Knowledge that Transforms

ABSTRACT Investors frequently rely on individual analysts' stock price targets. Aggressive price targets often reflect analysts' attempts to strategically influence investors. Therefore, investors' welfare may be compromised if they take aggressive price targets at face value. In this study, we examine conditions under which investors are more likely to infer that analysts who issue aggressive price targets are acting strategically. Investors can evaluate multiple analysts' price targets with or without other related information (e.g., earnings estimates). Investors can also evaluate the information provided by multiple analysts jointly or separately one analyst at a time. Two experiments find that as predicted, when investors evaluate multiple analysts' price targets without earnings estimates, there is no difference in investors' perceptions about whether the aggressive analyst is acting strategically across joint versus separate evaluation. However, also as predicted, when investors evaluate multiple analysts' price targets along with their earnings estimates, investors perceive the aggressive analyst as acting more strategically under joint evaluation than under separate evaluation. Our findings suggest that jointly evaluating multiple analysts' price targets with other related information, such as earnings estimates, can reduce the likelihood that investors would be overly influenced by aggressive analysts.

Recent management trends highlight two techniques firms use to motivate employee effort: (1) fostering employees' organizational identification (OI) and (2) offering employees tangible rewards such as gift cards instead of cash rewards. We use three studies to examine how OI affects employees' reward valuation and how such effects differ depending on the reward type. Study 1 is an experiment, demonstrating that increasing OI increases the emphasis participants place on a reward's symbolic value, which then increases the total value of the reward—to a larger extent when the reward is tangible than when it is cash. Study 2 is an experiment, providing evidence that Study 1 results are robust to using a tangible reward that is not socially consumed, that is selected either by the firm or by the employee, and that is either a good or poor fit with the employee's personal preference. Finally, Study 3 is a survey, asking respondents about actual rewards they received from their current employer and capturing their actual OI with their current employer. Results in Study 3 are inferentially similar to those in Study 1 and Study 2, albeit stronger for rewards of smaller monetary value. Collectively, these results highlight the particular benefit of strong OI on how employees value tangible rewards relative to cash rewards, which should be of interest to incentive system designers.

ABSTRACT Using a mixed‐methods approach, I investigate how the terms that firms use to label non‐GAAP earnings interact with investors' scrutiny of non‐GAAP reporting to affect investors' information search behavior and investment decisions. This study informs regulators, who have expressed concern over the mislabeling of non‐GAAP measures, and managers, who are often criticized for their misuse of discretion in non‐GAAP reporting. I first provide descriptive evidence on the non‐GAAP labels used in practice, followed by a survey to understand what investors believe these labels convey about earnings quality. Finally, drawing on theory from psychology, I predict and then find in an experiment that investors who are more likely to scrutinize non‐GAAP reporting are not affected by non‐GAAP labels when deciding to seek out the non‐GAAP reconciliation, and react positively to appropriately used labels. However, investors who are less likely to scrutinize non‐GAAP reporting rely on the cue provided by the label when deciding whether to seek out the non‐GAAP reconciliation, and are more likely to be misled by inappropriately used labels. For regulators, these findings validate concerns related to the mislabeling of non‐GAAP measures and suggest increased non‐GAAP scrutiny helps counteract mislabeling. For managers, these findings suggest investors react favorably to the appropriate use of discretion in non‐GAAP reporting.

ABSTRACT Enforcement of non‐compete agreements could affect executives' and directors' incentives to profit from their information advantage. This is because excessive trading profits could result in job termination, which would trigger the restrictions imposed by the non‐compete agreements. We find that executives' and directors' insider trading profits from sales are lower for companies headquartered in states with greater enforcement of non‐compete agreements. The path analyses suggest that high enforcement of non‐compete agreements disincentivizes managers to profit from their information advantage to avoid the possibility of job termination and the cost of job terminations. We also find that insiders in companies headquartered in states with greater enforcement of non‐compete agreements are less likely to exploit their information advantage by timing their sales before unfavorable corporate earnings announcements. The results suggest that enforcement of non‐compete agreements reduces executives' and directors' incentives by imposing costs on future outside employment opportunities.

This study investigates the financial and operational implications of enterprise systems (ESs) in corporate risk management. Using matched difference‐in‐differences analyses based on ES implementation events, we document a significant reduction in the volatility of operating cash flows following ES implementations. We further show that ES implementers have better post‐implementation operational efficiency than matched non‐ES firms and better manage sales, costs of sales, working capital, and operating expenses to reduce operating cash flow volatility. Consistent with the benefits of lower cash flow volatility documented in prior literature, we find ES implementers demonstrate higher investment efficiency, lower reliance on external financing, and higher debt capacity post‐ES‐implementation than the matched non‐ES firms. Our study sheds light on the economic benefits of utilizing ESs in corporate risk management and in so doing responds to the paucity of empirical research in this area.

There is concern that rather than critically deliberating specific circumstances, auditors focus on selecting and documenting defensible audit positions. Currently, subordinate auditors perform tasks mindful that they will be accountable for their work both inside (e.g., partners) and outside (e.g., PCAOB) the firm and adopt “implementation intentions” based on previous review experiences to guide their performance. In the context of fraud‐detection planning, we consider an alternative approach in which subordinate auditors work under contingent reward agreements under which they will be compensated for effective fraud‐detection plans. Lacking an anticipated course of action, they invoke a “deliberative mindset” in order to create a task strategy. In an experiment, auditors completed a fraud‐detection planning task under contingent rewards, accountability, or anonymity. We find that auditors operating under contingent rewards used deliberative mindsets. They were better able to identify potential fraud, select more effective procedures, and plan more hours for effective procedures. Auditors under accountability completed the planning task based on implementation intentions. They focused on broadly increasing audit hours across procedures, including allocating significantly more hours to less effective procedures. Mediation analysis shows that improved planning performance resulted from the use of deliberative mindsets and not implementation intentions.

The stated goal of the SEC Whistleblower Program introduced as part of the Dodd‐Frank Act was to deter securities violations and thereby to strengthen investor protection. We document significant reductions in the likelihood of financial reporting fraud by US firms following the introduction of this program. The reductions are robust to controlling for other regulatory changes in the Dodd‐Frank Act and economic trends. Given that employees of firms with weaker internal compliance and reporting programs are more likely to report irregularities directly to the SEC rather than internally, we predict and find that these firms are more likely to change their reporting behavior. We also show that the observed reductions are attributable to an improvement in internal whistleblower programs and the hiring of more capable audit committee members after the program's inception. Collectively, these findings provide important large‐sample evidence of significant benefits of the SEC Whistleblower Program for deterring financial reporting fraud and of the efficacy of bounty‐type whistleblower programs.

In recent years, firms reporting revisions of prior financial statements outnumber those reporting restatements. Misstatements that are material to prior periods are required to be reported as restatements, whereas immaterial errors can be reported as revisions. Based on SEC guidance and widely used materiality benchmarks, I find a significant percentage (29%) of revisions are suspect in that they meet at least one materiality criterion. These suspect revisions are 15% to 29% more likely to be reported when managers have a strong incentive to avoid restatements—when they face the threat of a compensation clawback for reporting a restatement. This result is especially salient when the clawback policy does not require misconduct for recoupment and when the error correction significantly reduces prior period net income. Overall, this evidence suggests that some managers use materiality discretion opportunistically to report misstatements as revisions instead of restatements.

Social skills are important but difficult to measure. So far, few empirical studies have examined the effect of social skills on the performance of professionals. Using the number of LinkedIn connections as a proxy for social skills, we investigate the effect of financial analysts' social skills on their performance. We use multiple ways to validate the measure of social skills and show that analysts with better social skills produce more accurate earnings forecasts and that their stock recommendations elicit stronger market reactions. Furthermore, these socially skilled analysts are more likely to be voted as All‐Star Analysts. This study provides the first large‐sample evidence highlighting the importance of social skills on financial analysts' performance.

ABSTRACT This study examines boardroom connections that form when corporate executives sit on mutual fund boards. These connections have the potential to facilitate information flow that informs fund investment decisions. I find that fund trades in the executive's firm anticipate future earnings news and stock returns during the period that the fund and firm are connected. The evidence is consistent with a broad scope of information being transferred through the connections, implying the potential for these connections to have an economically significant impact. For example, trades in the executive's firm predict returns both inside and outside of the earnings announcement period, and trades in stocks in the same sector as the executive's firm also predict returns. This study highlights the potential for the role of fund directors to extend beyond their formal monitoring responsibilities and act as conduits of information.