Knowledge that Transforms

manuscripts in process at the beginning of the year, plus new submissions, plus resubmissions).In general, this number has grown along with the increase in submissions.Column (e) of Table 1 reports the number of decision letters issued each year. 2 Commensurate with the increase in new submissions during 2018 reported in column (b) and the modest decrease in resubmissions reported in column (c), column (e) shows that the number of decision letters grew by 5.5% in 2018, from 1,113 to 1,174.Thus, driven by the growth in submissions in recent years, the number of submission letters by TAR editors also is at historically high levels.

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Mean reversion in profitability and growth is a well-documented phenomenon; however, comparatively less is known about the level of analysis that best captures mean reversion. In this study, we find that analyzing firms by life cycle stage improves the out-of-sample accuracy of profitability and growth forecasts over analyzing firms pooled across the economy and analyzing firms by industry. The improved accuracy is robust to both short-term and long-term forecasts of profitability and growth. We also find that the improvement in accuracy of forecasts from life cycle analyses is greatest for firms in the introduction and decline stages and for firms with greater uncertainty. Finally, we examine market participants' use of life cycle information in forming expectations. We find inefficient use of life cycle information in analyst forecasts, but not in management forecasts. We also find that life cycle forecasts are associated with year-ahead abnormal stock returns.

Many companies administer wage policies based on tournaments or have different salaries attached to various promotion-based ranks within the company. Employees, however, do not always receive information about pay-level differences at higher ranks prior to joining the company. While some companies openly disclose prize spread information across these ranks, others keep such information secret. In this paper, we experimentally investigate whether the availability of tournament prize spread information enhances employee effort through both a selection effect and a motivation effect. We predict and find that when employees can select into tournaments of varying prize spreads (which proxies for an environment where prize spread information is available), high-ability employees are more likely than low-ability employees to select into the tournament with a larger prize spread. Thus, the availability of prize spread information produces a separation of employees based on ability. We also find that employees exert more effort when they can select into a tournament than when they are randomly assigned to one (which proxies for an environment where prize spread information is absent). We show that this result is driven by greater homogeneity in the ability of tournament contestants when the availability of tournament prize spread information provides self-selection opportunity. JEL Classifications: C91; D83; M40. Data Availability: Experimental data are available from the authors on request.

Firms trade off CFOs' fiduciary duties against their decision-making duties when designing CFO bonus plans. Decreasing bonus incentives tied to financial measures benefits CFOs' fiduciary responsibilities at the expense of motivating their decision-making duties. As prior research indicates that clawbacks increase personal misreporting costs through the loss of previously awarded compensation, we examine whether clawbacks allow firms to increase incentives in CFO bonus contracts. Based on a sample of U.S. firms between 2007 and 2013, we find that clawbacks are associated with greater CFO bonus incentives. We also find the increase in incentives to be more pronounced for CFOs relative to other executives. Our results are moderated by firms' susceptibility to misreporting. The relation between clawbacks and incentives is weaker when firms experienced internal control deficiencies, have larger abnormal accruals, when CFOs are more vulnerable to pressure from CEOs, and when audit committees have less financial expertise and prestige.

This study presents evidence suggesting that investors do not fully unravel predictable pessimism in sell-side analysts' earnings forecasts. We show that measures of prior consensus and individual analyst forecast pessimism are predictive of both the sign of firms' earnings surprises and the stock returns around earnings announcements. That is, we find that firms with a relatively high probability of forecast pessimism experience significantly higher announcement returns than those with a low probability. Importantly, we show that these findings are driven by predictable pessimism in analysts' short-term forecasts, as opposed to optimism in their longer-term forecasts. We further find that this mispricing is related to the difficulty investors have in identifying differences in expected forecast pessimism. Overall, we conclude that market prices do not fully reflect the conditional probability that a firm meets or beats earnings expectations as a result of analysts' pessimistically biased short-term forecasts.