Knowledge that Transforms

How do global firms manage conflicting constituencies in complex markets? The Big 4 accounting firms have expanded their size and scope to the extent that they need to relate to different constituencies simultaneously, sometimes on controversial issues. This is particularly relevant given their engagement in aggressive tax planning services alongside their traditional professional obligations, as this generates a conflict between discretion offered to “offshore” clients and accountability offered to other stakeholders. This requires strategic duplicity—sending differentiated signals to different stakeholders. We suggest that firms use organizational partitioning across legal structures and geographies to enable strategic duplicity. We test this by collecting a unique data set on the Big 4's ownership structures and staff numbers across all locations, showing that their organizations are heavily segmented. We show that the Big 4 use this geographical and legal differentiation to send contrasting signals to constituents about their organizations, engaging in a type of strategic duplicity that we term transparency arbitrage, in which “onshore” stakeholders receive a signal of transparency and “offshore” stakeholders receive a signal of discretion. This duality enables them to engage in controversial issues with conflicting stakeholders.

This study provides empirical evidence that key audit matters (KAMs) are informative for future negative accounting outcomes. We employ FinBERT—a deep learning model designed for natural language processing that allows human‐like text comprehension—to demonstrate that goodwill‐related KAMs are predictive of firms' future impairments. Our findings reveal that utilizing KAMs as a stand‐alone predictor for future impairments provides meaningful predictive power. By exploring the semantic content of reported KAMs, we find that their predictive power is primarily driven by text passages covering how both the firm and the auditor exercise judgment in the accounting and auditing of goodwill. Furthermore, we show that KAMs are incrementally predictive beyond several firm‐level determinants and disclosures in annual reports. Finally, our additional analyses indicate that (1) KAM‐predicted impairment probabilities are relevant to capital markets, (2) KAMs are useful for predicting the magnitude of goodwill impairments, and (3) the predictive power extends to other KAM topics. Collectively, our findings enhance the understanding of the informational content of KAMs, which is a key rationale for their introduction.

This study examines the association between firm performance and promotion incentives (i.e., the product of vertical pay disparity and promotion probability) in multilayer corporate tournaments using a unique data set of Korean public firms. We dissect the corporate tournament into layers and separately examine their association with firm performance while also accounting for the role of promotion probability. We find that (1) upper‐layer, rather than lower‐layer, tournaments are the main drivers of the positive association between vertical pay disparity and firm performance and (2) this association becomes stronger with higher promotion probability, consistent with tournament theory, but only in the upper layer. These results are more pronounced in settings where tournament incentives are plausibly more important, such as those characterized by high labor productivity and high average tenure. Our study draws a comprehensive picture of the corporate tournaments that simultaneously accounts for various factors that previous studies have examined only in isolation.

This study examines whether and how brokers manage the distribution of their stock recommendations. We document that if a broker's percentage of buy recommendations in a quarter is substantially higher than its target level, the broker issues significantly fewer buy recommendations than other brokers in the following quarter. This evidence remains robust after controlling for mean reversion in the data and varies systematically with brokers' expected benefits and costs of managing the distribution. Exploring possible methods to manage the distribution, we find evidence suggesting that brokers alter the timing of recommendation initiations and reiterations, and shift recommendations between adjacent quarters. Finally, we show that distribution management affects the informativeness of stock recommendations in the market.

In three experiments, we examine how the widespread phenomenon of overwithholding affects retirement savings and how the additional option at tax time of saving retroactively for retirement affects total savings levels. Our results show that overwithholding significantly reduces retirement savings. We show that this outcome can be explained by individuals' anchoring on their take‐home pay when making savings decisions and by individuals' reduced motivation to save in the presence of overwithholding. Moreover, we find that the introduction of an additional retroactive savings option at tax time increases overall savings by providing information about the correct after‐tax income and by emphasizing the importance of a savings norm that nudges individuals to save. Furthermore, our findings demonstrate that immediate taxation (back‐loaded retirement plans) results in greater effective savings than deferred taxation (front‐loaded retirement plans), irrespective of whether there is overwithholding or the existence of an additional option to save. Policy‐makers may therefore consider both the introduction of an additional savings option at tax time and immediate taxation as policy tools to encourage retirement saving.

A significant challenge firms face is providing performance feedback that effectively motivates low‐performing employees. In our field experiment, we examine the impact of an often‐overlooked form of relative performance feedback (RPF) that emphasizes comparing employees based on their inputs. Our results indicate that input‐based RPF enhances the input performance of low performers without adversely affecting high performers. Furthermore, our field experiment demonstrates that selecting the right input—specifically, actions that employees can control and that are linked to outputs—can significantly boost low performers' contributions to a firm's overall output. Together, our findings support our prediction that input‐based RPF provides a viable strategy for low performers to narrow the performance gap with high performers by guiding them toward the crucial inputs that high performers use to generate output. Our study adds an important refinement to our understanding of how RPF promotes upward social comparison and facilitates social learning, offering insights for firms aiming to motivate low performers in their workforce.

In this study, we examine whether environmental, social, and governance (ESG) funds' investment decisions are sensitive to the existence and extent of firms' voluntary environmental disclosures. We create our measures of voluntary environmental disclosure using bigrams extracted from the Global Reporting Initiative standards. We provide robust evidence that voluntary environmental disclosure in conference calls is associated with greater ESG fund ownership in the subsequent period, incremental to firms' ESG ratings. We also provide evidence that fund managers' reliance on environmental disclosure is concentrated in water, waste, emissions, and compliance disclosures. ESG fund ownership increases with environmental disclosure that is more positive and specific. Our primary finding persists both when we rely on the sustainability report as an alternative proxy for environmental disclosure and when we use fund‐level tests. Overall, our evidence is consistent with ESG funds relying on firms' disclosures when making investing decisions and inconsistent with recent regulatory concerns that ESG fund managers are not following through on their stated investing strategies.

This paper extends a familiar model of competition and disclosure to incorporate the practical feature that firms may not only hold private information about consumer demand, but they can also influence demand by the investments they make in improving product quality. Such investments can reflect installing new product features, improving durability, adding design enhancements, and the like. This paper demonstrates that investments stand to significantly influence the firm's preference for disclosures and, in fact, become a determining feature of disclosure choice. In particular, under Cournot competition, a firm prefers disclosure when the industry‐wide effects of information and investments are concordant. That is, if both product quality and demand information have large positive industry spillovers, disclosure is desirable because it promotes implicit cooperation in investments; if both have low spillover, disclosure permits a firm to convey strength to a rival and then use quantity and quality in concert to dominate the market precisely when the firm's demand is at its peak.

The availability of big data and analytics expertise provides insurers with informational advantages over policyholders in estimating risk. We study competition between heterogeneously informed insurers, showing that their information may or may not be revealed in equilibrium. We find that all equilibria are profitable and that noninformative equilibria entail risk pooling and possibly efficiency. In informative equilibria, the signaling problem interacts with the screening problem that arises endogenously from insurers’ revelation of information, implying underinsurance. Our main insights are robust to changes in insurers’ information precision and market concentration and to the presence of two-sided asymmetric information and withdrawable contracts.

Firms enter new sectors by either building on their resources or buying existing companies. Using French administrative data, we propose a measure of human capital distance between a firm and a sector of entry. Using a shift-share instrument, we show that firms build in close sectors and buy in distant sectors in terms of human capital distance. Firms build by hiring new workers, which becomes increasingly costly in distant sectors as it requires not only hiring more workers but also having more organizational capital to integrate these workers. Hence, firms buy in distant sectors to acquire already operational human capital.