Knowledge that Transforms

ABSTRACT Why do seemingly similar firms show such different productivity? We argue that unresolved measurement problems, i.e., the persistent incongruity between economic transactions and their accounting representation, affect resource allocation. Our metric quantifies technical accounting terminology in firm disclosures to capture these unresolved measurement problems, UMPs, using over 90,000 10-Ks. A one standard deviation increase in UMP is associated with lower capital investment (6 percent), R&D (5 percent), and hiring growth (30 percent). We also find a reduction in total factor productivity (5 percent) and Tobin’s q (4 percent). Further, CEO compensation sensitivity to accounting performance decreases with UMP, whereas stock-based sensitivity remains unaffected. Our inferences continue to hold when we use a Bartik instrument, which exploits differential exposure to GAAP changes to isolate accounting-driven variation from the firm’s underlying economics. The results suggest unresolved measurement problems are a significant friction in resource allocation. Data Availability: The UMP dataset is available upon request. Please contact the first author. JEL Classifications: D22; D23; D24; G12; J23; M40.

ABSTRACT We examine how the prospect of research and development (R&D) disclosure affects a firm’s institutional investor base. Difference-in-differences (DiD) regressions around the enactment of the American Inventors Protection Act (AIPA), which mandated the public disclosure of patent applications within 18 months of filing, show that short-term institutional investors increase their holdings before public information is released, whereas long-term investors do not adjust their positions. This anticipatory shift is consistent with theoretical predictions that expected disclosure strengthens short-horizon investors’ incentives to acquire and trade on private information. We further document that stock prices reflect more firm-specific information leading up to disclosure and that improved liquidity at disclosure enables short-term investors to partially unwind their positions. Our paper offers novel evidence on how increases in the expected likelihood of disclosure shape investor behavior and the composition of firms’ investor bases.

ABSTRACT The world of capital markets is constantly evolving, driven by technological advancements and changing global economies, presenting challenges for accounting practitioners. Amid current dynamic capital markets, this paper proposes a pathway for generating innovative accounting research that addresses practitioners’ needs by focusing on three critical financial reporting areas: contingent claim securities, sustainability/ESG metrics, and cryptocurrencies/digital assets. Secondly, to address the complex research challenges before us, I propose that we, as accounting scholars, embrace educational changes that may enhance the early research career success of our doctoral students and junior scholars, given that the accounting industry is on the brink of a profound technological transformation. Finally, I urge us to foster academic change by leveraging our strengths within and across disciplines to meet the accounting challenges and opportunities ahead. JEL Classifications: M410; G1.

ABSTRACT Publications on external reporting have played an important role in the first 100 years of The Accounting Review. The first 40 years featured publications prescribing desirable financial accounting principles. The next 45 years featured archival empirical research focusing on managers’ financial accounting choices and the use of financial accounting information by capital market participants. The most recent 15 years have been characterized by growth in research on sustainability reporting. I briefly summarize this research and propose opportunities for future research. Data Availability: Data are publicly available from sources indicated in the text.

ABSTRACT Prior work documents that managers increase the quantity of earnings guidance provided after exogenously losing coverage from an equity analyst. I examine how analysts influence guidance quality. I find that following an exogenous reduction in analyst coverage, managers issue earnings guidance that is lower quality (i.e., it is less accurate). This result varies predictably based on managers’ incentives, features of the firm’s analyst coverage, and the presence of other intermediaries. Overall, my findings identify a situation in which guidance quantity and quality move in divergent directions and highlight that analysts can be an important determinant of voluntary disclosure quality. JEL Classifications: G10; G17.

ABSTRACT We examine how the SEC’s 2014 Municipalities Continuing Disclosure Cooperation initiative (MCDC) affects disclosure compliance in the municipal bond market. The MCDC granted favorable settlement terms to municipal debt issuers and underwriters who voluntarily self-reported having violated SEC disclosure requirements. Although underwriters participated widely, most municipal issuers did not participate in the MCDC initiative despite having publicly observable disclosure violations. We find that, after the MCDC, official statements were less likely to contain false claims about past compliance—particularly when underwriters had participated—suggesting improved underwriter oversight of the initial bond offering. However, contrary to the SEC’s intention, we observe a 9 percent post-MCDC decrease in issuers’ compliance with continuing disclosure requirements compared with a control group of voluntarily disclosing issuers. Our findings provide no evidence that the MCDC improved continuing disclosure compliance; rather, the MCDC may have instead exacerbated noncompliance by exposing the weaknesses of the existing regulatory regime. JEL Classifications: G24; G28; H74; M40; M41.

ABSTRACT Using Census microdata on 28,000 manufacturing plants, we examine how firms manage employee retention concerns. In response to reductions in the local unemployment rate, plants take additional steps beyond increasing compensation. First, plants adjust bonus architecture to ensure bonuses can be paid. Second, plants offer more agency to employees by deploying high-involvement work practices that generate longer-term commitment. Third, plants pull these retention levers less when they have high availability and use of data as this reduces the adverse effects of employee turnover on organizational knowledge. These results are robust to using the fracking revolution as a shock increasing firms’ retention concerns. Additionally, we observe that although compensation increases tend to spill over to other plants within the same firm—aligning with theories of inequity aversion—adjustments to bonus architecture and the provision of employee agency do not, suggesting these may be more cost-effective strategies for multiplant firms. JEL Classifications: J63; M51; M54.

ABSTRACT This study examines whether enterprise resource planning (ERP) implementations are associated with reductions in corporate misconduct. Specifically, we study the relation between staggered facility-level rollouts of ERP systems and facility-level regulatory violations across a large sample of U.S. firms. Our results indicate that facility-level ERP adoptions are associated with substantial reductions in local violations and penalties. Additional analyses suggest that the effects are more pronounced among facilities incorporating advanced analytics into their systems and among workforces that are less resistant to technology change. Overall, our results suggest that ERP systems generate indirect effects that enhance compliance outcomes across a wide range of violations. JEL Classifications: M40, M41

ABSTRACT In the wake of the financial crisis, policymakers expressed the concern that the incurred loss model delays loan loss recognition to economic stress periods and thereby exacerbates banks’ lending contraction during these periods. Addressing this concern, the FASB issued Accounting Standards Update 2016-13, which requires large public banks to accrue for loan losses using the current expected credit loss (CECL) approach starting in January 2020. We hypothesize and find that banks that adopted CECL prior to the COVID-19 pandemic increased loan loss provisions and reduced loan growth during the accompanying recession more than other banks. The lending contraction is stronger for adopting banks with low regulatory capital and low loan impairment and is primarily driven by commercial loans. Lastly, we find that counties in which CECL-adopting banks have higher market share experience larger increases in unemployment rates during the recession and slower subsequent recoveries. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: E32; G21; G28; M41; M48.

ABSTRACT Many countries have converged their domestic auditing standards with International Standards on Auditing (ISA). This study provides global empirical evidence on first-order determinants of audit quality by examining whether and how convergence affects audit quality through utilizing data on 41 jurisdictions and using a staggered difference-in-differences approach. We find that ISA convergence leads to higher audit quality on average. The positive effect is stronger for clients of domestic audit firms, in jurisdictions with stronger enforcement, and when the ISA convergence level is higher. Insights from textual features suggest that changes in principle-orientation, comparability, readability, and size (or length) of auditing standards are positively related to audit quality. Exploratory analyses of textual content using machine learning reveal that the emphases of ISA on going-concern assessment and legal compliance, fraud risk assessment and internal control evaluation, and related-party transactions and subsequent events contribute to enhanced audit quality. JEL Classifications: M40; M42; M48.