consolidation status, which determines whether firms must report under IFRS. In response to this gap, we showcase the application of bidirectional encoder representations from transformers (BERT) models for extracting the consolidation status and offer guidance for coding IFRS‐mandated firms. Our article underscores the need to exercise caution when using secondary data sources.

Abstract Using two experiments, I examine the effects of relative performance information (RPI) on social bonding and subsequent cooperation. In Experiment 1, participants in groups of four first complete a more or less difficult individual math task and then participate in a public goods game. I find that RPI significantly increases contributions in the public goods game when group members exhibit similar performance levels in the individual task and when the task is more difficult. Conceptually, RPI in such a setting fosters social bonds by revealing a common challenge shared by group members. In scenario‐based Experiment 2, with performance level held constant, RPI strengthens social bonds when peers similarly miss a difficult target but not when they similarly surpass an easy target. Additionally, the inclusion of ranking information in RPI negatively impacts social bonding, regardless of target difficulty. While prior research predominantly examines RPI through the lens of social comparison, this study illustrates the conditions under which RPI can also foster social bonds and enhance subsequent cooperation.

Abstract We hypothesize that managers use their hierarchical role as reviewers of accounting judgments and estimates to manage earnings, which we call indirect earnings management (IEM). Across a series of experiments using highly experienced financial executives as participants, we provide evidence that IEM (1) is likely used by managers to achieve current and future earnings targets, (2) reduces both cognitive dissonance associated with managing earnings and the extent to which managers think that their behaviors constitute earnings management, and (3) is more likely to be used when corporate governance is strong than when corporate governance is weak. The results of this study suggest new directions for future research on earnings management and highlight the important role of the hierarchical structure of the accounting function in efforts to understand how earnings are managed.

Abstract This article examines the role of accounting in the recursive processes of continuous adjustment to programs that emerge when programs are imposed by central government on local government. Focusing on the Italian context and adopting the conceptual lens of governmentality, our study contributes to the extant literature by highlighting the role of accounting in the power dynamics and transactional realities at the intersection between the governors and the governed. In doing so, it considers how accounting can shape plural local government conducts and counter‐conducts and how this, in turn, affects programs imposed centrally. It also sheds light on the transactional realities inherent in multiple, layered forms of central disciplining power and how this plays out to recursively redefine central discipline and local autonomy. The study highlights the importance of considering the different ways in which power is enacted and resisted through accounting in governmentality studies. By taking a pluralist and dynamic view of the ways in which programs are implemented, the study reveals multiple local translations and outcomes, as well as the underlying power dynamics at play.

Abstract Using terrorist attacks and mass shootings as an exogenous source driving psychological changes in managerial sentiment, we explore the causal effect of managerial sentiment on firms' short‐term operating decisions. Employing cost stickiness to measure short‐term operating decisions on resource allocation and cost control, we find that firms located in the attacked metropolitan areas experience a significant decline in the degree of cost stickiness. We further find that the effect is more pronounced for firms that have inexperienced and less confident CEOs, when attack events are more salient, and when managers have lower prior exposure to negative events in their personal experiences. We also explore inventory management as another form of short‐term operating decisions and find that firms exhibit reduced asymmetric inventory management and a lower level of abnormal inventory holdings in postattack periods. Overall, our study suggests that shocks caused by exogenous negative events affect managerial sentiment, which in turn shapes managers' short‐term operating decisions.

Abstract We examine the extent to which the distribution of corporate shareholdings affects seasonality in realized returns and the resulting implications for the conditions under which information asymmetry (IA) appears to be priced. Earlier studies have found that IA attracts a return premium only for firms with low competition for their stock, as proxied by the number of common shareholders or the number and concentration of institutional holdings. However, we demonstrate that the association between these proxies for competition and the pricing of IA is restricted to the month of January, is increasing in the potential for tax‐loss selling, concentrates in the first days of the tax year, and exists regardless of firms' fiscal year‐end dates. Overall, our evidence suggests that the association between the distribution of shareholdings and the pricing of IA reflects variation in mispricing arising from tax‐loss selling rather than compensation for the risk of trading at an information disadvantage.

Abstract While prior studies have examined whether financial analysts affect corporate innovation, there is little research on the mechanism through which this occurs. In this paper, we examine whether and how analysts' questions about innovation during site visits affect corporate innovation. Using a sample of corporate site visits in China, we find that when analysts ask questions about innovation during site visits, firms invest more in R&D in the future. Consistent with knowledge diffusion across firms, this association is stronger when analysts cover more firms in the same industry, when firms share similar technologies as industry peers, and when an innovation‐expert analyst is present at site visits. We also find that analysts' questions about innovation during site visits are positively associated with the quantity and quality of firms' patent applications in the future. Overall, we provide evidence that analysts can affect corporate innovation through their questions about firms' innovation activities.

Abstract Prior research documents that mergers and acquisitions result in significant financial reporting risks. In this article, we examine whether acquirers that share a common auditor with the target experience higher post‐acquisition financial reporting quality (FRQ) and reduced audit fees. We find that same‐office, but not different‐office, common auditors are associated with improved post‐acquisition FRQ, as evidenced by a decreased likelihood of misstatement, lower F ‐score, and a lower likelihood of meeting or just beating analyst forecasts. We also find that same‐office common auditors are associated with a lower percentage change in audit fees. In additional tests, we find that these inferences are robust to limiting the sample to acquirers with multiple acquisitions or to acquirers and targets with no auditor switches in the prior 3 years. Together, our findings suggest that same‐office common auditors facilitate knowledge transfer about the target and provide important post‐acquisition benefits.