Knowledge that Transforms

Using a novel data set of misconduct records for Finnish CEOs and directors and their parents, we explore whether corporate executives’ financial misconduct is associated with similar behavior by their parents. Controlling for various other factors of executive financial misconduct, we find that executives are significantly more likely to engage in financial misconduct, including accounting, tax, and other financial offenses, if their parents have a history of financial misconduct. This intergenerational association is stronger when the parental misconduct is more severe. Additional findings reveal that growing up in high‐misconduct municipalities and cohabiting with spouses who engage in financial misconduct are also associated with a higher likelihood of executive misconduct, indicating that such behaviors may be shaped by broader socialization processes that extend beyond the immediate family. Although our analyses do not establish causal relationships, the collective evidence presented in this study offers insights into why some corporate executives engage in misconduct while others do not.

We examine the usefulness of machine learning approaches for measuring vocal tone in corporate disclosures. We document a substantial mismatch between the widely adopted actor‐based training data underlying these approaches and speech in corporate disclosures. We find that existing models achieve near‐perfect vocal tone classification within their training domain. However, when tested on actual executive speech during conference calls, their performance declines to chance levels. We thus introduce FinVoc2Vec, a deep learning model that adapts to audio recordings of conference calls and classifies the vocal tone of executive speech significantly more accurately than chance. FinVoc2Vec estimates are associated with future firm performance and can be used to construct profitable stock portfolios. Throughout our analyses, estimates from previous vocal tone models are largely unrelated to firm performance. Our findings emphasize the importance of a domain‐specific approach to voice analysis in accounting and finance.

We study the use of generative AI for firm‐specific financial analysis on the Seeking Alpha platform. After the initial launch of ChatGPT in November 2022, the share of AI‐generated articles rose sharply to 13.5% of all articles, then declined in late 2023 after Seeking Alpha equated the use of AI to plagiarism and announced a prohibition on its use. We organize our study around two questions: (1) Does AI use increase author productivity? and (2) does AI use have capital market consequences and ultimately affect the informational landscape? We find that authors who adopt AI become more productive, publishing more articles and covering more new firms than non‐adopters. Findings on AI article informativeness are more nuanced. On average, AI articles are less informative than human‐written articles, eliciting smaller trading volume and abnormal return responses. However, AI use leads to increased firm coverage and in turn to improved liquidity and faster price discovery. Our findings suggest that, while AI‐generated articles are currently perceived as less informative than human‐written articles, their comparatively low cost enables increased firm coverage and thereby improves the overall informational landscape.

I examine whether the FASB's revenue recognition guidance under ASC 606 influences revenue comparability across firms and industries and whether revenue comparability reduces analysts’ disclosure processing costs. I extract firms’ revenue policy disclosures from 10‐K filings to measure their textual similarity and compare revenue policies across firms and industries. I find an increase in revenue comparability for firms in different industries with similar revenue‐generating transactions upon adoption of ASC 606. In contrast, I find a decrease in revenue comparability for firms in the same industry with similar revenue‐generating transactions. Further, though I find that analysts are more likely to forecast revenues when firms have higher revenue comparability, this benefit of revenue comparability is less pronounced under ASC 606. This finding suggests the ASC 606‐related changes to revenue comparability impose disclosure processing costs on analysts.

Most loan contracts in the United States contain a provision for lender voting rules. We study the optimal voting rule that allows lenders to waive a covenant violation. When lenders have heterogeneous preferences, lenient voting rules increase the probability of waivers that allow inefficient investments. Stringent voting rules tend to allocate the marginal vote to lenders who deny waivers after false alarms so that they can renegotiate the loan to extract value from the firm, which incurs deadweight costs. In equilibrium, the optimal voting rule balances these two forces to improve contracting efficiency. We derive and empirically test comparative statics on how the optimal voting rule varies with lenders’ preferences and the borrower's accounting properties. Our model offers a rationale for the prevalent use of voting rule clauses in syndicated loan contracts.

The protection of free speech enhances the ability of various public stakeholders to disseminate privately observed adverse information about public firms, making it difficult for corporate managers to conceal negative information about their companies. Using the staggered enactment of anti‐strategic lawsuit against public participation (anti‐SLAPP) laws across U.S. states as a shock that strengthens free speech protection, we show that stronger protection is associated with less concealment of bad news. This is evidenced by a lower likelihood of stock price crashes, a decreased probability of accounting fraud, and an increased frequency of firm‐initiated negative press releases. These results are more pronounced for states with stronger anti‐SLAPP laws and where such laws are likely to be more influential. Moreover, the impact of free speech protection on bad news concealment is more significant for firms with greater ex ante incentives to conceal negative information. Further analyses suggest that free speech protection likely enhances the ability of short sellers, employees, and the media, among others, to reveal bad news about public firms. Finally, we find evidence that strengthened free speech protection also improves financial reporting quality. Our study highlights the importance of free speech protection in enhancing corporate transparency.

Effective policymakers must balance the demands of formulating a corporate tax system that raises revenue and spurs economic activity (e.g., investment) while promoting a “level playing field” across firms. Balancing these tradeoffs has likely caused tax systems to become more complex over time, increasing firms’ difficulty in understanding and complying with tax regulations. We investigate the impact of tax system complexity on the responsiveness of firm‐level investment to tax policy changes. Exploiting staggered tax rate changes and variation in tax system complexity across countries, we document two key findings. First, firm‐level investment is less sensitive to changes in the corporate tax rate when tax system complexity is higher, suggesting that such complexity can undermine the ability of tax policy to affect economic growth. Second, the impact of tax complexity on the sensitivity of investment to tax rate changes varies significantly across firms, with domestic‐owned, smaller, and private firms being more affected. These cross‐sectional disparities are consistent with tax system complexity potentially reducing tax system parity. Collectively, our findings suggest that corporate tax system complexity can negatively impact the ability of fiscal policy to affect investment and lead to heterogeneous tax policy responses across firms.

In this study, I explore how accounting rules—in particular the restrictiveness of GAAP—have impacted the labor market for accountants. I find that when the rules become more restrictive, there are fewer students majoring in accounting and fewer accountants and auditors overall. The overall number of accounting positions that firms recruit for does not decrease when the rules become more restrictive; however, the nature of accountants' work changes. There is less focus on tasks such as applying judgment, thinking creatively, and thinking critically and more focus on determining compliance. Despite the decrease in accountants, earnings for accountants do not increase, and the wage distribution becomes more compressed. I supplement these analyses with a survey‐based field experiment and find that the salience of restrictiveness heightens students' views of accounting as a profession where they are unable to use creative and critical thinking. Overall, the findings suggest that restrictive regulation can shift the task content of occupations and reduce the pool of individuals interested in the profession.

As the use of audit data analytic tests (ADA) becomes increasingly established in practice, auditors will often confront situations in which they inherit ADA developed by others, as opposed to developing the ADA themselves. Despite the potential benefits of ADA, inheriting ADA could decrease auditors’ skeptical actions by diminishing their psychological ownership of the ADA. In an experiment where an ADA identifies a fraud red flag, we find that auditors who inherited the ADA are less likely to exercise skeptical actions than those who were personally involved in its development. We then provide evidence that informing auditors who inherit an ADA about the test development activities (e.g., a brief memorandum documenting the ADA's development) mitigates the negative effect of inheriting the ADA. Evidence from mediation analyses suggests that these effects are driven by decreased psychological ownership when auditors inherit the ADA.

We investigate whether shared auditors promote the dissemination of innovative knowledge among their clients, thereby fostering follow‐on innovation. We find that a company cites more patents from another company when they are audited by the same audit office. To address concerns about potential confounding factors stemming from commonalities in the fundamentals of the two companies, we leverage a quasi‐exogenous shock to auditor sharing: the demise of Arthur Andersen and the subsequent increase in auditor switching in 2002. Further analysis reveals that the effect of a shared auditor on cross‐client patent citations is stronger when both clients engage in intensive innovation activities. Additional evidence suggests that shared auditors exert more influence on the citations of recent patents and patents that are easier for outsiders to utilize. Overall, our findings suggest that auditors affect corporate innovation by facilitating the transfer of innovative knowledge among their clients.