Knowledge that Transforms

The firm‐level bullwhip effect is the amplification of demand uncertainty along a supply chain—that is, fluctuations in production (for manufacturing firms) or purchases from suppliers (for retailers or wholesalers) in a firm tend to be greater than its demand fluctuations. We predict that the bullwhip ratio (a proxy for the bullwhip effect) amplifies the relation between demand uncertainty and cost structure. We expect this amplifying effect because the bullwhip ratio determines the extent to which demand uncertainty translates into uncertainty in production or purchases, which, in turn, affects cost structure. Using data from public US firms over the 1990–2020 period, we find results consistent with our prediction. Specifically, we find that both the negative relation between demand uncertainty and cost elasticity in the manufacturing sector and the positive relation between the two in the retail/wholesale sectors are stronger for firms with higher bullwhip ratios. We contribute to the literature on cost structure by highlighting the important role of the bullwhip effect in cost structure decisions.

Building effective corporate culture is challenging as it requires senior managers to embed shared values within the firm. Yet some firms can do so, and some cannot. This study examines whether managers' career preferences influence manager‐employee value misalignment and weaken corporate culture. Career preferences for job‐hopping provide incentives for managers to signal their leadership quality in the labor market. We capture managers' and employees' attention allocation across different cultural values using data from conference calls and Glassdoor. We predict and find that job‐hopping managers direct their attention away from soft cultural values (e.g., respect and integrity) that are less observable by the external labor market. Furthermore, job‐hopping managers who pay insufficient attention to soft cultural values fail to address the concerns that employees have in their everyday work, resulting in lower overall employee culture ratings. Our study highlights the significance of managers' career preferences in shaping different cultural values and offers implications for firms selecting senior managers.

We examine shareholders' perceptions about how external tax advisors contribute to corporate tax planning. As residual claimants of corporate tax planning, shareholders benefit from lower corporate taxes, but also bear the financial and reputational costs of subsequent tax enforcement. Despite the influential advisory role of external tax advisors in corporate tax planning, existing research on how shareholders perceive this role is limited. Using event study methods and exploiting the heightened regulation of tax advice through the covered opinion rules as a setting, we observe average and cross‐sectional stock returns consistent with shareholders perceiving external tax advisors as contributing unfavorably to tax planning by promoting excessively risky strategies. We further find that risky and overall tax planning declined across firms after the enactment of the rules, consistent with shareholders' perceptions about tax advisors' contributions to firms' tax planning. Overall, our findings contribute to research on shareholder perceptions and valuation of tax planning, and have important implications for practice, where regulatory oversight of external tax advisors remains a significant concern.

We use the adoption of General Accounting Standards Board Statement No. 34 (GASB 34) to examine whether disclosing information in states' financial reports influences their investment decisions. GASB 34 requires governments to report on general infrastructure assets and permits either the standard depreciation approach or the modified approach. The modified approach requires additional disclosures, a step which we argue promotes greater transparency about a government's infrastructure and can potentially facilitate infrastructure investment decisions. We find a robust positive association between the modified approach and investment in infrastructure maintenance. Additional evidence demonstrates a more pronounced effect when external monitoring is likely higher and government officials are likely better informed as a result of the increased disclosure. We further find that states using the modified approach are less likely to cut or divert funds intended for infrastructure maintenance. Our study suggests that disclosing information in governments' financial reports can have real effects, such as mitigating underinvestment in infrastructure maintenance, which governments often defer to future periods in violation of the interperiod equity principle and to the detriment of society.

While research has analyzed how the structure of incentive pay relates to the dispersion of the performance measure distribution, as measured by its variance or volatility, we examine how it relates to the asymmetry of the distribution, as measured by its skewness. In contrast to the variance, skewness affects the relative informativeness of high and low performance about the agent's effort, which determines the relative efficiency of providing rewards and punishments for incentive purposes. Therefore, skewness is an important determinant of compensation convexity, which is determined by the relative holdings of stock and options. Consistent with our analytical and numerical results, we find that the skewness of expected earnings is negatively associated with the convexity of CEO compensation. Our results are economically significant, robust to alternative specifications, and do not appear to be driven by reverse causality. In addition, we find that earnings skewness is negatively associated with total CEO compensation and that this association is driven by lower options‐based compensation. These findings are consistent with CEOs preferring positively skewed performance metrics. Overall, we provide theoretical, numerical, and empirical evidence suggesting that skewness is a more important determinant of the convexity and structure of CEO compensation than volatility.

Despite years of initiatives to improve gender equity in public accounting firms, women continue to be underrepresented at the partner level. Supporting women's aspirations to become partner is important to ensure there are more women in the pipeline of potential partners. However, we argue that challenges during the COVID‐19 pandemic are likely to have negative downstream effects on accounting firms' efforts to improve female partner representation. Therefore, using a survey of 192 certified public accountants (CPAs), we develop and test a theoretical model that examines changes in women's partner aspirations during the COVID‐19 pandemic. Using the conservation of resources (COR) theory, we predict that women experienced disproportionately higher role overload during the pandemic compared to men. We also rely upon COR theory to predict that higher levels of role overload will be associated with weakened partner‐track motivations (i.e., less value placed on the advantages of the partner level and lower willingness to make the sacrifices necessary to pursue the partner level) and weakened partner aspirations. Consequently, we expect that women public accountants experienced weakened partner aspirations through higher role overload during the pandemic. Results support our predictions as we find that women experienced higher levels of role overload, which are associated with weakened partner‐track motivations, which in turn are associated with weakened partner aspirations. In sum, our results suggest that the COVID‐19 pandemic exacerbated pre‐pandemic gender equity challenges within public accounting firms. Fortunately, we also find that higher levels of supervisor support and coworker support help limit role overload and mitigate declines in partner aspirations. We discuss several insights that firms can use to mitigate post‐pandemic declines in women's partner aspirations.

Focusing on multidivisional companies, this paper analyzes the hardening of local forecasts at the intersection of business units (BUs) and the corporate finance function. It investigates how BU controllers, accountable to both local management and the corporate finance function, seek to establish themselves as competent and trustworthy forecasters vis‐à‐vis their functional superiors. Drawing on Goffman's dramaturgical sociology, we demonstrate how these encounters constitute episodes in a multiperiod hardening game feeding into the management of forecast quality and anticipatory control. We illustrate how expressive performances of their competence and trustworthiness are vital for BU controllers to manage vertical information flows between the local and the corporate level and for aligning corresponding interests. Convincing performances can reinforce BU controllers' status as stewards of the forecasting process and help to maintain a “truce” between the local and the corporate level, assuring corporate controllers that the unit's future is under control.

In this paper, we introduce the construct of proactive auditing behaviors to the accounting literature and report the first experimental investigation of their antecedents. Regulators and practitioners agree that proactive behaviors are needed to consistently achieve high‐quality audit outcomes, but also that these behaviors are scarce. Drawing on theory from management, accounting, and psychology, we predict that an environmental factor (autonomy) and a dispositional factor (tacit knowledge) interact to increase a range of distinct proactive auditing behaviors. These behaviors involve responding to evidence that has out‐of‐task implications, coordinating with clients to acquire task‐related evidence, and two forms of coaching junior auditors. As predicted, we find that auditors are more proactive when they have both higher autonomy and higher tacit knowledge than when they lack either or both factors. Our theory and findings inform academics, regulators, and practitioners about the types of work environments and policies that can promote auditor proactivity successfully.

We develop a composite firm‐year earnings quality score ( EQSCORE ) that uses signals based on fundamental analysis. We obtain a proprietary data set of 613 reports about aggressive reporting practices over 2004–2009 for 230 unique firms from a research firm (RF). From these reports, we identify red flags of poor earnings quality relating to (1) sales quality, (2) margin quality, (3) cash flow quality, (4) corporate governance, (5) audit, and (6) others. We construct the EQSCORE using 51 signals employed by the RF and a novel approach that imitates the RF's process for discovering earnings quality. The EQSCORE outperforms existing composite models of earnings quality in identifying accounting and auditing enforcement releases and restated firm‐years and predicts future stock returns. The corporate governance–related and audit‐related red flags included in the EQSCORE complement accounting‐based red flags and enhance the ability of the EQSCORE to identify firms with poor earnings quality.

We explore the turnover intentions of creative R&D employees and the role of performance management practices in shaping these considerations. Since the success of a firm's R&D efforts hinges on the innovative ideas of its employees, it is crucial to retain particularly creative individuals. At the same time, however, we argue that this is especially difficult because both the higher outside options of creative employees and their specific individual characteristics make them, on average, more likely to leave their company. Most importantly, we suggest that two widely studied performance management design choices (target difficulty and career tournaments) typically used to motivate effort may influence the loss of creative talent. Using survey data from our unique access to R&D employees of a large manufacturing firm and a complementary experiment among business students, we find evidence that creative employees are, on average, more likely to leave their firm. Consistent with creative employees possessing a stronger learning orientation, we also predict and find that this tendency to leave is mitigated by target difficulty (as difficult targets speak to creative individuals' learning orientation) and exacerbated by the intensity of career tournaments (as they reduce team cohesion and, ultimately, undermine learning opportunities).