Knowledge that Transforms

This study examines whether analysts have an industry‐level information advantage over managers when forecasting earnings. While analysts are often viewed as industry experts, prior research fails to document such an advantage. We predict that analysts' industry‐level information advantage is more likely to exist in industries where firm performance is more sensitive to industry‐level external economic forces. We find that for such firms, analysts provide relatively more accurate earnings forecasts compared to managers. Consistent with our predictions, we further find that managers of such firms provide fewer and less precise forecasts and that this association is more pronounced in firms with higher analyst following. Collectively, these findings suggest that analysts have an industry‐level information advantage over managers when forecasting earnings for firms in industries with high sensitivity to external forces, and that industry sensitivity risk is a distinct industry characteristic that affects firm‐level disclosure.

A recent trend in organizations is to motivate employees with goal‐based prosocial rewards, whereby employees must donate their rewards to charities upon goal attainment. We examine the motivational effects of goal‐based prosocial rewards versus cash rewards under different levels of goal difficulty. We develop our hypotheses based on affective valuation theory, which posits that when valuing uncertain outcomes by affect rather than calculation, individuals are largely insensitive to changes in probability of the outcomes, including probability of goal attainment. Experiment results support our hypotheses. Specifically, we find that employees who are rewarded with prosocial (vs. cash) goal‐based rewards are more likely to adopt an affective valuation approach. Consequently, when employees are assigned either an easy goal or a stretch goal, their effort is higher when incentivized with a goal‐based prosocial reward than a cash reward. Furthermore, there is a less curve‐linear relationship between goal difficulty and effort with prosocial (vs. cash) goal‐based rewards. These findings highlight for incentive system designers the motivational advantage of goal‐based prosocial rewards relative to traditional cash rewards. Furthermore, we extend the academic literature by showing how affect‐rich rewards such as prosocial rewards can influence employees' assessment of the probability of goal attainment.

This study investigates when and why intrayear bonus target revisions occur. This is important as intrayear target revisions occur regularly in practice but are not well understood. Specifically, we analyze two potential drivers of intrayear bonus target revisions: reduced managerial incentives owing to managers dropping out of the incentive zone of their piecewise defined bonus function and potential spillovers from planning target revisions that reflect changes in performance expectations during the year. We also investigate the effects of organizational characteristics on intrayear bonus target revisions. Using data collected from sales executives via multiple waves of surveys, we find evidence for both predicted drivers. In addition, consistent with our predictions, we find that the levels of delegated decision authority, intrafirm interdependencies, and information asymmetry negatively moderate the positive association between reduced managerial incentives and revision likelihood. Our paper contributes to the target setting literature by being the first study to investigate intrayear bonus target revisions and shed light on when firms commit to not revising such targets intrayear.

We investigate whether the PCAOB's decision to expand the number and location of its inspection offices in 2009 improved the reliability of US audits. We use a difference‐in‐differences empirical design to consider the impacts of the expansion on audit quality and find that audit quality significantly improved following the PCAOB's expansion in markets where new offices opened relative to markets without an office opening. We find that the improvement in audit quality appears to be driven by auditors' reaction to real changes in PCAOB oversight and that triennially inspected auditors appear to be impacted the most by this office expansion. Our findings provide new insights into the PCAOB's operational decision‐making and suggest that the regulator's additional investment in audit oversight was effective in improving audit quality.

This study examines whether and how media coverage improves price discovery before earnings announcements. Given the broad reach and timeliness of media coverage, understanding its role in forming earnings expectations is important. I posit that the media specialize in searching for and screening news, while institutional investors and financial analysts specialize in interpreting and integrating information. I expect these coordinated efforts to improve earnings expectations and preempt upcoming earnings announcements. Consistent with this prediction, I find (i) preannouncement media coverage is negatively associated with price revaluations during earnings announcements, (ii) preannouncement media coverage is positively associated with institutional investors' information acquisition and financial analysts' forecast frequency, and (iii) institutional information acquisition and analyst forecast activity are two mechanisms by which media coverage preempts upcoming earnings. My main results are robust to short‐window tests and identification concerns. Overall, my findings suggest that media coverage coordinates information efforts and accelerates the incorporation of information in prices, facilitating preannouncement price discovery.

We examine how executive equity incentives are associated with firms' conforming tax avoidance. Conforming tax avoidance is unique compared to nonconforming tax avoidance in that it decreases tax liabilities by reducing pretax income. Thus, conforming tax avoidance presents a unique set of consequences with important links to both risk and value‐creation incentives. Consistent with risk‐taking incentives increasing conforming tax avoidance, we find that linking executive wealth to stock price volatility (i.e., vega) is positively associated with conforming tax avoidance. We also find that linking executive wealth to stock price (i.e., delta) is negatively associated with conforming tax avoidance. The results of our cross‐sectional tests suggest that the negative association between delta and conforming tax avoidance is predominantly driven by a risk aversion effect rather than a value‐creation effect. Our findings add to the literature on the relation between tax avoidance and executive compensation, as well as the trade‐off between book and taxable income.

Social network analysis (SNA) examines whether interactions between individuals, teams, and organizations result in network structures and patterns that can explain important outcomes, including firm performance, management reporting behaviors, investor beliefs, and audit outcomes. This paper reviews the growing body of work on SNA in accounting and finance research, focusing on 162 articles published between 2000 and 2021, and offers a roadmap that may help move this literature forward. Our survey summarizes the elements of SNA, organizes this literature within a theoretical framework, and provides a thematic discussion of the context and contribution of the selected studies. We also discuss opportunities and challenges for future research. Finally, we include an empirical illustration of the key concepts and tools of SNA. We believe that SNA will continue to offer an interesting avenue for conducting high‐impact and cross‐disciplinary research in accounting and finance.

The Sarbanes‐Oxley Act charges management with the primary responsibility for internal control over financial reporting (ICFR). However, prior research tells us little about the ICFR process from management's perspective. We develop a theoretical model of the ICFR process from management's perspective and examine that model by surveying 145 and interviewing 35 accounting executives at large US public companies. Our primary finding is that executives feel constrained in their ability to direct ICFR and hold perspectives that reflect these constraints. Specifically, most executives feel compelled by auditors to follow the PCAOB's preferences even though executives believe these preferences often tend to distract management and auditors from riskier areas. Executives also believe that audit committees' involvement in ICFR is too passive and that auditors' assessments are sometimes too severe, prompting executives to push back on auditors. Overall, executives strive to make decisions that are optimal for their ICFR, but limited resources and other business conditions, such as restructuring events and lack of qualified personnel, limit the effectiveness of their ICFR efforts. We discuss the implications of our results for practitioners, regulators, and researchers.