Leverage and acquisition performance

From an agency perspective, leverage may have a positive effect on firm performance by limiting managers’ ability to allocate resources to unproductive uses, as well as increasing pressure on them to perform well. Consequently, we might expect leverage to have a positive impact on acquisition performance. However, the increased risks associated with higher leverage, combined with the other risks inherent in an acquisition, could also cause managers to take actions to reduce risk even if doing so is contrary to value maximization. High debt levels might also limit managerial discretion over how resources are allocated during the acquisition process, which can have a negative impact on performance. We investigate the effect of leverage on post-acquisition stock performance and find that post-acquisition performance is decreasing in leverage brought by the target firm and in additional leverage taken on to execute the acquisition. This negative performance is clustered among acquirers who are already financially constrained. Our results are robust to various returns measurement methodologies and to the inclusion of several controls known to predict future returns. Our results also represent viable investment strategies, and suggest that the market underestimates difficulties that arise from acquisition-related increases in leverage.     

Managerial multi-tasking,Team diversity,and mutual fund performance

This study examines the impact of multi-tasking teams on fund performance. We find that while managerial multi-tasking has a negative impact on fund performance, teamwork can mitigate the adverse effect associated with managerial multi-tasking, which is indicative of superior performance of funds managed by multi-tasking teams. More importantly, it is the characteristics of the multitasking team that contribute to these superior results, which can be attributed to network cognitive diversity, suggesting that extended networks, facilitated by indirectly-connected managers via local teammates, can largely enhance the scale of cognitive diversity, thus generating significant gains through information pooling and integration. In assessing possible mechanisms for the observed superior performance, we find evidence of improved decision-making induced by network cognitive diversity through both transmission and sharing of value-relevant information, and speedy information diffusion.     

The discipline of teams

Groups don't become teams because that is what someone calls them. Nor do teamwork values by themselves ensure team performance. So what is a team? How can managers know when the team option makes sense and what they can do to ensure team success? In this article, drawn from their recent book The Wisdom of Teams, McKinsey partners Jon Katzenbach and Douglas Smith answer these questions and outline the discipline that makes a real team. The essence of a team is shared commitment. Without it, groups perform as individuals; with it, they become a powerful unit of collective performance. The best teams invest a tremendous amount of time shaping a purpose that they can own. The best teams also translate their purpose into specific performance goals. And members of successful teams pitch in and become accountable with and to their teammates. The fundamental distinction between teams and other forms of working groups turns on performance. A working group relies on the individual contributions of its members for group performance. But a team strives for something greater than its members could achieve individually. In short, an effective team is always worth more than the sum of its parts. Katzenbach and Smith identify three basic types of teams: teams that recommend things--task forces or project groups; teams that make or do things--manufacturing, operations, or marketing groups; and teams that run things--groups that oversee some significant functional activity. For managers, the key is knowing where in the organization real teams should be encouraged. Team potential exists anywhere hierarchy or organizational boundaries inhibit good performance.(ABSTRACT TRUNCATED AT 250 WORDS)     

How and when do firms translate slack into better performance?

Many studies have tested the impact of organizational slack on performance, and yet little is known about how managers make use of slack, and in what circumstances it is most beneficial. We show that the managers of firms with higher levels of slack tend to overinvest, which will have a negative impact on performance, but at the same time they may innovate, which will subsequently have a positive impact. Our results also indicates slack is more beneficial when the firm has many profitable investment opportunities. We show that different types of slack influence performance differently, the total effect of available slack on performance being positive, whereas that of recoverable slack on performance being negative.     

Accounting comparability and relative performance evaluation in CEO compensation

We investigate whether accounting comparability is associated with the likelihood that CEO compensation is tied to relative accounting performance (e.g., return on assets). We predict that higher accounting comparability increases the risk-sharing benefit of accounting-based RPE because peer firm performance better controls for common risk in RPE firm performance. Thus, firms that have higher accounting comparability with potential performance peers will be more likely to include accounting-based RPE as a component of the total CEO compensation contract. We find support for this prediction using (1) an explicit test design that relies on the ex ante terms of CEO compensation contracts obtained from proxy disclosures, and (2) an implicit design that relies on the actual realizations of CEO compensation. To provide further evidence, we examine the association between accounting comparability and the selection of performance peers when the CEO compensation contract includes an accounting-based RPE component. We find that higher comparability between the RPE firm and a potential peer firm increases (decreases) the potential peer firm’s likelihood of being selected into (dropped from) the peer group. Cross-sectional analyses show that this association is less pronounced, or not present, when the relative performance measure is price-based (as opposed to accounting-based), indicating that these results do not merely reflect a more general role of comparability in all RPE contracts.     

The influence of strategy map communications and individual differences on multidimensional performance evaluations

Multidimensional performance evaluation systems such as the Balanced Scorecard (BSC) were developed to overcome the documented tendency of managers to focus almost exclusively on short-term financial performance measures while disregarding or de-emphasising other short-term and/or long-term non-financial performance measures. Evidence suggests, however, that implementation of many of these systems has not achieved desired outcomes. Cogent communication of a corporation's goals and management's strategy to achieve those goals can be expected to influence employee ‘buy-in’ and the subsequent use or resistance to multidimensional performance measures. In this study we examine the role of strategy maps in communicating goals and strategy. We also examine individual differences (tolerance of ambiguity and functional background) that we believe also influence individuals to be more (or less) receptive to the guidance of strategy maps. An experiment was conducted with 165 experienced professionals enrolled in MBA programmes in Spain and the US. Our experimental results indicate that a strategy map reflecting integrated dependencies can de-bias evaluations of certain groups of individuals, who have high tolerance for ambiguity and have a financial work background. Implications and suggestions for future research are also provided.     

The effects of feedback type on auditor judgment performance for configural and non-configural tasks

This study examines the effect of four different types of feedback (outcome, task properties, cognitive, combined task properties/cognitive) on the risk assessment judgments of auditors on two tasks, one requiring configural cue processing and the other not requiring configural cue processing. Task properties feedback and combined feedback improved performance on both tasks. Outcome feedback was more effective for the non-configural task, while cognitive feedback was more effective for the configural task. We also found that, on the configural task, the effect of cognitive feedback was heightened by lower levels of participant self-insight. Finally, combined feedback was particularly effective in transferring knowledge across tasks. These results have direct practical application for the use of feedback in audit practice. From a theoretical perspective they also help to reconcile earlier mixed results in accounting and psychology.     

Incentive Effects of Assigned Goals and Compensation Schemes on Budgetary Performance

This study examines the combined effects of two management interventions, assigned goals and monetary compensation, on performance in a routine task. It investigates the effects of assigned goals (four goal levels: low, medium, high, impossible) and three types of compensation scheme (fixed-pay, piece-rate and budget-based). A laboratory experiment involving 180 undergraduate accounting students showed that, in some circumstances, assigned goals dominated performance effects while, in other circumstances, monetary incentives played a major role. Over medium to high levels of difficulty, assigned goals had a positive and dominating effect on performance, regardless of type of compensation. When the assigned goal was low, however, performance-contingent pay schemes had an additive effect on performance, while at an impossible goal level, budget-based incentives had a negative effect on performance. Of the interventions tested, the highest performance resulted from using incentive-based compensation when the budget (assigned goal) was relatively low (80% achievable).     

Insider ownership, ownership concentration and investment performance: An international comparison

This article makes two important contributions to the literature on the incentive effects of insider ownership. First, it presents a clean method for separating the positive wealth effect of insider ownership from the negative entrenchment effect, which can be applied to samples of companies from the US and any other country. Second, it measures the effects of insider ownership using a measure of firm performance, namely a marginal q, which ensures that the causal relationship estimated runs from ownership to performance. The article applies this method to a large sample of publicly listed firms from the Anglo-Saxon and Civil law traditions and confirms that managerial entrenchment has an unambiguous negative effect on firm performance as measured by both Tobin's (average) q and our marginal q, and that the wealth effect of insider ownership is unambiguously positive for both measures. We also test for the effects of ownership concentration for other categories of owners and find that while institutional ownership improves the performance in the USA, financial institutions have a negative impact in other Anglo-Saxon countries and in Europe.     

Performance and performance persistence of UK closed-end equity funds

Using a comprehensive data set of almost 300 UK closed-end equity funds over the period 1990 to 2013, we use the false discovery rate to assess the alpha-performance of individual funds with both domestic and other mandates, using self-declared benchmarks and additional risk factors. We find evidence to indicate that up to 16% of the funds have truly positive alphas while around 3% have truly negative alphas. Positive post-formation alphas using fund-price returns depend on the factor model used: there is some positive-alpha performance when post-formation returns are evaluated using a one-factor global model but substantial positive-alpha performance when using a four-factor global model.