Knowledge that Transforms

ABSTRACT This field experiment investigates how different levels of aggregation in relative performance information (RPI) impact employee performance in environments with multiple tasks. We randomly assign store employees of a retail chain to three groups: RPI on overall performance (control group), RPI on separate tasks, and RPI on both overall performance and separate tasks. We do not find evidence that providing separate task RPI instead of overall RPI affects performance or effort allocation. However, providing RPI on both overall performance and separate tasks seems to reduce performance, especially in the low‐return task. This suggests that detailed RPI directs employees’ attention to the smaller benefits of low‐return tasks. We further find that only 30.5% of the employees accessed their performance reports, highlighting a distinction between providing RPI in the field and the laboratory. This study is based on a registered report accepted by the Journal of Accounting Research .

ABSTRACT This paper studies how a federal procurement regulation, known as the Truth in Negotiations Act (TINA), affects the competitiveness and execution of government contracts. TINA stipulates how contracting officials (COs) can ensure reasonable prices. Following TINA, for contracts above a certain size threshold, COs can no longer rely solely on their own judgment that a price is reasonable. Instead, they must either require suppliers to provide accounting data supporting their proposed prices or expect multiple bids. Using a regression discontinuity design, I find that above‐threshold contracts experience greater competition (i.e., more bids), improved performance (i.e., less frequent renegotiations and cost overruns), and reduced use of the harder‐to‐monitor cost‐plus pricing, compared to below‐threshold contracts. These findings suggest that TINA's requirements enhance competition and oversight for above‐threshold contracts.

ABSTRACT We examine how financial disclosure policy affects a firm manager's strategy to innovate within a two‐period bandit problem featuring two production methods: an old method with a known probability of success, and a new method with an unknown probability. Exploring the new method in the first period provides the manager with decision‐useful information for the second period, thus creating a real option that is unavailable under exploiting the old known production method. Voluntary disclosure of the firm's financial performance provides the manager with another option to potentially conceal initial failure from the market. The interaction of these two options determines the manager's incentive to explore. In equilibrium, a myopic manager who cares about the interim market price may over‐ or under‐explore compared to the optimal exploration strategy that maximizes firm value. Our analysis shows that firms operating in an environment with voluntary disclosure early in the trial stage and mandated requirement later are most motivated to explore, while firms subject to early mandated disclosure and late voluntary disclosure are least likely to do so. We also provide empirical predictions about the link between the disclosure environment and the intensity and efficiency of corporate innovation.

ABSTRACT We compile a novel data set on mandatory environmental, social, and governance (ESG) disclosure around the world to analyze the stock liquidity effects of such disclosure mandates. We document a positive effect of ESG disclosure mandates on firm‐level stock liquidity. The effects are strongest if the disclosure requirements are implemented by government institutions, not on a comply‐or‐explain basis, and coupled with strong enforcement by informal institutions. Firms with weaker information environments benefit more from ESG disclosure mandates. Our results support the view that ESG disclosure regulation improves the information environment and has beneficial capital market effects.

ABSTRACT I examine whether employee‐initiated lawsuits against an audit office adversely affect its ability to attract high‐quality talent and deliver quality audits. I posit that employee lawsuits erode prospective employees’ perceptions of an office, diminishing their willingness to join. Using a comprehensive data set of individual auditor profiles, I find a decline in the quality of newly hired auditors following an employee lawsuit. Cross‐sectionally, the adverse effect of employee lawsuits on talent acquisition is more pronounced when an office is undergoing higher growth and when a case receives greater media attention. Conversely, this adverse effect is less pronounced when an audit office is larger or offers more competitive wages within the local area. When an audit office is unable to recruit high‐quality talent, its audit quality is likely to suffer. Consistent with this, I find a deterioration in audit quality provided by an office following an employee lawsuit. Overall, this study underscores the importance of human capital management and employer reputation for audit offices that operate in competitive labor markets.

ABSTRACT Can culture explain regional differences in minority shareholder expropriation? Examining regional variation in China, we document that the influence of historical Confucian values persists, despite decades of political movements clamping down on these values, and that these values reduce minority shareholder expropriation in local public firms. The effect on minority shareholder expropriation, in part, operates through the establishment of oversight mechanisms (i.e., greater financial reporting quality and dividend payouts) that constrain expropriation. The findings have important implications for understanding the origins of enduring regional differences in minority shareholder expropriation and capital market development.

ABSTRACT Section 1502 of the Dodd–Frank Act requires SEC‐registered issuers to conduct supply chain due diligence and submit conflict minerals disclosures (CMDs) that indicate whether their products contain tantalum, tin, tungsten, or gold (3TG) sourced from the Democratic Republic of the Congo (DRC) or its neighboring countries (“covered countries”). Consistent with the reputational cost hypothesis, we find that heightened public attention to CMDs increases responsible sourcing. After Section 1502 takes effect, we find higher demand for 3TG products processed in certified smelters, decreased conflicts in covered countries’ mining regions relative to other regions, and reduced sensitivity of conflict risk to conflict minerals’ price spikes. Finally, we find that conflicts decrease in Eastern DRC territories with prevalent 3T (tantalum, tin, and tungsten) mines but increase in territories with prevalent gold mines. Overall, our findings highlight the real effects of enhanced supply chain transparency regulation.

ABSTRACT Using the public release of comment letters on EDGAR to capture a regime shift toward regulatory transparency, we examine whether an increase in transparency affects regulators’ effort and work performance. We find that the SEC staff reviews more filings and more documents per filing following the disclosure regime shift. These effects are incrementally stronger for firms with comment letters that are expected to attract greater investor or public monitoring. Furthermore, under the new regime, reviews are more timely. Upon the regime switch, the likelihood of a restatement (receiving a comment letter) decreases (increases) for filings that are reviewed. After receiving a comment letter, a firm with signs of potential fraud is more likely to be investigated, and this effect becomes more pronounced under the new regime. Altogether, our findings suggest that publicly disclosing regulators’ work output can mitigate moral hazard (i.e., increase regulators’ work input), improving their work performance.

ABSTRACT We examine the staggered adoption of additional educational requirements (“150‐hour rule”) for Certified Public Accountants (“CPAs”) to understand the effects of occupational licensing on minority participation in professional labor markets. The 150‐hour rule increased the educational requirement for CPAs from 120 to 150 credit hours, effectively adding a fifth year of study. We find a 13% greater entry decline following the requirement's enactment for minority than nonminority CPA candidates. Our analyses of parental income and financial aid availability point to a socioeconomic status channel explaining the differential entry declines. Studying exam passing patterns, professional misconduct, and job postings we find a deterioration, or at best, no change in CPA quality following enactment.

ABSTRACT Auditors are expected to identify and resolve material misstatements (MMs) in management's financial statements. However, beyond the audit opinion, the audit process is opaque. To address this, we independently survey 462 audit partners and interview 24 audit partners, CFOs, and audit committee members on how partners assess and address MM risk, resolve MMs, and the consequences of MMs. Partners identify MMs in approximately 9% (15%) of public (private) engagements and use qualitative factors to waive apparent MMs. Loan covenant and going‐concern issues increase MM risk more than earnings benchmark issues. Partners point to a variety of both auditor and client factors as threats to audit effectiveness. Partners often rely on rapport with management and involve the national office and audit committee in resolving MMs. Partner incentives around restatements are context specific. Our results provide new insights into the auditor's role in financial reporting that are relevant to academics, practitioners, and regulators.