A path model examining the relations among strategic performance measurement system characteristics,organizational justice,and extra- and in-role performance

Economic theory suggests that multiple financial and non-financial measures (i.e., a strategic performance measurement system “SPMS”) be used in compensation contracting to properly direct employees’ attention and motivate behavior aligned with organizational goals. Conversely, linking incentives to the SPMS can result in various dysfunctional behaviors, including game playing by employees, the achievement of unbalanced performance, and the potential of basing compensation on an incomplete performance measurement system. Prior literature has investigated the use of subjectivity in compensation contracting as a means of potentially mitigating these problems; however, subjectivity can introduce other problems including claims of favoritism and bias. Economic theorists have recently begun expanding the traditional agency model to include the notion of fairness or justice. In this study, we obtain data from an organization that uses an SPMS as the basis for the allocation of bonuses and investigate whether characteristics of the SPMS are associated with perceived organizational fairness. Specifically, we hypothesize and show that the extent to which employees perceive that the SPMS reflects a strategic causal model and the degree to which it is technically valid are positively associated with their perceptions of organizational justice. We also provide evidence that heightened levels of organizational justice are the mechanism though which the perceived characteristics of the SPMS are associated with employee performance. The implication is that firms do not necessarily need to introduce subjectivity into the incentive contracting system, but can enhance performance by linking incentive contracts to their SPMS if the system contains characteristics that enhance employees’ perceptions of justice.     

Performance effects of setting targets and pay–performance relations before or after operations

This study investigates both theoretically and experimentally whether and how ex post use of relative performance evaluation (RPE) information in determining performance target levels and profit sharing ratio (PSR) levels affects employer profit performance. Our findings show that employers use RPE information, i.e. peer performance, to adjust performance target levels and PSR levels to reflect economic conditions. More importantly, we find that ex post use of RPE information, i.e. peer performance, improves profit performance. However, ex post adjustment of target levels and PSR levels based on peer performance have different performance implications. Specifically, we find that ex post target contracts improve employer residual profit over ex ante target contracts, while ex post PSR contracts do not improve employer residual profit over ex ante PSR contracts. Our supplemental analyses suggest that this difference is likely because employees are more sensitive to prior period compensation determined by ex post PSRs than ex post targets. Compared to ex post targets that are likely perceived to be fair based on peer performance, ex post PSRs based on the peer performance can be used opportunistically by employers and/or are perceived so by employees, which leads to future repercussions manifested in lower employee effort and employer residual profit.     

The economic effects of expanded compensation disclosures

This paper analyzes the effects of expanded compensation disclosures on manager pay. For identification, I use the introduction of the Compensation Discussion and Analysis (CD&A) in the 2007 proxy season, a significant expansion in required compensation disclosures, to compare manager pay at firms with and without the disclosure in a difference-in-differences analysis. These disclosures are associated with increasing pay, contrary to the conventional wisdom that pay disclosures reduce pay levels via better shareholder monitoring. I hypothesize that enhanced ex ante disclosures of incentive plans reduce boards’ flexibility to make ex post adjustments or to use subjectivity and pressure boards toward more formulaic plans. Both effects impose higher payout risk on managers, leading to increased pay levels. Consistent with this hypothesis, the CD&A introduction is associated with lower likelihood to earn variable cash pay, greater use of formula-based pay, and higher pay at firms with more volatile measures of performance.     

The perceived fairness of performance evaluation: The role of uncertainty

This paper investigates the relationship between performance evaluation procedures and managerial perceptions of procedural justice. We examine two metric and two process characteristics. Metric characteristics are the diversity of metrics used by superiors and their reliance on outcome vs. effort metrics. Regarding process characteristics, we analyse the amount of subordinate's voice in the performance evaluation process, and the extent of formalization of the process. Using uncertainty management theory, we argue that justice effects of performance evaluation procedures may not be direct but are instead conditional on the amount of task uncertainty managers face in the their job context as well as on managers’ tolerance for ambiguity. Using a sample of 178 managers from the banking industry, we find that all four performance evaluation characteristics are related to justice perceptions, yet their effect depends on the level of task uncertainty and tolerance for ambiguity. These findings explain some inconsistencies in extant studies on fairness of performance evaluation procedures.     

ORGANISATIONAL COMMITMENT IN THE POLICE SERVICE: EXPLORING THE EFFECTS OF PERFORMANCE MEASURES,PROCEDURAL JUSTICE AND INTERPERSONAL TRUST

This study aims to investigate whether, and how, the use of performance measures, procedural justice, and interpersonal trust interact to affect organisational commitment of police officers. Drawing on a survey based on a sample of 57 senior officers within a single police force, we find that the use of performance measures, procedural justice, and interpersonal trust are positively associated with organisational commitment. Further analysis reveals that trust between officer and superior mediates the relationship between the use of non‐financial measures and organisational commitment, but procedural justice does not have a mediating effect on commitment. These findings are further explored through selected interviews with respondents.     

The moderating role of board gender diversity on the relationship between firm opacity and stock returns

In this study, we examine the impact of board gender diversity on the association between firm opacity and stock price crash. We utilize the negative shock of the 2007–2008 financial crisis to capital markets to examine whether firms with gender-diverse boards witnessed lower stock price crashes due to their lower opacity ex ante. Using a sample of S&P 1500 firms spanning the period 2005–2008, we employ a difference-in-differences research design and find that firms with high opacity ex ante witness more negative returns ex post. We also find that gender-diverse firms ex ante witness less negative returns ex post. Finally, our analysis reveals the moderating role that board gender diversity plays in the association between firm opacity and stock returns around the financial crisis. We subject our results to a range of robustness checks, including instrumental variable regressions, matched-sample analyses, and a set of falsification and placebo tests. Overall, we provide evidence that board gender diversity is associated with increased transparency in financial reporting, which pays off in times of crisis.     

The impact of subjectivity in performance evaluation practices on public sector managers’ motivation

We conduct an explorative study to investigate the effect of subjectivity in performance evaluation practices on managerial motivation in public sector organisations. Increased subjectivity can enhance motivation if supervisors are able to provide better informational feedback. However, subjectivity is likely to reduce motivation if it reduces perceived mission clarity or negatively affects relations between supervisors and subordinates. Our analysis is based on a survey among 94 public sector managers in the Netherlands. We predict and find that subjectivity in performance evaluation practices reduces perceived mission clarity, which in turn decreases motivation. We also find that subjectivity negatively affects subordinate managers’ trust in their supervisor, which also reduces motivation. Jointly, these results indicate that the negative effects of subjectivity in performance evaluation practices outweigh its potential positive consequences, suggesting that New Public Management's focus on more objective performance measures can indeed be beneficial. By itself, however, this does not automatically imply that more objective systems in general are optimal in all public sector organisations as such systems may have dysfunctional side effects such as distortion of performance measures, gaming or manipulation. In addition, we find that the effects of subjectivity are moderated by organisational characteristics.     

Market discipline during crisis: Evidence from bank depositors in transition countries

The Central European banking industry is dominated by foreign-owned banks. During the recent crisis, for the first time since the transition, foreign parent companies were frequently in a worse financial condition than their subsidiaries. This situation created a unique opportunity to study new aspects of market discipline exercised by non-financial depositors. Using a comprehensive data set, we find that the recent crisis did not change the sensitivity of deposit growth rates to accounting risk measures. We establish that depositors’ actions were more strongly influenced by negative press rumors concerning parent companies than by fundamentals. The impact of rumors was especially perceptible when rumors turned out ex post to be founded. Additionally, we document that public aid announcements were primarily interpreted by depositors as confirmation of a parent company’s financial distress. Our results indicate that depositors react rationally to sources of information other than financial statements; this discovery has policy implications, as depositor discipline is usually the only viable and universal source of market discipline for banks in emerging economies.     

Editor's introduction

Prestige distinctions are critical to any understanding of the US academic community. Past rankings of academic departments of accounting, based on a variety of factors including faculty publications, citations and external perceptions, fail to provide a means of assessing relative prestige. This paper proposes that an accounting department's ability to place its doctoral recipients should serve as the pivotal prestige measurement. As such, prestige becomes an ex anteattribute of the stratification system rather than an ex postproductivity metric. An empirical analysis of accounting faculty placements from graduate schools in the US was conducted as a means of ranking US departments of accounting that offer the doctoral degree. The resultant rankings, also evaluated over time and against programme size, provide a unique opportunity to observe a hierarchy of social judgment.     

Co-opted directors,covenant intensity,and covenant violations

This study investigates how the level of board co-option might affect a borrowing firm's ex ante covenant intensity and ex post covenant violations. As the fraction of co-opted directors (those who joined the board after the CEO assumed office) increases, creditors include more covenant restrictions in their loan contracts, indicating that more co-opted boards are considered as weaker monitors. The results remain robust to various approaches accounting for endogeneity, and are not driven by alternative explanations such as CEO tenure, director inexperience, or CEO's involvement in the nominating committee. Ex post tests reveal that firms with more co-opted boards are more likely to violate loan covenants after controlling for covenant intensity. Non-co-opted independent directors appear to be the most effective monitors in mitigating covenant violations among revolving loans and loans to unrated borrowers.     

Moral hazard,hold‐up,and the optimal allocation of control rights

I examine the optimal allocation of control rights in a model with manager moral hazard, where the manager and investor may hold up each other ex post. The control allocation determines both the likelihood of hold‐up and the agents’ renegotiation payoffs. In equilibrium, only two control allocations are optimal: either exclusive investor control or a contingent control allocation that allows the manager to remain in control if, and only if, interim performance is good. Thus, my model explains why it may be optimal to link control to the firm’s performance such that managers retain control only following good performance.     

The Importance of Adverse Selection in the Credit Card Market: Evidence from Randomized Trials of Credit Card Solicitations

Analyzing unique data from multiple large‐scale randomized marketing trials of preapproved credit card solicitations by a large financial institution, we find that consumers responding to the lender's inferior solicitation offers have poorer credit quality attributes. This finding supports the argument that riskier type borrowers are liquidity or credit constrained and, thus, have higher reservation loan interest rates. We also find a more severe deterioration ex post in the credit quality of the booked accounts of inferior offer types relative to superior offers. After controlling for a cardholder's observable risk attributes, demographic characteristics, and adverse economic shocks, we find that cardholders who responded to the inferior credit card offers are significantly more likely to default ex post. Our results provide evidence on the importance of adverse selection effects in the credit card market.     

The influence of voice and explanation on performance in a participative budgeting setting

This paper examines the relationship between the use of a fair budgeting process and subordinate performance. Organizational justice theory is used to define a fair budgeting process as having two components: the subordinate’s involvement in the budgeting process, voice; and the communication of a rationale for the subordinate’s lack of influence over the final budget target the superior sets, explanation. Results indicate significant performance improvements when voice and explanation are combined as compared to voice alone.     

Reexamining the empirical relation between loan risk and collateral: The roles of collateral liquidity and types

This paper offers a possible explanation for the conflicting results in the literature concerning the empirical relation between collateral and loan risk. We posit that differences in collateral characteristics, such as liquidity, may be associated with the empirical dominance of different risk-collateral relations implied by economic theory. Using credit registry data and a novel identification strategy to control for borrower and lender selection effects allows us to differentiate between the ex ante and ex post theories of collateral. We find that collateral overall is associated with lower risk premiums and higher default rates. The results indicate an important role for collateral in mitigating losses and reducing risk-taking incentives, consistent with ex post theories. Liquid collateral is associated with especially low risk premiums, and these loans perform better than those with illiquid collateral or no collateral. We also find that individual collateral types exhibit significant variation in terms of risk-collateral relations, with some consistent with ex ante theories and others with ex post theories. Our results suggest that the conflicting results in the literature may occur because different samples may be dominated by different types of collateral with different economic characteristics.     

When noise trading fades,volatility rises

We hypothesize and test an inverse relation between liquidity and price volatility derived from microstructure theory. Two important facets of liquidity trading are examined: volume and noisiness. As represented by the expected turnover rate (volume) and realized average commission cost per share (noisiness) of NYSE equity trading, both facets are found negatively associated with the ex post and ex ante return volatilities of the NYSE stock portfolios and the NYSE composite index futures. Furthermore, the inverse association between noisiness and volatility is amplified in times of market crisis. The negative noisiness–volatility relation is also supported by our analysis on the effects of trade size on price volatility. The overall results demonstrate that volatility increases as noise trading declines.     

Information systems, incentives and the timing of investments

The purpose of this paper is to study the effects of introducing information systems into a model featuring managerial incentive problems and investment opportunities that are mutually exclusive over time. In a principal-agent model in which a manager (agent) has superior information about investment costs, we introduce information systems, the signals from which are available to both the manager and the owner of the investment opportunity, which allow the owner to decrease the manager's informational advantage.We examine (i) the characteristics of the optimal information systems; (ii) the effects of such information systems on the owner's investment and compensation choices and on the value of the investment opportunity to the owner; (iii) the effects of such information systems on the timing of investment; (iv) the effects of such information systems on the overall probability of investment; and (v) when the owner might want to improve the information system at a particular point in time.     

How formal performance evaluation affects trust between superior and subordinate managers

An important question in the control literature concerns the role of interpersonal trust in the design and functioning of formal control systems for collaborative settings. In this paper, we argue that subordinate’s trust in the superior depends on the formality of the performance evaluation procedure and that this relationship is mediated by managerial perceptions of justice and feedback. The findings confirm our predictions. Furthermore, we find that formality matters more for trust formation for those managers that are in functions with less contractible outputs.     

Transparency in the food aisle: the influence of procedural justice on views about labeling GM foods

Issues of transparency lay at the center of the debate surrounding the labeling of genetically modified (GM) food products in the USA. These issues include not only the argument that consumers should be allowed to make purchasing choices based on full disclosure of product ingredients but also that they should have access to the process that makes decisions about labeling. This study examines the influence of procedural justice on perceived decision legitimacy and decision support regarding GM food labeling decisions. Using a 2 × 2 factorial design, participants recruited from an online Qualtrics panel (N = 450) were randomly assigned to read a fictitious news article about an agricultural company’s decision about whether to label their food products as having GM ingredients. Articles varied by the company’s labeling decision (label versus no label) and whether the company listened to public input prior to making the decision (public input versus no public input). The results showed significant main effects on decision support and perceived legitimacy for articles that mentioned public input. Specifically, when participants read articles stating that the company made its decision after listening to public input, they were more supportive of the decision and perceived the decision as more legitimate. Moreover, this main effect occurred irrespective of whether or not the company’s decision was to label GM foods. Our results confirm the influence of procedural justice perceptions in fostering support and perceived legitimacy for controversial risk-related decisions.     

The Role of Soft Information in a Dynamic Contract Setting: Evidence from the Home Equity Credit Market

Credit underwriting is a dynamic process involving multiple interactions between borrower and lender. During this process, lenders have the opportunity to obtain hard and soft information from the borrower. We analyze more than 108,000 home equity loans and lines‐of‐credit applications to study the role of soft and hard information during underwriting. Our data set allows us to distinguish lender actions that are based strictly on hard information from decisions that involve the collection of soft information. Our analysis confirms the importance of soft information and suggests that its use can be effective in reducing overall portfolio credit losses ex post.     

Ex ante performance from ex post models of global equity market correlations

Analysis of ex post returns reveals the time series properties of correlations, but ex ante correlations are required for efficient diversification. We find that a time-varying parameter model offers the best fit to ex post global equity market correlations, suggesting changing mean correlations and changing rates of adjustment back to the means. Nevertheless, we do not find improved forecast performance from time-varying parameter models in holdout periods. The added complexity of time-varying models does not translate into lower forecast errors.