We examine how metric intensity—that is, the quantity, frequency, and extent to which performance metrics are tracked and used—varies with a firm's dependency on innovation for business success. Although performance metrics are essential in an organization's management control system, little is known about how the use of metrics differs in organizations with varying dependencies on incremental and radical innovation. Drawing on data from a sample of small‐ and medium‐sized enterprises (SMEs), we hypothesize and find that firms' dependency on incremental (radical) innovation is positively (negatively) associated with metric intensity. Furthermore, we find that (1) the positive relationship between the dependency on incremental innovation and metric intensity is stronger when the organizational culture is focused more on “control” and (2) the negative relationship between the dependency on radical innovation and metric intensity is mitigated when the organizational culture is focused more on “flexibility.” Additional analysis shows that the positive (negative) relationship between incremental (radical) innovation dependency and metric intensity can be mitigated by greater use of metrics for decision‐facilitating purposes. Our findings suggest that metrics‐based formal controls are designed to match the types of innovation dependencies and pre‐existing informal controls such as organizational culture. This study highlights the importance of distinguishing different types of innovation dependency in studying management control systems

Previous studies on accounting innovations emphasize the key role played by innovators and other core actors in theorizing and popularizing such innovations. This paper extends this literature by drawing attention to the role of actors who occupy a more peripheral position within the innovation‐based field. We regard accounting innovations as strategic action fields, in which core and peripheral actors interact to shape the trajectory of the innovation. In contrast to core actors, peripheral actors only weakly identify with the innovation‐based field and often occupy a core position in some other industry, professional, and/or geographical field. Given their embeddedness in these other fields, they are likely to try to accommodate an innovation with existing practices. Such frame blending can be problematic for core actors who envisage a more radical frame shift. Using the case of Beyond Budgeting, we show how the interplay between core and peripheral actors shapes the trajectory of an innovation, in terms of the composition of the field and the framing tactics that dominate at different stages in the development of the field. Our paper advances a perspective on accounting innovations which highlights the variable nature of the innovation space, in terms of different actors entering and exiting this space over time, as well as the importance of considering the overlaps between an innovation‐based field and other (industry, professional, geographical) fields

This study examines how the design of incentive contracts for tasks defined as workers' official responsibilities (i.e., standard tasks) influences workers' propensity to engage in employee‐initiated innovation (EII). EII corresponds to innovation activities that are not formally assigned to workers but are nonetheless encouraged and considered to be important for the company's success. Like other extra‐role behaviors, EII is difficult to incentivize directly. Therefore, it is important to understand whether and how explicit incentive contracts designed for the workers' standard tasks may indirectly influence their EII activity. We use field data from a manufacturing company that uses a dedicated information system to track workers' EII idea submissions. We find theory‐consistent evidence that, compared to workers receiving fixed pay, employees rewarded for their standard tasks with variable compensation contracts exhibit a lower propensity to engage in EII. This result is concentrated among ideas benefiting other constituents and activities beyond the proponents' standard task (i.e., broad‐scope ideas). In contrast, we find no difference attributable to standard task incentive design in the proposal of innovation ideas narrowly focused on the proponent's standard task (i.e., narrow‐scope ideas). Our findings suggest that variable pay narrows employees' conceptual focus around the standard task and hinders employee engagement in broad‐scope innovation activities compared to fixed compensation contracts. We contribute to the literature on incentives for innovation by showing that standard task compensation contracts have spillover effects on EII behavior. We also contribute to the nascent literature on EII by showing that innovation types , defined based on their relation with the proponent's standard task, matter. Our results are relevant for practitioners in that managers relying on variable pay contracts to incentivize standard task performance should expect lower employee engagement in broad‐scope EII

The current audit environment encourages auditors to conduct defensive auditing procedures in lieu of using new, innovative, and potentially more effective audit procedures, due to concerns these procedures may be second‐guessed in litigation or by audit inspectors such as the PCAOB. As a result, auditors may prefer traditional “generally accepted” procedures over innovative procedures that are potentially more effective. We test recent proposals that an Audit Judgment Rule (AJR) encourages the use of innovative, and potentially more effective, audit procedures analogous to the similar Business Judgment Rule that affords legal protections to corporate directors. Under an AJR, litigators or audit inspectors could not second‐guess auditor judgments, even if they perceive that alternate judgments would have ordinarily been reached, provided the auditor's judgment was made in good faith and in a rigorous manner. However, the AJR's requirements that auditors must defend the rigor of their innovative judgments could potentially backfire and lead auditors to select more traditional procedures. Under the framework of goal activation theory, we conduct an experiment with audit managers and seniors and find that an AJR makes auditors less likely to select innovative audit procedures, particularly when audit risk is high. They do so despite believing the innovative procedures to be more effective than the traditional procedures. Findings from a supplementary experiment with experienced auditors further suggest that national office affirmation of the reasonableness of the procedures does not help overcome this effect. Overall, our findings suggest that an AJR may have the unintended consequence of further increasing auditors' focus on more traditional, and potentially less effective, audit procedures

In 2007, Pink Sheets LLC assigned each Pink Sheets ® company to a disclosure tier and on its website affixed a colorful graphic to its stock symbol signifying the company's public disclosure level. This unique innovation allows us to investigate the impact of increased salience of disclosure practices on liquidity. Using a difference‐in‐difference design, we find evidence that firms classified into the Current Information category experienced an increase in liquidity while firms classified into the No Information category experienced a decrease in liquidity, both relative to other unclassified over‐the‐counter firms. This suggests that increases in the salience of disclosure practices via assignment to disclosure tiers affect investors’ attention, leading to changes in trading behavior that ultimately translate into liquidity changes. We also provide evidence that some investors anticipated the resulting liquidity changes because stock returns around a key event date leading up to the release of the disclosure tiers are positively associated with subsequent liquidity changes

Creativity and innovation have been identified by senior executives as some of the most desired characteristics of corporate culture. Accordingly, managers strive to build these cultures within their organizations. However, research in psychology suggests that these attempts may have unintended negative consequences. In this study, I predict and find that managers in a more (versus less) innovative company culture will engage in higher levels of real earnings management (REM). I then test two construal level theory (CLT)‐based interventions designed to reduce REM. As I predict, I find that in more innovative corporate cultures an intervention that makes downside risk more salient reduces REM, but an intervention that encourages managers to consider the “big‐picture” impact of their decision reduces REM to a greater extent. Unexpectedly, I also find that the effect of the “big‐picture” intervention reverses in a less innovative corporate culture leading to an increase in REM. My findings contribute to the emerging accounting literature regarding REM. I also extend the psychology literature investigating the link between opportunistic behavior and creativity, and I also expand research into how interventions based on CLT can affect judgment and decision making in an accounting context

Human capital is a major impetus for technological innovation. We examine the relation between the technological dimension of product market competition and the disclosure of skill requirements in job postings. On the one hand, technological competition may raise the urgency of recruiting tech talent and make firms provide more specific skill requirements. On the other hand, technological competition can increase the proprietary costs of skill requirement disclosure. Using technological peer pressure as a measure of technological competition, we find that firms facing intense technological competition provide more specific skill requirements for tech positions, suggesting that the disclosure benefits outweigh the proprietary costs when firms face pressure to innovate. The effect of technological peer pressure is more pronounced among firms that make only incremental innovations and less pronounced among firms that rely on trade secrets or have greater industry peer presence in close geographical proximity. Our study documents a distinct relationship between technological competition and voluntary disclosure targeted to labor market participants

Analysts have been found to underweight the innovation in the most recent quarterly earnings when forecasting next‐quarter earnings, and these expectations have been posited as an explanation for post‐earnings‐announcement drift. This study uses an experimental asset market to examine whether similar errors in forecasting quarterly earnings are made by student‐subjects. We examine two aspects of their behavior: (1) do subjects underestimate the autocorrelation in quarterly earnings when forming earnings expectations? and (2) are asset prices consistent with a subject's underestimation of the autocorrelation in quarterly earnings? We observe subject errors in forecasts that underweight extreme innovations in the most recent quarterly earnings by approximately 40 percent. The prices in the experimental markets also fail to reflect fully the most recent innovation in quarterly earnings. We are able to predict the sign of the incorrect pricing, from the mean initial earnings predictions of the subjects, in 74 percent of the 135 markets. These forecast errors observed in this study are consistent with forecast errors observed for analysts, and this consistency suggests that errors in analysts' forecasts may be at least partially attributable to the use of judgmental heuristics

The stated goals of the SEC are to protect investors, maintain orderly markets and facilitate capital formation. These goals can be achieved with very light regulation if, as assumed by traditional economic theory, investors process information costlessly and protect themselves from informational disadvantages, and firms optimally balance the costs and benefits of committing to make their reports reliable. A growing body of research demonstrates that light regulation fails to achieve the SEC 's goals, because investors find information processing costly and fail to protect themselves. After reviewing theory and prior evidence, I discuss new lessons learned from Jiang, Petroni, and Wang ( ), who show that Pink Sheets ® reduced the liquidity of firms with low reporting quality and increased the liquidity of firms with high reporting quality, merely by highlighting the quality of their listed firms’ disclosure. While the Pink Sheets ® innovation might have occurred through many causal channels, all of them entail a violation of costless processing and self‐protection, and lead to the conclusion that this lightly regulated market did not initially meet the stated goals of the SEC . I conclude by arguing that markets can achieve the SEC 's goals only if they exhibit a particularly strong version of “dynamic” market efficiency, which requires that each individual trade on the path to even incomplete revelation occurs at the then‐optimal price. Because dynamic efficiency is unlikely, we should stop being surprised to see evidence that lightly regulated markets fall short on key dimensions. Instead, we should use our well‐developed understanding of market inefficiency to guide regulation

Researchers typically infer real earnings management when a firm's operating and investing activities differ from industry norms. A significant problem with classifying deviations from industry averages as myopic earnings management is that companies can change their operating and investing decisions for strategic business reasons rather than to mislead stakeholders. Using principal components analysis, we systematically evaluate existing measures and develop a comprehensive real activities measure to better capture earnings manipulation. Our measure reflects (i) deviations from industry averages across multiple activities and (ii) other signals of manipulation. This approach is promising because, although there are many sources of abnormal activities, manipulation is more likely the cause when managers engage in multiple income‐increasing abnormal activities that coincide with other signals that indicate an elevated risk of manipulation. This simple approach results in a metric that associates negatively with future operating performance and earnings persistence, yields high‐power tests, and captures manipulation reasonably well across most life‐cycle stages. Importantly, this approach performs better than the standard real earnings management metrics across all dimensions. Specifically, it generates the expected reduction in future earnings and reduced earnings persistence in 82% of the tests compared to 36% and 46% in common alternatives. Also, because this innovation does not require a long time‐series or rely on future period realizations for classification, it can be useful in more research settings than other recent innovations in the literature