Knowledge that Transforms

To what extent do U.S. consumers change their purchase behavior or, in the extreme, boycott companies based on negative information about corporate tax activities? Practitioner publications and academic research identify consumers as a key corporate tax stakeholder. But we have limited empirical evidence whether information about corporate tax activities influences consumer actions. We undertake a comprehensive study of this question, triangulating across several settings. First, a representative sample of consumers suggests they rarely boycott in response to corporate tax activities. Next, an analysis of granular retail scanner data fails to provide compelling evidence of consumer purchase responses to negative tax news. An analysis of individual foot traffic at retail establishments around negative tax news again fails to suggest U.S. consumers change their shopping activities in response to negative tax news. The combined evidence suggests consumers do not meaningfully alter their purchase behavior in response to negative tax news.

This study examines the risk taking properties associated with incentive plans that use relative performance evaluation, with a focus on the form of payout, whether in cash or shares. By analyzing determinants and consequences of payout form choice, I find that share-based plans offer risk-averse managers weaker incentives to pursue projects with idiosyncratic risk compared with cash plans. This occurs because share plans—unlike cash plans—expose managers to systematic performance trends, as payout values are linked to stock prices. Additionally, I document that the variation in risk taking incentives depends on expected relative performance and the strength of the incentives. Overall, this study’s findings suggest that commonly used share-based relative performance plans might not always motivate managers to pursue innovative projects with high idiosyncratic risk when projects with systematic risk are available. Data Availability: All data are available from the sources identified in the text.

We study a model in which financial reports are used in labor markets to learn about managerial talent. A manager manipulates reports to influence the labor market assessment of his talent. If investors are uncertain about the manager’s incentives, manipulation introduces noise into the report and reduces its usefulness for the capital market. We consider price informativeness and expected reporting bias as measures of capital market efficiency and develop novel empirical predictions. We show that higher uncertainty about the manager’s contribution to firm value can decrease price informativeness and earnings response coefficients. Intuitively, supplemental disclosures about managerial talent can mitigate the detrimental consequences of uncertain labor market incentives. Perhaps surprisingly, we show that the usefulness of such supplemental disclosures may increase in their susceptibility to manipulation.

We examine whether the design of a firm’s internal management accounting system is associated with GAAP earnings management. We exploit the fact that ASC 280 mandates a “management approach” requiring multisegment firms to disclose their segment earnings as defined internally by their management accounting system. We posit that the less these segment earnings are decoupled from GAAP earnings, the higher are the costs of earnings management because earnings management spills over to segment earnings and distorts information used for internal decision-making. Thus, we predict that firms with more decoupled segment earnings engage in more earnings management. Using a large sample of U.S. firms from 1998 to 2020, we find support for this prediction. We also find that the decision usefulness of segment earnings for segment investment purposes decreases as earnings management increases, with this association being more pronounced for firms with less decoupled segment earnings measures. Data Availability: Data are available from the public sources cited in the text.

Creativity drives profit in an idea economy, and many companies organize teams to facilitate creativity. This paper investigates the strategic deployment of individuals to boost a team’s creativity. More individualistic team members tend to generate highly original ideas yet are less likely to share these ideas. We theorize that adding a connector—an individual strongly predisposed to form and foster relationships—to a team will enable more idea sharing among individualistic team members, thus increasing the likelihood that the team’s creative potential will be realized. We leverage a new conceptualization of the “connector” construct to identify connectors and then use an experiment to study the impact of their presence or absence on team creative performance. Our results support these predictions and suggest that connectors improve team creativity by enabling others to share in the creative process and not because connectors themselves exhibit greater creative performance than their average peer. Data Availability: The data reported in the paper are available from the authors.

I evaluate the effect of financial statement audits on the governance practices of nonprofit organizations. Using a regression discontinuity design that exploits revenue-based exemption thresholds, I find that financial audits cause organizations to implement governance mechanisms, such as conflict of interest policies, whistleblower policies, and formal approval of the CEO’s compensation by a committee. Consistent with these governance practices curtailing managers’ private benefits, I document reductions in nepotism and CEO-to-employee pay ratio. The results are more pronounced for organizations (1) whose audit is overseen by an audit committee, (2) that already have an independent board, and (3) that face high charity-level demand for oversight. Collectively, these findings shed light on how financial audits shape the governance practices of small, less sophisticated organizations like nonprofits in ways that go beyond financial statements’ direct use in decision-making and contracting.

Despite the increase in and diversity of disclosure channels available, our understanding of how managers incorporate channel features into their disclosure decisions remains incomplete. I provide evidence that managers choose relatively rich channels that offer multiple cues, opportunities for interaction, and linguistic diversity (i.e., the earnings call, as compared to the press release) to communicate complex information. The positive relation between disclosure channel richness and subject matter complexity persists in both a document-level analysis and a small sample test examining disclosure channel choice from all possible disclosure channels. I provide some evidence that deviating from the complexity/richness matching strategy is associated with a muted market response to firms’ quarterly disclosures. The results are consistent with managers choosing disclosure channels to reduce investors’ information processing costs. Data Availability: Data are available from the public sources cited in the text.

There are instances where CEO turnover occurs, even if the company has not made any significant strategy changes, and the new CEO possesses similar abilities as the predecessor. This paper aims to provide a rational explanation for this seemingly irrational phenomenon. One possible reason for this “aggressive” CEO turnover is the board’s desire to reduce the information rents earned by the privately informed CEO. Specifically, the incumbent CEO has a temptation to “sandbag” the board about profitability prospects to secure more generous incentive pay for future implementation, and a (seemingly aggressive) replacement policy helps discourage this kind of gaming. That is, instead of “information-based entrenchment” as suggested by the literature (Laux 2008; Inderst and Mueller 2010), this paper shows a countervailing effect that the CEO’s private information (combined with the later-stage moral hazard problem) may lead to her dismissal more often than the ex post efficient benchmark.

I study the effect of the implementation of the SEC’s EDGAR system on information asymmetry among investors. The SEC adopted EDGAR to decrease acquisition costs of mandatory filings. However, disclosure theory suggests that, even when acquisition costs are low, integration costs (i.e., costs necessary to filter and interpret information signals) may be so high that less sophisticated investors are disadvantaged, relative to their sophisticated peers. Consistent with this theory, I find evidence that EDGAR increased information asymmetries among investors. This result is more pronounced for firms with higher integration costs—i.e., those with more complex filings and filings that have higher information content—as well as for firms with lower analyst coverage. Overall, my results suggest that, although EDGAR lowered acquisition costs for all investors, it also benefited some investors at the expense of others. Data Availability: Data are available from the public sources cited in the text.

Regulators and researchers express concern about auditors who leave their firms for employment at their clients, due to lingering relationships which might represent a threat to audit quality. These relationships could negatively impact audit quality through undue influences of the client personnel on auditor judgment. We examine how these relationships influence novice auditors during evidence collection. Understanding the effects of alumni affiliation on evidence collection is important because undiscovered issues at this phase may go unaddressed, potentially hurting audit quality. Contrary to most research findings, we find that alumni affiliation can benefit the audit by increasing auditors’ evidence collection. However, we also find, when auditors become depleted, the benefits of alumni affiliation actually reverse, as auditors overrely on the relationship, leading them to prematurely cease evidence collection. These findings have implications for both practitioners and researchers. Data Availability: Data are available from the authors upon request.