The language of US corporate environmental disclosure

We rely on prior work in environmental disclosure and corporate impression management to investigate whether there are self-serving biases present in the language and verbal tone used in corporations’ environmental disclosures. Specifically, we argue that the degree of bias in these narratives varies systematically based on firm environmental performance, hypothesizing that disclosures of worse environmental performers exhibit significantly more “optimism” and less “certainty” than their better-performing counterparts. We test our two hypotheses using a cross-sectional sample of corporate environmental disclosures contained in US 10-K annual reports. Utilizing the content analysis software DICTION to determine “optimism” and “certainty” scores for the disclosures, we find empirical support for both hypotheses. Our study contributes significantly to research in environmental disclosure by investigating bias in the use of language and verbal tone as a tool for managing stakeholder impressions and by finding empirical support for this role. Thus, the language and verbal tone used in corporate environmental disclosures, in addition to their amount and thematic content, should be considered when investigating the relation between corporate disclosure and performance.     

Technical analysis as the representation of typical cognitive biases

The present research provides a justification for the popularity of the technical analysis. It finds that financial analysts firmly discriminate between two types of technical signals—those based on typical cognitive biases and “empty” signals that sound like a technical analysis but are without any connotation with psychological inclinations.At the same time that they treat them differently, different analysts rate these items very similarly. These results suggest that the popularity of technical analysis is associated with its relation to the typical cognitive biases of humans.     

“Black Swans” before the “Black Swan” evidence from international LIBOR–OIS spreads

The LIBOR–OIS spread is a closely monitored indicator of the financial health of economy. Previous research has used this spread to identify and anticipate abrupt changes in financial markets. Taylor and Williams (2009) refer to the drastic increase in the US LIBOR–OIS spread on August 7th, 2007 as a “Black Swan” in the money market. In this paper, rather than rely on visual observations of “Black Swans” we estimate them using Bai and Perron’s (1998) procedure. We estimate structural breaks, Granger causality tests, and innovation accounting in international LIBOR–OIS spreads and a CDS index to better understand their dynamics during the recent crisis. Our results reveal that “Black Swans” appeared in smaller economies prior to that in large ones during the financial crisis. In addition, we find that only shocks to the US LIBOR–OIS spread has any statistically significant effects after 30 days.     

Web disclosure and the market for charitable contributions

Nonprofit organizations face intense competition in the market for charitable contributions. Increasingly, donation decisions are made online, and organizations have responded by implementing substantive Internet disclosure and reporting regimes. We posit here that the voluntary disclosure of financial and performance information inherent in these regimes provides additional relevant information to a broad array of market participants, and thus has a positive impact on the receipt of charitable contributions. We test our hypotheses on a random sample of 400 US nonprofit organizations by building on the well established economic model of giving (Weisbrod and Dominguez, 1986), in which donations serve as the proxy for demand. Our central research question is thus: Are donors willing to “pay” for Web disclosure? Results indicate a positive relationship between the level of charitable contributions and the amount of disclosure provided by an organization on its website; however, performance and annual report disclosure are more important than financial disclosure, and performance disclosure has the biggest impact in organizations that are less reliant on donations.     

The Role of Financial Incentives in Balanced Scorecard‐Based Performance Evaluations: Correcting Mood Congruency Biases

Moods are low‐intensity affective states that individuals bring to a decision, and may be especially important when the balanced scorecard (BSC) is used for performance evaluation purposes. We propose that financial incentives can motivate decision‐makers to correct mood congruency biases, in which judgments and decisions are consistent with moods. In experiment 1, participants rated the performance of one division manager based on two accounting measures and another manager based on a 16‐measure BSC; there were mood congruency biases at both levels of information load. Financial incentives to make benchmark‐consistent judgments eliminated bias in the former condition but not in the BSC condition. In experiment 2, incentives were offered and performance evaluations were based on an eight‐measure BSC; mood congruency bias was eliminated. Results suggest that management control systems, specifically financial incentives, should be included in future affect correction research.     

National differences in incentive compensation practices: The differing roles of financial performance measurement in the United States and the Netherlands

This paper describes the findings of a study aimed at providing an international replication of a US-based study by Gibbs et al. [Gibbs, M., Merchant, K., Van der Stede, W., & Vargus, M. (2004). Determinants and effects of subjectivity in incentives. The Accounting Review, 79(2), 409–436; Gibbs, M., Merchant, K., Van der Stede, W., & Vargus, M. (2006). The structure of incentive contracts: Evidence from auto dealerships. Working Paper, University of Chicago, University of Southern California, London School of Economics and University of Texas-Dallas] focused on the incentive compensation practices of firms in the automobile retailing industry. The purpose was to determine the extent to which these practices and their effects were similar across countries. Theory provides conflicting predictions as to whether international practices should reflect a situational “best fit” or “global best practices.” We collected a dataset comparable to that of Gibbs et al. from Dutch automobile retailers. The findings reveal dramatic differences in practices across the two countries. As compared to the US firms, the Dutch firms are much less likely to provide their managers with incentive compensation in any form. Where Dutch firms do offer incentive compensation, the payouts are smaller and their bonus awards are less likely to be based on profit measures of performance. But where the Dutch firms use incentive compensation, their performance/reward functions are more complex. Moreover, unlike in the US firms, in the Dutch firms the effects of the use of incentive compensation on net profit and pay satisfaction are negative.     

The impact of strategy communications, incentives and national culture on balanced scorecard implementation

Professionals are challenged daily with difficult decisions. Capital budgeting decisions are one type of difficult decision, especially in firms that embrace a Balanced Scorecard management philosophy. In these firms, the decision maker frequently must choose among multiple options on the basis of multiple criteria with no one option dominating across all criteria. Not only must the decision maker evaluate each option on each criteria, the decision maker also must weigh the relative importance of each criteria when making a final judgment. When faced with difficult decisions, decision makers will resort to various coping behaviors, such as decision avoidance or delay, status quo bias, deferral to others' preferences, or reliance on decision aids. In a Balanced Scorecard environment, one important type of decision aid is the strategy map. The ambiguity introduced by multiple options and multiple criteria also creates a condition in which the subjective biases of the decision-maker can easily manifest in the absence or despite decision aids. Among those potential biases are self-interests and national culture. In this study we examine the effects on capital budgeting decisions of two common types of strategy maps as well as incentive effects and national culture. An objective of Balanced Scorecard management practices is to overcome a common North American fixation on short-term financial outcomes. Recent research submits that an appropriate strategy map will facilitate that end by overcoming certain other cognitive limitations (such as fixation on common metrics). Our inquiry will examine whether biases related to self-interests and national culture persist in the presence of two common strategy maps. A behavioral experiment was conducted in which 140 MBA students from Spain and the U.S. with average work experience of 10 years participated. Findings were that significant fixation on short-term financial outcomes persists in the presence of one common strategy map, but not in the presence of an alternate common strategy map, and that incentive and national culture biases persist in the presence of both. In addition, all three experimental variables exhibited significance and equivalent influence, although prior research has only addressed the influence of incentives.     

The Great Recession: US dynamics and spillovers to the world economy

This paper provides an empirical investigation of both the within-US and international channels of transmission of macroeconomic and financial shocks by means of a 50-country macroeconometric model (estimated over the 1980-2009 period), including measures of excess liquidity and financial fragility, specifically designed in order to evaluate the relevance of the boom-bust credit cycle view put forward as an interpretation of the recent “Great Recession” episode. We find that such a view is consistent with the empirical evidence. Moreover, concerning the real effects of financial shocks within the US, we detect stronger evidence of an asset prices channel, rather than a liquidity channel. Concerning the spillovers to the world economy, we find that while financial disturbances are transmitted to foreign countries through US house and stock price dynamics, as well as excess liquidity creation, the trade channel is the key trasmission mechanism of real shocks.     

Financial contagion in the laboratory: The cross-market rebalancing channel

We present the results of the first experimental study of financial markets contagion. We develop a model of financial contagion amenable to be tested in the laboratory. In the model, contagion happens because of cross-market rebalancing, a channel for transmission of shocks across markets first studied by Kodres and Pritsker (2002). Theory predicts that, because of portfolio rebalancing, a negative shock in one market transmits itself to the others, as investors adjust their portfolio allocations. The theory is supported by the experimental results. The price observed in the laboratory is close to that predicted by theory, and strong contagion effects are observed. The results are robust across different market structures. Moreover, as theory predicts, lower asymmetric information in a (“developed”) financial market increases the contagion effects in (“emerging”) markets.     

Banking system control,capital allocation,and economy performance

We observe less efficient capital allocation in countries whose banking systems are more thoroughly controlled by tycoons or families. The magnitude of this effect is similar to that of state control over banking. Unlike state control, tycoon or family control also correlates with slower economic and productivity growth, greater financial instability, and worse income inequality. These findings are consistent with theories that elite-capture of a country’s financial system can embed “crony capitalism.”     

Does it really pay to be green? Determinants and consequences of proactive environmental strategies

This study examines what factors affect firms’ decisions to adopt a proactive environmental strategy and whether pursuing proactive environmental strategies leads to improved financial performance. Using longitudinal data from 1990 to 2003 for the four most polluting industries in the US (Pulp & Paper, Chemical, Oil & Gas, and Metals & Mining), this research empirically models the causal relations between firms’ environmental performance and their financial resources and management capability. Our results show that positive (negative) changes in firms’ financial resources in the prior periods are followed by significant improvements (declines) in firm’s relative environmental performance in the subsequent periods. In addition, we also find that significant improvements (declines) in environmental performance in the prior periods can lead to improvements (declines) in financial performance in the subsequent periods after controlling for the impact of Granger causality. Finally, 3SLS analysis suggests that the positive association between environmental performance and financial performance is robust. Overall, our results are consistent with predictions of the resource-based view of the firm and indicate that although becoming “green” is associated with improvement in firm performance, such a strategy cannot be easily mimicked by all firms.     

The genetics of investment biases

For a long list of investment “biases,” including lack of diversification, excessive trading, and the disposition effect, we find that genetic differences explain up to 45% of the remaining variation across individual investors, after controlling for observable individual characteristics. The evidence is consistent with a view that investment biases are manifestations of innate and evolutionary ancient features of human behavior. We find that work experience with finance reduces genetic predispositions to investment biases. Finally, we find that even genetically identical investors, who grew up in the same family environment, often differ substantially in their investment behaviors due to individual-specific experiences or events.     

Federal Reserve financial crisis lending programs and bank stock returns

We use an E-GARCH model to estimate the wealth effects of Federal Reserve lending during the financial crisis to Investment banks (I-Banks), “Too Big to Fail” (TBTF) banks, and “traditional” commercial banks. Borrowing from the Term Auction Facility program has negative wealth effects for all banks and I-banks in particular. We also find that the market view of the liquidity programs changed across the sample sub-periods. I-Bank and TBTF bank borrowing from the discount window is initially viewed positively, however continued use of the discount window and the Term Auction Facility was generally (though not universally) viewed negatively. Commercial Paper Funding Facility program participation is consistently positive only for traditional banks and programs that focus on the purchase of specific securities (e.g., commercial paper) to address specific problems also appear to primarily benefit traditional banks. The inconsistency of results across the time periods of the crisis is telling as market participants struggled to discern what access to these programs meant.     

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.     

Effect of perceived conflict among multiple performance goals and goal difficulty on task performance

Contemporary performance measurement systems, such as the balanced scorecard, often advocate the use of an array of financial and non‐financial measures. Despite many claimed advantages for these systems, recent research shows that the inclusion of multiple performance measures sometimes has undesirable effects. The present study examines one of the potential problems of implementing these systems; namely, the impact of perceived goal conflict on task performance. Using survey data from employees working in multiple call centres in a telecommunication company, we find that perceived goal difficulty increases perceived goal conflict. Additionally, perceived goal difficulty also has a negative, indirect effect of task performance, through the mediating role of perceived goal conflict. Our results have important implications for both the research literature and the designers of performance measurement systems.     

Institutional thinking: The case of financial instruments

Although financial accounting practices and disclosures are frequently altered, such changes appear to be constrained by “institutional thinking”. In this paper, I explore an instance of institutional thinking — the emergence and development of an FASB project on financial instruments. This study illustrates the programmed ways in which accounting problems are constructed and resolved, a process that shadows certain questions while emphasizing the traditional accounting concerns with disclosure, recognition and measurement.     

Misreaction or misspecification? A re-examination of volatility anomalies

Existing research examines the impact of volatility shocks on the relative pricing of long-term vs. short-term options and documents patterns of “short-horizon underreaction” and “long-horizon overreaction” in the options market. These studies, however, rely on implied volatilities derived from specific option-pricing models and are thus subject to model specification errors. In this paper, we show that these anomalous patterns are the result of model misspecification as opposed to market misreaction. We provide evidence that these patterns are consistent with, in both direction and magnitude, inherent biases in the misspecified models. We also apply a model-free approach to re-examine the anomalous patterns and find no evidence of market misreaction.     

Shareholder value efficiency in European banking

This paper advances the studies of [Hughes, J.P., Lang W.W., Mester L.J., Moon C.G., Pagano M.S., 2003. Do bankers sacrifice value to build empires? Managerial incentives, industry consolidation, and financial performance. Journal of Banking and Finance 27, 417–447] by developing a new measure of bank performance which we refer to as “shareholder value efficiency” – a bank producing the maximum possible Economic Value Added (EVA), given particular inputs and outputs, is defined as “shareholder value efficient”. This new efficiency measure is estimated using the stochastic frontier method focussing on the French, German, Italian and UK banking systems over the period 1997–2002 and includes both listed and non-listed banks. We find that European banks are, on average, 36% shareholder value inefficient. Shareholder value efficiency is found to be the most important factor explaining value creation in European banking, whereas cost and profit efficiency only have a marginal influence.     

Traditional accountants and business professionals: Portraying the accounting profession after Enron

Society’s perception of the legitimacy of the accounting profession and its members is grounded in the verbal and visual images of accountants that are projected not only by accountants themselves but also by the media. The paper uses the critical literature on stereotypes to examine how books written for a general readership on Enron and other recent corporate failures portray accountants and accounting, and the implications their authors draw for corporate governance and the survival of the financial system. The paper explores how commentators have analyzed the changing activities of accountants (including the rise of consulting) and have contrasted the personalities of “founding fathers” of the US accounting profession with their early 21st-century successors. The paper concludes that changing stereotypes of accountants are evidence of “negative signals of movement” for accounting as a profession.     

How the Internet affects output and performance at community banks

Internet web sites have become an important alternative distribution channel for most banking institutions. However, we still know little about the impact of this delivery channel on bank performance. We observe 424 community banks among the first wave of US banks to adopt transactional banking web sites in the late-1990s, and compare the change in their 1999–2001 financial performance to that of 5175 branching-only community banks. Whereas today virtually all viable community banking franchises offer the Internet banking channel, studying this earlier time period allows us to make clean comparisons between subsamples of “brick-and-mortar” and “click-and-mortar” community banks. We find that Internet adoption improved community bank profitability, chiefly through increased revenues from deposit service charges. Internet adoption was also associated with movements of deposits from checking accounts to money market deposit accounts, increased use of brokered deposits, and higher average wage rates for bank employees. We find little evidence of changes in loan portfolio mix. Our findings suggest that these initial click-and-mortar banks (and their customers) used the Internet channel as a complement to, rather than a substitute for, physical branches.