Knowledge that Transforms

Prior research has established that tax liability increases lead to decreased compliance. However, tax liability changes do not happen in a vacuum. Notably, prior research has also identified a withholding phenomenon: individuals in a tax due position are less compliant than those in a refund position. Additionally, tax law changes are often enacted in politically polarized environments. We examine how three factors—tax liability changes, withholding position, and group affiliation—combine to influence individuals' tax compliance decisions. Our experimental results show that a tax increase is universally experienced as a loss, even when coupled with a tax refund and enacted by an ingroup, leading to decreased compliance. However, a tax decrease coupled with a tax due position is viewed neutrally and leads to less compliance than a tax decrease coupled with a tax refund. Further, group affiliation influences compliance in some situations. Individuals in a tax due position are less compliant when an outgroup, versus an ingroup, is responsible for the tax change. This study contributes to the mental accounting literature by examining how individuals react to mixed gain/loss situations when the gains and losses are of different types. We also integrate the previous separate research streams on the withholding phenomenon and tax liability changes. Practically, our results contribute to tax policy by showing how individuals react when tax law changes are enacted. Importantly, even when a tax change results in a decrease in tax liability, tax compliance may be affected by individuals' withholding position and group affiliation.

We provide evidence that some managers use a multi‐period, coordinated strategy involving inflated current‐period discretionary accruals and optimistic forecasts of future earnings to delay the revelation of bad news. Inflating discretionary accruals increases investor expectations of future performance, and issuing optimistic earnings forecasts of future earnings supports the inflated accruals and extends the horizon for managers to benefit. This strategy is more pronounced for firms that engage in earnings management outside of GAAP, suggesting intentional behavior. Our evidence indicates that managers use this coordinated strategy when firms experience significant bad news and cannot delay revealing all of the bad news through accrual management. We also find that managers use this coordinated strategy when focusing on short‐term performance due to career concerns (i.e., dismissal) or retirement or when they have shorter stock option vesting schedules, which motivates them to inflate investor expectations for shorter‐term personal benefits. Furthermore, managers using this strategy do not hold deep in the money exercisable stock options, which is consistent with managers' private assessment of a higher (lower) likelihood of releasing bad (good) news in the future.

Prior research demonstrates that audit professionals encounter client incivility. We extend this research by examining whether client incivility negatively impacts auditors' judgments and whether any adverse effects are reduced when auditors use coping strategies. We first collect descriptive survey evidence revealing that client incivility toward auditors is more widespread than currently documented. Next, using an experiment, we predict and find that auditors who experience client incivility (vs. those who do not) are less likely to challenge aggressive reporting if they are not prompted to cope. We also find that active coping reduces the adverse impact of client incivility, whereas findings for passive coping are inconclusive. Audit standards and users of financial statements expect auditors to fulfill their duty of maintaining a high level of professional skepticism irrespective of external circumstances. Our findings highlight the challenges auditors face in meeting these expectations when facing uncivil clients, thus posing a threat to audit quality.

One view of the socialization experienced by professionals in global Big 4 firms suggests that the intensity of socialization engenders a strong and deep‐rooted professional identity. We scrutinize this claim by drawing on interviews with partners who retired from lifelong employment in Big 4 firms in Japan. Through partners' reflections on their experiences in detaching from the firm, we examine how socialization manifests in partners' identity work. We find that partners' identity, which often appears entrenched, invariable, and heroic, can be highly fragile and vulnerable to changing circumstances. Before leaving the firm, interviewees attempt to reconcile their Big 4 “graduation” with feelings of obsolescence and a growing distance from previous accomplishments. After leaving the firm, interviewees revisit the identity built throughout their careers. Unable to move on to a selfhood detached from that identity, they refashion their identity relative to their former Big 4 partner self, backgrounding their private life and post‐firm professional affiliations. Not knowing how to “close the books,” retired partners seek comfort in the old “plot” and in the old “characters,” finding ways to “keep the books open” even after the “setting” has changed. Our results reconfirm the powerful socialization experienced by partners during their tenure with the Big 4 but run counter to scholarship that characterizes the identity of Big 4 partners as strong and fixed. Rather, we demonstrate the insecurity underlying our professional service heroes' identity work and the contingent identity work processes that partners engage in while navigating departure from the Big 4.

We interview public company tax executives to provide new evidence on how corporate taxpayers experience and navigate the income tax audit process. Interviewees describe being “targeted” by “tax police” and having to “defend” their positions. Thus, we adopt a structural metaphor of tax audits as police investigations and use a framework from the policing literature to explain what influences taxpayers' perceptions of fairness during audits. Perceptions of fairness are important as targets of investigations are more likely to cooperate and accept outcomes when they perceive policing processes as fair. Tax executives aim to obtain fair and consistent treatment by compiling documentation, consulting with peers and external advisors, and educating tax agents. Audits are adversarial, however, and taxpayers also act strategically to secure favorable outcomes and appeal or litigate when they believe outcomes are unfair. Interviewees note variation in the extent to which tax authorities create frameworks that facilitate fair audit processes and whether tax agents implement these frameworks. Our study offers new insights into the tax audit process from corporate taxpayers' perspectives. First, public company taxpayers view tax audits as redundant to financial statement audits of their tax positions. Thus, tax audits may have limited scope to deter tax noncompliance. Second, tax executives are not passive actors; they take deliberate actions to shape audit outcomes. Third, audits are less efficient for everyone when taxpayers perceive them as procedurally unfair. Investments by tax authorities that increase perceptions of fairness may enhance audit efficiency by increasing taxpayers' cooperation and acceptance of outcomes.

This study examines the informational role of local newspapers in institutional investments. Exploring local newspaper closures across US counties, we document that institutional investors significantly reduce their holdings in firms located near the closed newspapers. The post‐closure decrease in institutional holdings is concentrated for non‐local or non–hedge fund institutions. In contrast, institutions that are likely to possess information advantages—local institutions or hedge funds—do not decrease their holdings and may even increase them when faced with a lack of local news coverage. Further analysis reveals that local newspaper closures adversely impact institutional investors' ability to predict firms' stock returns, particularly for non‐local or non–hedge fund institutions. Collectively, we provide novel evidence suggesting that local newspapers are a key channel through which institutional investors acquire geographically scattered information.

The study develops theorizing of external organizational communications that entail impression management. This includes developing linkages to Goffman's work and a Goffmanian research tradition. Our approach innovatively articulates dimensions of impression management entailing the presentation of others and nuanced practices of what we term organizational altercasting (OAC). Altercasting has been conceptualized in a Goffmanian tradition. OAC, seen as implicated in more developed organizational impression management (OIM), involves an organization constructing for another/others (an audience with whom the organization interacts) a persona that is congruent with the organization's goals. Our theorizing also innovatively draws from Goffmanian insight in a coherently associated way—namely, by appreciating the pervasiveness of interaction rituals, including those that take place in an organizational communication style using today's technology. We suggest that OAC especially tends to entail tact. The empirical focus is a case analysis of a Polish bank (CB) facing challenges of cybersecurity and disclosing/communicating externally on cybersecurity/cyber‐risk. For insight, we address this question: In terms of a developed theorizing of OIM (including OAC), how did the bank respond to external challenges, related to cybersecurity, through public disclosures/communications? A content analysis of types of multimedia, with attention given to context, indicated the importance of the presentation of others. We were drawn to how CB's customers, a key audience, were presented in CB's external communications, highlighting long‐term engagement in, and an increase in the significance of, these communications. For our case, articulation of OIM and the presentation of others was further developed through OAC, with particular attention given to communication style vis‐à‐vis modern technology. Our work promotes OAC's wider applicability, including beyond cyber‐risk disclosures.

In recent years, the Big 4 firms have embarked on digital transformation projects that have the potential to throw auditors' daily practice into turmoil. This study looks at the auditors' quest for professional security—namely, their confidence in the fundamental features of their profession. Specifically, we investigate how auditors, when construing their experiences in a firm engaged in a digital transformation project promoting automation of a significant portion of their work, seek to preserve their sense of professional security. Interviews with auditors indicate that, in contrast to the high professional insecurity caused by the commercialization of auditing in the early 2000s, the digital transformation of the profession ultimately strengthened auditors' professional security. Over time, the interviewees became receptive to the firm‐promoted label of tech‐savvy auditor and subscribed to the technological complementarity thesis, which sees closer “collaboration” with technology as enhancing the auditor's work rather than replacing, undermining, or enslaving the auditor. Three implications are discussed. First, our study casts doubt on auditors' romanticized view of the technological complementarity thesis in light of economic and socio‐organizational theories about the automation of work. These theories lead us to question the auditors' belief that they will retain their professional autonomy. Second, according to our analyses, one key explanation for auditors' high level of professional security is that digital transformation projects surrounding the audit function are part of a continuing and reassuring trajectory of commercialization within accountancy. Third, our findings suggest that digital transformation projects act as vehicles for identity development, allowing the tech‐savvy auditor to escape the shameful stereotypes ascribed to the traditional auditor—that is, an auditor who manually performs most of the mundane tasks required to complete an audit.

We examine how common institutional investors (CIIs) facilitate the financial reporting comparability (FRC) of US firms. Common ownership increases FRC of firms that are directly owned by CIIs (via a direct effect) and has positive spillover effects on other firms in the same industry. We find spillover effects in two types of firms: (1) those that are commonly owned by different institutional investors but are connected through common firms, and (2) those that do not have any common ownership. These results suggest that the effect of common ownership goes beyond commonly owned firms and extends to non‐commonly owned firms. Furthermore, we find two mechanisms for the direct and spillover effects of common ownership on reporting comparability: firms' hiring of common auditors and their adoption of similar accounting practices. Overall, we provide comprehensive evidence on how common institutional ownership benefits the comparability of financial reporting in the United States.

We find that nonlinear estimation of profitability decomposition frameworks yields more accurate out-of-sample profitability forecasts than forecasts from both a random walk and linear estimation. The improvements derive from nonlinear estimation and synergies between nonlinear estimation and profitability decomposition frameworks. We analyze three essential financial statement analysis design choices to provide insights for the practice of fundamental analysis and find robust evidence that higher levels of profitability decomposition, focusing on core items, and using up to three years of historical information improve forecast accuracy. We find that our forecasts predict returns and profitability changes before and after controlling for analyst forecasts and common asset pricing factors.