Firm-specific Knowledge Research Articles

Cultural dynamics and tenure trajectories: how auditor tenure and culture influence key audit matters in the GCC

PurposeThis study examines the impact of audit partner tenure on Key Audit Matters (KAM) disclosures within Gulf Cooperation Council (GCC) countries. It explores how Hofstede’s cultural dimensions influence this relationship, elucidating the effect of cultural context on auditing practices.Design/methodology/approachUtilizing a sample of 456 non-financial firms in the GCC from 2016 to 2021, the study employs regression analyses to explore audit partner tenure's influence on KAM disclosures and the moderating effects of Hofstede's dimensions of power distance, individualism, masculinity and uncertainty avoidance. This affords a detailed examination of individual and cultural impacts on audit quality.FindingsResults reveal a positive relationship between audit partner tenure and KAM disclosures, suggesting that firm-specific knowledge and industry expertise acquired over a long tenure may enhance auditors' ability to identify and report significant matters. Power distance and uncertainty avoidance amplify this effect, whereas individualism diminishes it. Masculinity does not yield significant results.Research limitations/implicationsThis study underscores the need for auditing standards to reflect the complex interplay of auditor tenure and cultural dynamics in the profession's global landscape.Originality/valueThis research contributes to the literature on audit quality by highlighting the formative role of individual auditors and cultural characteristics in KAM disclosure practices. It is among the first to quantitatively analyse the intersection of audit partner tenure and culture in the GCC. It provides valuable insights for regulators, practitioners and policymakers seeking to enhance audit practices across diverse cultural environments.

Absorptive capacity for market knowledge and knowledge creation outcomes: the case of Thai SMEs

ABSTRACT Absorptive Capacity (ACAP) helps firms acquire, assimilate, and utilise new knowledge. Drawing on crucial managerial perspectives, this study employs a Partial Least Squares-Structural Equation Model (PLS-SEM) to scrutinise the various dimensions of ACAP (e.g. routines versus extra work, organisational culture, leadership, and the trustworthiness of knowledge sources) concerning market knowledge and knowledge creation outcomes (e.g. knowledge creation activities and firm’s private knowledge) among small and medium enterprises (SMEs) in Thailand. The findings indicate that all dimensions, with the exception of extra work, contribute significantly to the augmentation of firm-specific knowledge. However, only routines and knowledge-oriented leadership demonstrate a positive association with knowledge-creation activities. The results suggested that managers and top executives of SMEs should emphasise non-financial rewards more, create knowledge learning routines, and support the learning culture to enhance the ACAP for market knowledge.

Artificial Stupidity and Coping Strategies

While artificial intelligence (AI) is supposed to augment the capability of human beings, paradoxically, it could also dehumanize, suppress, and demobilize them and result in mistakes, failures, and even disasters, actually manifesting itself in some forms of artificial stupidity (AS). This article dissects two basic types of artificial stupidity -- replacement and enslavement -- and suggests corresponding coping strategies. Replacement happens when human efforts and intelligence are entirely replaced by AI, which could result in a lack of human sensitivity, overlooking interdependencies and firm-specificity, and the inability to deal with extreme challenges. Enslavement happens through dehumanization, suppression, and alienation of human users of AI. Coping strategies to remedy AS include improving the training data, machine learning process, and the learning of firm-specific knowledge through supervised learning, fostering AI-user fit and complementarity, and building trust and understanding between AI and its users.

The Over-Concentration of Innovation and Firm-Specific Knowledge in the Artificial Intelligence Industry

The Over-Concentration of Innovation and Firm-Specific Knowledge in the Artificial Intelligence Industry

Employment protection and labour productivity growth in the EU: skill-specific effects during and after the Great Recession

Does employment protection affect sectoral productivity growth differently during crises and recovery periods? This paper sheds light into this question by investigating the relationship between employment protection legislation (EPL hereafter) and sectoral labour productivity growth in the EU in the context of the Great Recession. We consider the crisis and recovery periods, evaluate the relevance of both levels and changes in EPL for productivity growth, and explore the conditioning role played by sectoral differences in terms of cumulativeness of knowledge as well as the skills of the labour force, captured by different levels of education. We find that stricter labour protection reduces labour productivity growth in sectors with a large share of workers with tertiary education, whereas this effect is negligible or positive in sectors where workers with secondary or only primary education are more prevalent (such as agriculture, mining and quarrying). We attribute this to a more intensive labour hoarding in the former, as EPL strengthens labour hoarding in sectors that rely on firm-specific knowledge accumulation and skilled human capital that are difficult to substitute with physical capital. Whereas it is simple to dismiss (and to find later) unskilled employees. They not only can be substituted more easily with capital, but also the costs of their firing are lower, they are overrepresented among workers holding temporary contracts, and they might be unequally informed and able to exercise their rights. This leads to low (if any) labour hoarding and little impact of EPL on labour productivity in such sectors. We also document that the negative effect is prominent only during the crisis, and an increase in the stringency of EPL over an extended period stimulates employers to substitute labour with investments in physical and knowledge capital.

Constrained by Localized Attention Focus: The Negative Effect of Firm-Specific Knowledge on Exploratory Firm Innovation

AbstractIntegrating the resource-based view (RBV) and attention-based view (ABV), this study explores the impact of firm-specific knowledge (FSK) on a firm's exploratory innovation and the role of government support in this process. We argue that firms with a high degree of specificity in their knowledge assets tend to have a more localized attention focus, leading to those firms with less exposure to distant and diverse information and knowledge. Consequently, such firms are likely to have reduced exploratory innovative outputs. However, government resource support could expand a firm's attention focus beyond local searches, mitigating its negative effects. Based on a unique combined two-wave survey and archival data from over 500 firms in China, we find that the level of FSK is negatively related to a firm's exploratory innovation output. We provide evidence that localized attention focus partially mediates the negative effect of FSK on firms’ exploratory innovation. We further reveal that state ownership and state financial support for firm innovation weaken the negative main effect. This study makes important contributions to the literatures on the RBV, FSK, and firm innovation.

Training Initiatives in a Cooperative Network: A Polish Case Study

Paper applies an in-depth example to knowledge-development decisions made at the top levels of firms and their consistency with specific training initiatives arranged with third party educational providers. The unique access provided by the network in Poland at the core of this study yields insights at both levels, an opportunity not often available to academic researchers. Case study is employed. The cooperative training network includes multiple firms (five included here), thirty-eight vocational schools, and a technical university overseeing the program. Data collection including preparatory communication, periodic surveys, and additional in-depth interviews with companies as well as data provided by participating schools though only the quantitative survey results are included in this paper. Both firms and schools, as a proxy for participants, are pleased with training initiatives. Moreover, specific results on training initiatives varying by degree of company control and location (in-house, on-campus) provide insights on how firms can gain more control over the nature of the training (firm-specific knowledge) while still maintaining participant interest (often based on obtaining more industry-specific or occupational knowledge). The research is a case study and so not statistically extendable. The case study also takes place in Poland and describes a unique cooperative network including for-profit firms, vocational secondary schools, and a university. Results should be interpreted with some care, but at the same time provide unique depth and insight. Results provide useful guidance for firms participating in training partnerships as well as for schools joining in such partnerships. Specific feedback on the perception and acceptance of specific initiatives (e.g. internships) has been obtained. Brings together several streams of literature often not discussed in one place. Uses this perspective to analyze a unique cooperative network and provide unique depth to the discussion.

Sarbanes-Oxley and Firm-Specific Knowledge: Evidence from Inhouse Lawyers

Sarbanes-Oxley and Firm-Specific Knowledge: Evidence from Inhouse Lawyers

Common Owner, Uncommon Value: Business Group Ownership and Firm Growth Opportunities

Recent research on business groups has traced their continued growth, despite widespread institutional changes, to their inherent characteristics such as diverse business portfolio and multi-entity structure. We add to this stream of work by focusing on the third important characteristic of business groups, viz., their ownership structure. In sharp contrast to the prevailing view that business group core owners use their control to expropriate minority shareholders in weak institutional environments, we focus on their value adding potential in strengthened institutional environments. We argue that higher levels of controlling ownership positively influence all key drivers of opportunity pursuit by firms, viz., motivation, firm-specific knowledge, and controllability, and hence a firm’s growth opportunities. More significantly, we highlight the common nature of business group ownership that distinguishes them from controlling owners of standalone firms. We argue that this common characteristic together with control enables business group owners to orchestrate resource and information transfer across affiliate firms and importantly leverage their accumulated expertise of making decisions to positively influence growth opportunities of affiliate firms. We test our arguments on a sample of Indian firms during the time period 2001-2019 and find significant support. Our work adds to business group research by investigating a defining yet understudied characteristic of business groups—common ownership. By demonstrating their value adding role, we complement the emerging body of work that looks beyond institutional environment-based explanations for the existence of business groups. Our work also has significant implications for the nascent competence-based view in ownership research.

Interlocking complementarities between job design and labour contracts

In this paper, we study the existence of interlocking complementarities between job design and labour contract at the firm level. Using a formal model, we show that firms face two organizational equilibria: one in which job designs with high routine task intensity are matched with a large use of non-standard contracts; and the other in which low routine task intensity combines with a small use of non-standard contracts. These complementarities exist because while non-standard contracts allow firm to adjust to external shocks, they also provide little incentive to invest in firm-specific knowledge. We test this prediction using linked-employer-employee data from the Emilia-Romagna region. The evidence is consistent with our theory: the use of non-standard contracts is positively associated with routine task intensity at the firm level. This result holds controlling for a wide range of firm-specific and contextual covariates and it is robust to alternative estimation methods (OLS, panel and IV).

Knowledge Management and Innovation Performance a Mediated-Moderation Model

This study aims at explaining innovation performance of organizations as a combination of resources and capabilities. This study starts with asking the question how the relationship between firm-specific knowledge and innovation performance can be explained. To answer this question, insights from the resource-based view (RBV) and the dynamic capabilities approach (DCA) are combined. This leads to a set of hypotheses. The first hypothesis states that knowledge-specificity and innovation performance are positively related. The second hypothesis states that organizational learning practices mediate the relationship between knowledge-specificity and innovation performance. Then, two contrasting hypotheses are formulated stating that the relationship between knowledge-specificity and organizational learning practices of organizations is strengthened or weakened by the level of autonomy. Together these hypotheses lead to a mediated-moderation model of knowledge-specificity and innovation performance. The model is tested using a mediated-moderation analysis on a sample of 673 private organizations in the Netherlands. The analyses show that there is a positive relationship between knowledge-specificity and innovation performance and that this relationship is mediated by the extent to which organizations apply learning practices. Hypotheses 1 and 2 are thus supported. Furthermore, the level of autonomy weakens the relationship between knowledge-specificity and organizational learning practices. This study’s main contribution lies in combining theoretical insights from the RBV and the DCA, applying them to the field of knowledge management, and testing them empirically. The analyses lead to two insights for organizations interested in increasing their innovation performance. First, investing in learning capabilities enhances innovation performance. Second, organizations based on general knowledge can grant work autonomy to employees to enhance their ability to learn.

The Impact of Alliances on Knowledge Growth Within Firms

How do alliances lead to knowledge growth and learning for parent firms? Prior research focuses on knowledge inflows from a partner when a firm enters into an alliance. In this paper, we examine factors that enable firms to make better use of their own knowledge and capabilities as a consequence of alliances. To demonstrate the latter dimension of knowledge growth, we depart from prior research that has focused on cross citations of patents between partners, and instead a study self-citation activity. We examine the effect of four factors on self-citations, each of which reflects distinct learning mechanisms and cooperative dynamics, namely knowledge inflows from the alliance partner, knowledge outflows to the alliance partner, partner characteristics, and alliance governance. Results suggest that knowledge inflows from the partner were positively associated with changes in self-citations in alliance domains, whereas knowledge outflows to the partner had a positive impact on changes in self-citations for the smaller firm in the alliance. In contrast, firm specific knowledge possessed by the partner and equity governance had a negative impact on changes in self-citations in alliance domains. This paper develops a fuller understanding of the learning effects of alliances by highlighting that apart from better utilization of the partner's capabilities, alliances also lead to enhanced utilization of the firm's own knowledge and capabilities in further innovative activity.

The Sheep Watching the Shepherd: Employee Representation on the Board and Earnings Quality

We investigate to what degree employee representatives contribute to the board’s monitoring of earnings quality. We argue that employee representatives have incentives to prevent earnings manipulations motivated by negotiation considerations. Furthermore, they seek risk reducing policies, have a long-term interest in their firm and possess firm-specific knowledge, which in turn can result in improved earnings quality. Employee representation also increases the diversity on the board, which can enhance the board of directors’ internal communication and monitoring. Using a sample of firms listed on the Stockholm Stock Exchange (2006–2014), we find lower abnormal accruals as well as less excessive R&D cuts in firms with employee representation, controlling for alternative model specifications and potential sample selection bias. Moreover, we find less income-decreasing abnormal accruals in firms with employee representatives during the 2010-2011 collective bargaining period. This study also reveals that earnings quality varies with the characteristics of employee representatives. Our findings contribute to the literature on boards’ monitoring and financial reporting quality, as it examines a less noticed aspect of board diversity, i.e. employee representation.

Information related service trade within firms: evidence from firm-level data in Germany

Multi-unit firms have productivity advantages over competitors because of their use of a non-rival asset—firm-specific knowledge—in several units. Using knowledge-intensive services leads to economies of scope in production by multi-unit firms. Such headquarter are usually supplied by parent companies and serve to link different firm units. Headquarter services are difficult to quantify in statistics or surveys, except when they cross-borders and the exchange of services between MNEs and their offshore subsidiaries becomes apparent. This study therefore focuses on IT service imports to explain productivity differences among foreign affiliates of multinational firms in Germany. The authors base the analysis on the population of foreign multinational firms active in Germany and analyze what effect the import of IT services has on their productivity. They find that IT headquarter service flows have significant impacts on foreign affiliates’ productivity in general and US affiliates in particular. As the average IT-service flows (per firm and partner) from parent countries are significantly higher for US affiliates than non-US affiliates, they conclude that the import of IT services from the parent-company is a source of the productivity advantages of US affiliates in Germany.

Big data analytics and competitive advantage: the strategic role of firm-specific knowledge

PurposeWhile advances in big data analytics (BDA) provide valuable business insights and immense business value, many firms find it difficult to gain advantage from their BDA initiatives. Noting the strategic role of firm-specific knowledge, we develop a framework examining the relation between firm specificity of BDA knowledge and competitive advantage. We also examine the dynamic evolution of BDA capabilities and the associated knowledge management strategies.Design/methodology/approachWe review the resource-based view (RBV), capabilities life cycles and absorptive capacity perspectives along with the literature on BDA competitive advantage. Identifying two key BDA factors, application customization and data proprietorship, we develop a BDA competitive advantage framework. We also investigate the absorptive capacities employed by firms to advance their BDA capabilities. We use anecdotal cases to support our theoretical arguments.FindingsWe propose that BDA solutions with vendor-based applications (noncustomized) and public data will not generate firm-specific knowledge and therefore not provide competitive advantage. In contrast, BDA solutions with custom applications and proprietary data will provide high-level firm-specific knowledge and potentially result in sustained competitive advantage. We further suggest the relevant absorptive capacities and the knowledge management strategies for BDA capability development.Practical implicationsOur framework provides managers with insights into how to develop and enhance firm-specific knowledge from their BDA solutions to gain competitive advantage.Originality/valueOur study offers a new BDA firm-specific knowledge framework for competitive advantage.

Changing the Audit Committee Chair: An Analysis of Potential Effects on Audit Quality and Audit Fees

This paper examines the association between changes of the audit committee (AC) chair on audit quality and audit fees. We find that changes of the AC chair are negatively associated with audit quality. This finding indicates that firm-specific knowledge and task-related experience have an impact on audit quality. Furthermore, AC chair changes are positively associated with audit fees. Specifically, audit fees are approximately 7.14 percent higher following a change of the AC chair. However, our analyses show that our findings depend on the accounting experience of the former AC chair. Thus, if the former AC chair has no accounting experience, the negative effect of AC chair changes on audit quality turns insignificant, which indicates that former AC chair’s firm-specific knowledge and task-related experience only improve the effectiveness of the AC when the former AC chair has simultaneously accounting expertise. This result highlights the importance of accounting expertise for AC chair´s monitoring effectiveness. Similarly, if the former AC chair has accounting experience, the effect on audit fees turns insignificant. We, therefore, conclude that new AC chairs are aware of the supervisory shortcomings of former AC chairs without accounting expertise, and, thus, demand a greater degree of audit procedures from the external auditor resulting in higher audit fees. However, it appears that the extension of audit procedures cannot compensate for the monitoring shortcomings associated with the change of the AC chair and, thus, for the decrease of audit quality.

Audit Committee Chair Succession And Financial Reporting Quality: Does Firm-Specific Knowledge Matter?

We investigate whether new audit committee (AC) chairs provide more effective monitoring of the financial reporting process when they have firm-specific knowledge, proxied for by prior service on the firm’s AC. Consistent with practitioner and governance experts’ views on the importance of firm-specific knowledge, we find that firms are less likely to misstate their financial statements when new AC chairs previously served on the AC. This effect is stronger in the first two years of the AC chair’s succession period and when the incoming AC chair has more prior service on the AC. AC chair industry, accounting, and supervisory expertise, as well as prior experience as an AC chair at a different firm, do not compensate for a lack of firm-specific knowledge. These findings contribute to the literature on the AC chair’s role in the financial reporting process, suggesting that AC chair succession planning is important for financial reporting outcomes.

The Impact of CEOs’ Characteristics on Corporate Leverage: Indian Scenario

Ever since the prominent work by Modigliani and Miller (1958), much research has been undertaken in trying to identify the factors affecting the capital structure. Lately, behavioural finance has begun to take hold of a more prominent position in trying to explain aspects of finance which traditional research has failed to clarify. In fact, a growing body of empirical evidence suggests that manager-specific characteristics significantly influence firms' financing decisions. The limited work carried out in lower-middle income countries drives us to thoroughly investigate the role played by CEOs’ characteristics in determining corporate financing decisions.Employing a sample of 307 non-financial firms listed in Nifty 500 index, the panel regression results indicate that CEO tenure is significantly and positively associated to firm’s leverage for the possible reason that a long tenure of CEO reflects strong networks and alliances with important stakeholders that allow the CEO to compose, foster, and support risky initiatives like raising debt. Further, the level of leverage is higher at organizations where CEOs are younger on account of the fact that career and financial securities are imperative to a greater extent for older executives; therefore they may evade risky engagements that may interfere with their securities. The results also display that CEO share ownership has a significantly negative relationship to leverage because these executives have a large share of their personal wealth capitalized in the firm in the shape of firm-specific human capital and common stock holdings. This makes managerial insiders unwilling to use the optimum amount of debt funding for the firm for the reason that additional bankruptcy risk associated with higher levels of debt may arise.The findings thus put forward that recurrent job changes among the senior officials should be discouraged because the subsequent short-term focus and dearth of firm-specific knowledge might promote risk evasion. It shows that elder executives desire a more conservative capital structure whereas younger executives endeavour to take more risk. So, there is a need to bring diversification in the management so as to take advantage from the skills and services of the young. The inverse association between CEO share ownership and firm leverage specifies that board of directors and the shareholders should be stringent in checking managers to make sure they perform as per the interests of shareholders. It seems that while making capital structure decisions risk seeking behaviour favouring high corporate leverage is important and should be encouraged.

Minding the gap: the effect of CEO underpayment on firm-specific knowledge

PurposeThis study aims to build on equity theory to assess the effect of chief executive officer (CEO) underpayment on the accumulation of firm-specific knowledge, accounting for the moderating effects of the CEO compensation gap and the clarity of the board’s informal hierarchy.Design/methodology/approachThis study starts with all firms listed in the Execucomp database for the period 1992 to 2006. Then, all data sources are merged and entries with missing information are excluded. The final data set used for model estimations includes 1,152 firm-year observations. The command xtreg in Stata 12 with the fixed-effect option (fe) is used to estimate the relationship between CEO underpayment and firm-specific knowledge.FindingsThis study proposed and examined the role of CEO underpayment in discouraging CEO willingness to invest firm-specific human capital and, accordingly, to adopt a strategy of accumulating lower levels of firm-specific knowledge assets. The empirical analyses strongly support this argument. Moreover, CEO compensation gaps and the informal hierarchy of boards negatively moderated this relationship. That is, CEO underpayment had a weaker negative effect on firm-specific knowledge when the CEO compensation gap and the clarity of the board’s informal hierarchy were high.Originality/valuePrior studies from the knowledge-based perspective have focused on the importance of firm-specific knowledge in enabling a firm to achieve superior financial performance. However, relatively little attention has been paid to CEOs’ willingness to accumulate firm-specific knowledge. The present study contributes to the knowledge-based view of the firm. This study integrates equity theory with the knowledge-based view of the firm by highlighting how unfair compensation of CEOs may discourage them to fully realize a firm’s potential to generate specific knowledge. By incorporating the fairness issue of CEO compensation into the knowledge-based view, this study contributes to a deeper understanding of the origins of firm-specific knowledge.

The Importance of Director External Social Networks to Stock Price Crash Risk

Prior research documents that information transmitted via director networks affects firms’ policies and real economic activities. Given a manager’s potential monopoly over firm information, it is important to analyze whether information transmission through director social networks undermines the manager’s control. Specifically, we explore whether information flow through director networks influences managers’ ability to hoard bad news. We predict and find that the extent of external connections of the board of directors is negatively associated with future stock price crash risk. Additional analysis implies that this evidence is driven by firms with more powerful executives, with weaker auditor monitoring, or subject to strong investor protection, and by directors with greater monitoring incentives or responsibilities and directors with less firm-specific knowledge. Collectively, our research lends empirical support for the monitoring view under which better informed directors narrow the scope for bad news hoarding evident in stock price crash risk. In another series of tests, we fail to find evidence consistent with the information leakage view under which directors pass sensitive firm-specific information to connections who trade on the information before its public release. Other analysis helps dispel the concern that the endogenous match between directors and companies is spuriously responsible for our core results. Our empirical findings have important implications on how social networks affect the proper functioning of capital markets.