Knowledge that Transforms

We investigate the impact of job loss on crime and the mitigating role of unemployment benefits, exploiting detailed individual‐level data linking employment careers, criminal records, and welfare registries for the universe of male workers in Brazil. The probability of committing crimes increases on average by 23% for workers displaced by mass layoffs, and by slightly less for their cohabiting sons. Using causal forests, we show that the effect is entirely driven by young and low‐tenure workers, while there is no heterogeneity by education and income. Regression discontinuity estimates indicate that unemployment benefit eligibility completely offsets potential crime increases upon job loss, but this effect vanishes completely immediately after benefit expiration. Our findings point to liquidity constraints and psychological stress as the main drivers of criminal behavior upon job loss, while substitution between time on the job and leisure does not seem to play an important role.

We study a fiscal policy model in which the government is present‐biased towards public spending. Society chooses a fiscal rule to trade off the benefit of committing the government to not overspend against the benefit of granting it flexibility to react to privately observed shocks to the value of spending. Unlike prior work, we examine rules under limited enforcement: the government has full policy discretion and can only be incentivized to comply with a rule via the use of penalties which are joint and bounded. We show that optimal incentives must be bang‐bang. Moreover, under a distributional condition, the optimal rule is a maximally enforced deficit limit, triggering the maximum feasible penalty whenever violated. Violation optimally occurs under high enough shocks if and only if available penalties are weak and such shocks are relatively unlikely. We derive comparative statics showing how rules should be calibrated to features of the environment.

We propose a robust solution concept for Bayesian persuasion that accounts for the Sender's concern that her Bayesian belief about the environment—which we call the conjecture —may be false. Specifically, the Sender is uncertain about the exogenous sources of information the Receivers may learn from, and about strategy selection. She first identifies all information policies that yield the largest payoff in the “worst‐case scenario,” that is, when Nature provides information and coordinates the Receivers' play to minimize the Sender's payoff. Then she uses the conjecture to pick the optimal policy among the worst‐case optimal ones. We characterize properties of robust solutions, identify conditions under which robustness requires separation of certain states, and qualify in what sense robustness calls for more information disclosure than standard Bayesian persuasion. Finally, we discuss how some of the results in the Bayesian persuasion literature change once robustness is accounted for, and develop a few new applications.

Academics and practitioners agree that there are substantial barriers to systematically transferring audit research knowledge to policy‐makers. We adopt a design science approach to investigate the efficacy of employing a research synthesis, embedded in an interactive process with audit standard setters, to transfer such knowledge. We identify a standard‐setting issue that, we argue, is typical of the class of problems encountered by both parties when attempting knowledge transfer. Following design science prescriptions, we evaluate the pragmatic validity of our prototype research synthesis and its creation process. We provide initial evidence (“proof of concept”) that a research synthesis process can effectively and efficiently facilitate academic research knowledge transfer to inform audit standard setters' deliberations. Finally, we provide evidence that the problem of academic research knowledge transfer in accounting standard setting and evaluation continues. Our study and findings reflect how design science facilitates change in real‐world problem contexts through research‐based proofs of concept.

We examine how audit partners' geographic proximity to clients affects audit quality. We use hand‐collected data to show that approximately half of audit partners are assigned to clients headquartered more than 100 km away from the partners' home locations. Few of these partners relocate after receiving their assignments and, as a result, more than one‐third of clients are audited by partners who must commute long distances to visit the client in person. We explore this phenomenon by first modeling how distance affects partner‐client matching. We find that partners' geographic proximity to a prospective client is an important matching criterion, but also that trade‐offs are made when other partner characteristics such as industry specialization are more likely to be important. Next, consistent with our prediction, we show that audit quality is lower when partners reside farther from their clients. We corroborate our primary findings by showing that the association between partner distance and audit quality is mitigated when partners have access to direct flights to their clients' headquarters and when clients are geographically dispersed. Our paper should be informative for regulators, practicing auditors, and academics interested in how partner‐client matching affects audit outcomes.

This study uses a resilience perspective to examine the opportunities and challenges that management accountants may experience when they are given a role as a business partner in risk management. Drawing on insights from an in‐depth case study in a large European bank, our study sheds light on management accountants' responses to a change from a compliance‐oriented role to a business partner role. In the bank studied, part of the management accountants' new role was to balance various performance objectives and thereby to incorporate risk considerations in managerial decision‐making. Our findings suggest that this role challenged the management accountants due to the ambiguity inherent in the role and also due to unfavorable conditions that surrounded the role change. We find that these circumstances culminated in a move backward, with the management accountants falling back on practices that were consistent with the values and beliefs they had developed in their previous role. In doing so, they emphasized what the resilience literature labels “well‐learned responses.” These responses contributed to an emphasis on a narrow risk management approach and had implications for the management accountants' long‐term position within the organization. We discuss these findings against the background of previous research that suggests that management accountants move forward to the business partner role by engaging in job crafting (i.e., adapting their work) or identity work (i.e., redefining their role identity). By utilizing the concepts of lingering identities and identity asymmetries to explain the management accountants' move backward, we also shed light on new facets related to role identity.

We investigate whether individual securities regulators exhibit personal styles in their work, a question of importance to corporate executives and capital market participants. Using the SEC's comment letters as our setting, we find that SEC staff members exhibit unique personal “styles.” We manually collect information on SEC staff members and provide evidence that staff members' personal characteristics influence the SEC's review process. Further analyses reveal that SEC staff members with a CPA qualification are associated with a lower likelihood of future accounting restatements; moreover, similarity between the SEC staff member and the firm's correspondent is associated with lower scrutiny intensity. Overall, our study offers evidence that SEC staff members exhibit individual differences and that their styles shape the SEC's enforcement actions. Our results offer implications for the working of securities regulators.

This study develops a process model of how accounting may come to an end. Grounded in a longitudinal study of a risk culture survey, this model focuses on the dynamics that underpin the repetition of accounting practices, and sheds light on two boundary conditions of successful repetition and continuation, which are in tension with each other. On the one hand, there are pressures for repetition that preserves continuity and comparability. On the other hand, there is the ongoing organizational need to adjust accounting practices. Iterating between the case study findings, social studies of accounting, and the sociology of replication in scientific practice, the model shows how moving too close to either boundary increases the risk that repetition undermines the accounting practice being repeated: “perfect repetition” may be perceived as uninteresting and decision‐irrelevant; very “imperfect repetition” may be perceived as something too different and idiosyncratic, and hence also decision‐irrelevant. As a result, the analysis extends a rich literature that has examined empirical instances of failure of the conditions that sustain the repeatability of accounting practices. Via the theory of “self‐undermining repetition,” this study shows how the possibilities for accounting's ending are paradoxically inherent in the very act of repetition. This notion of “self‐undermining repetition” is deepened by a discussion of how it may be affected by four contingencies: task ambiguity, organizational politics, organizational actors' reflexivity, and external networks of support. Overall, the analysis of the self‐undermining dynamics of repetition and related contingencies contrasts with research that foregrounds the constitutive nature of repeated uses of accountings. It shows how repetition may also undermine, rather than cumulatively consolidate, accounting practices.

Audit regulators and commentators propose prompting auditors to more fully take an investor's perspective as a remedy to their concern that auditors underreact to material misstatements. By contrast, we predict that prompting auditors in this manner will backfire, making them less (more) heavily weight indicia that misstatements are (not) material. We further predict auditors will apply this asymmetric weighting instrumentally —to a greater degree as needed—to justify management‐preferred conclusions. We test these predictions in two experiments in which in‐charge audit seniors judge the likelihood that identified audit differences are material and choose required adjustment amounts. Between‐participants, we manipulate whether or not auditors are prompted to take an investor's perspective and, within‐participants, whether these audit differences would or would not violate a qualitative criterion—by breaking or not breaking a favorable profitability trend. Study 1 uses a context in which a relatively low degree of motivated perspective taking is needed, as the audit difference is just below tolerable misstatement (TM). Investor‐prompted auditors assess audit differences as less likely to be material than do unprompted auditors, but only when the qualitative criterion is not violated. Study 2 adds a between‐participant manipulation of misstatement tolerability—that is, whether the audit difference is just below or well above TM. Consistent with an instrumental increase in motivated perspective taking, investor‐prompted auditors assess audit differences that simultaneously are less tolerable and violate a qualitative criterion as significantly less likely to be material. Overall, our theory and experimental evidence suggest prompting auditors to take the investor perspective may have unintended consequences.

Speakers of weak future‐time reference (FTR) languages perceive the future as closer and more imminent. In this study, we examine the important question of whether the FTR properties of languages spoken by investors affect their demand for forward‐looking information, thereby influencing corporate management forecast practices in different countries. We predict that investors who speak weak‐FTR languages are more concerned about the future prospects of their investments and the ability of company management to respond to future changes, leading to a greater demand for management forecasts from these companies. We find that firms in weak‐FTR language countries exhibit a greater propensity for and frequency of issuing management forecasts and that they also issue more long‐horizon forecasts, compared to those in strong‐FTR language countries. Our results hold after controlling for other country‐level cultural factors. Within the same countries, firms with more foreign institutional ownership from weak‐FTR countries issue more (long‐horizon) management forecasts than their counterparts. Finally, firms from strong‐FTR countries significantly increase their issuance of (long‐horizon) management forecasts, after cross‐listing their stocks in Germany, a weak‐FTR country. This is the first study to examine language FTR as an antecedent to voluntary disclosures. We document a linguistic trait as a novel investor environment factor that shapes corporate voluntary disclosures and explains the cross‐country variations in management forecast practices.