Transparency in Hierarchies

We use an agency model to address the benefits and costs of transparency in a hierarchical organization in which the principal employs a manager entrusted with contracting authority and several workers, all under conditions of moral hazard. We define the principal's transparency choices as a decision to allow workers to observe their coworkers’ performances (observability) and as an investment in monitoring worker performance (precision). We find that whereas precision alleviates agency conflicts as expected, observability can exacerbate agency conflicts, especially if the manager's interests are misaligned sufficiently with those of the principal. Our results suggest several testable hypotheses including predictions that opaque performance measurement practices are well suited for small organizational units at lower hierarchical ranks, and in settings where the sensitivity-precision of the available measures is low, workers’ performances are correlated positively, and managerial productivity is modest.     

Coping with ambiguity through the budget: the positive effects of budgetary targets on managers' budgeting behaviours

Much consideration has been given over the years to what may be described as the `negative' aspect of budgeting; that budgets may constrain innovation and learning, and that budgetary pressure may lead to unintended behavioural side effects. In contrast to this, the present study examines the extent to which budgets have a more positive, `comforting' role to play in the individual's work experiences. We argue that managers confronted with uncertainties associated with role ambiguity may respond by becoming positively committed to achieving budgetary targets as budgets offer a source of structure and certainty. We find that the use of budgets as an antidote to role ambiguity is a powerful influence on the manager's budgeting behaviour. We test the strength of this effect and we find that budgetary commitment brought on by the experience of role ambiguity may over-ride the potential for recognised explanatory variables such as leadership style, the expectations of the superior, and occupational socialisation, to inform managers' budgeting behaviours in these circumstances. Budgets, it seems, may be as useful to the individual as they are problematic.     

CEO Horizon,Optimal Pay Duration,and the Escalation of Short‐Termism

This paper studies optimal contracts when managers manipulate their performance measure at the expense of firm value. Optimal contracts defer compensation. The manager's incentives vest over time at an increasing rate, and compensation becomes very sensitive to short‐term performance. This generates an endogenous horizon problem whereby managers intensify performance manipulation in their final years in office. Contracts are designed to encourage effort while minimizing the adverse effects of manipulation. We characterize the optimal mix of short‐ and long‐term compensation along the manager's tenure, the optimal vesting period of incentive pay, and the dynamics of short‐termism over the CEO's tenure.     

On the origin of shared beliefs (and corporate culture)

This article shows how corporate culture, in the sense of shared beliefs and values, originates (often unintentionally) through screening, self‐sorting, and manager‐directed joint learning. It shows that such culture will be stronger among more important employees and in older and more successful firms where employees make important decisions and the manager has strong beliefs. It further shows how a manager's beliefs influence culture, how culture persists despite turnover, and why the suggested link between culture and performance may be a case of inverse causality. It finally shows that, from an outsider's perspective, organizations may tend to overinvest in corporate culture.     

Why do employees take more initiatives to improve their performance after co-developing performance measures? A field study

Performance measurements may stimulate employee initiatives to improve operational performance, especially when employees themselves participate in the development of their own departmental performance measures. Using the theory of planned behavior, we examine why this occurs in a beverage manufacturing company where we helped bottling line maintenance technicians develop measures about the results of their own work. Our analyses are based on qualitative data gathered at 156 meetings, 34 semi-structured interviews, quantitative performance data from the company's information systems, and quantitative questionnaire data. We found that the participatory development process increased employees’ attitude, perceived social pressure and perceived capability to take initiative. Moreover, the departmental performance improved when the jointly developed performance measures were put to use.     

Reliability-Relevance Trade-Offs and the Efficiency of Aggregation

This paper studies how an accountant's method of aggregating information in a financial report is affected by differences in the reliability and relevance of components of the report. We study a firm that hires an accountant to produce a report that reveals information to investors regarding the returns to the firm's past investments. In constructing the report, the accountant must combine information elicited from the firm's manager with other information directly observable to the accountant. The manager's information is assumed to be directly observable only by the manager and to be of superior quality to the other information available to the accountant. Reliability‐relevance trade‐offs arise because as the accountant places more weight on the manager's report, potentially more useful information gets included in the report, at the cost of encouraging the manager to distort his or her information to a greater extent. Capital market participants anticipate this behavior and price the firm accordingly. We show how the market's price response to the release of the firm's aggregate report, the efficiency of the firm's investment decisions, and the manager's incentives to manipulate the soft information under his or her control are all affected by—and affect—the aggregation procedure the accountant adopts. In addition, we identify a broad range of circumstances under which aggregated reports are strictly more efficient than disaggregated reports because aggregation tempers the manager's misreporting incentives. We also demonstrate that, as any given component of the aggregated accounting report becomes softer, the equilibrium level of the firm's investment diminishes and the market places greater weight on the remaining components of the report.     

Financial Reporting and Supplemental Voluntary Disclosures

A standard result in the voluntary disclosure literature is that when the manager's private information is a signal correlated with the firm's liquidation value, mandatory disclosures substitute for voluntary disclosures. In this paper, we assume that the manager's private information complements the mandatory disclosure and show that the content and likelihood of a voluntary disclosure depend on whether the mandatory reports contain good or bad news. This different information asymmetry produces new, testable implications regarding the probability of and market reaction to voluntary disclosures. We also show that changes in mandatory disclosure regulations can have unintended consequences due to their effects on the manager's willingness to voluntarily provide supplemental disclosures.     

Judging Fund Managers by the Company They Keep

We develop a performance evaluation approach in which a fund manager's skill is judged by the extent to which the manager's investment decisions resemble the decisions of managers with distinguished performance records. The proposed performance measures use historical returns and holdings of many funds to evaluate the performance of a single fund. Simulations demonstrate that our measures are particularly useful in ranking managers. In an application that relies on such ranking, our measures reveal strong predictability in the returns of U.S. equity funds. Our measures provide information about future fund returns that is not contained in the standard measures.     

Fund Manager Use of Public Information: New Evidence on Managerial Skills

We show theoretically that the responsiveness of a fund manager's portfolio allocations to changes in public information decreases in the manager's skill. We go on to estimate this sensitivity (RPI) as the R² of the regression of changes in a manager's portfolio holdings on changes in public information using a panel of U.S. equity funds. Consistent with RPI containing information related to managerial skills, we find a strong inverse relationship between RPI and various existing measures of performance, and between RPI and fund flows. We also document that both fund‐ and manager‐specific attributes affect RPI.     

The Impact of Position Difference on Employees’ Organizational Commitment After the Merger of Life Insurance Companies

We investigate the impacts of job position and survey time period on employee’s organizational commitment of insurance company after the merger. Our results show that both job position and survey time period are significant determinants to employee’s organizational commitment. Results also show that there is no interaction effect between survey time period and job position. For each year, during the survey time period, the mean of organization commitment of agent employees is significantly higher than staff employees. The mean difference of organizational commitment between agent and staff employees shrank year by year during the survey time period.     

Is backdating executive stock options always costly to shareholders?

We use a binomial model to investigate the cost to shareholders of backdating employee stock option (ESO) grants to award in‐the‐money rather than at‐the‐money options to a manager. When the expected return of the stock underlying an ESO is sufficiently close to the risk‐free rate, a backdating arrangement can always be structured to simultaneously improve shareholders’ wealth and the manager's utility. The smaller the manager's non‐option wealth, personal income tax rate or risk tolerance, the more likely a backdating arrangement can be welfare improving.     

Rank and file equity compensation and earnings management: Evidence from stock options

The widespread use of rank and file equity‐based compensation suggests that executives believe that rank and file employees can affect firm outcomes, and some research supports this view. If equity‐based incentives influence rank and file employees’ productive efforts, they might also influence their earnings management decisions. We find that increases in rank and file employees’ option‐based compensation—our proxy for equity‐based compensation—are associated with increases in earnings management and that this relation is attributable to real activities (as opposed to accrual) earnings management. Cross‐sectional tests indicate that the relation is stronger when rank and file option compensation is likely to generate greater performance incentives and attenuated in the presence of more intense monitoring. Finally, we explore the role of cash constraints and overvaluation as potential alternative explanations for this relation and find that neither accounts for our results.     

Investment decisions: The trade-off between economic and environmental objectives

While there are broader socio-political, psychological, and structural factors that influence investment decisions (see Harris et al., 2016), in line with the critical approach, this study provides an empirical insight into the notion that financialization, specifically the tendency to prioritise economic over environmental objectives, has a strong bearing on how managers view investment trade-off decisions in relation to sustainability issues. The study empirically investigates this notion by examining the investment trade–off preferences of Australian managers in relation to three decision attributes – economic outcomes (i.e. financial returns), environmental impact (i.e. carbon emissions) and stakeholder pressure to consider environmental issues. We use the discrete choice experimental method to quantify the trade-offs between the above mentioned three attributes. In addition, we also investigate the potential effect of three contingency factors on individual's preferences. Specifically, at the organisational level, we explore the effects of financial and environmental rewards and at the individual level, we explore the effect of environmental consciousness. In line with the financialization hypotheses our results indicate that managers prioritise financial returns over carbon emissions and stakeholder pressures with the preference for financial returns found to be positively associated with rewards for financial performance. However, in line with the pragmatic approach and despite the overall dominance of financial returns, there is evidence that manager's focus on financial returns can be influenced, with the preference for financial returns negatively associated with rewards for environmental performance and environmental consciousness. In addition, while stakeholder pressure was not found to be associated with any of the three contingency factors and, manager's emphasis on carbon emissions was not associated with financial rewards, manager's emphasis on carbon emissions was found to be positively associated with both rewards for environmental performance and environmental consciousness. Therefore, our findings suggest that corporate management have an important role to play, both in respect to the design of performance rewards systems and the recruitment of environmentally conscious managers, in order to promote the sustainability agenda.     

Dupes or Incompetents? An Examination of Management's Impact on Firm Distress

This article examines whether managers impact firm performance. We conservatively define managerial ability as the manager's capacity to deploy the firm's resources. We verify the validity of our metric using a manager–firm matched panel data set that allows us to track managers (CEOs) across different firms over time. We find managerial ability is inversely related to the amount of time a firm spends in distress, the likelihood of a firm's failure, and the cost of failure. These results suggest that the managers of failed firms are less skilled than their counterparts. But even within failed firms there is heterogeneity in the talents of managers.     

The Effect of Personnel Characteristics in the Internal Accounting Control System on Discretionary Tax Accruals: Evidence from Korea

This study examines whether the characteristics of personnel in a firm's internal accounting control system (IACS) and auditor characteristics control managers’ discretionary behaviour for tax planning. The study uses a sample of 4210 firm‐year observations from 2006 to 2014. The results show that managers’ discretionary tax planning cannot be controlled when the personnel in charge of internal accounting control are at an optimum level or higher. On the other hand, when a CPA is included among the personnel, the manager's discretionary behaviour is somewhat controlled. Moreover, the results show that firms audited by a large accounting firm also control the manager's discretionary tax planning to some extent. Unlike previous studies that examine the effects of IACS on discretionary accruals mostly in terms of book income, this study's contribution is an examination of the effects of the characteristics of personnel in IACS on the relationship between discretionary book‐tax conformity accruals and discretionary book‐only accruals that can be used when the manager establishes a tax plan. Additionally, this study also provides indirect evidence that the characteristics of auditors and personnel in charge of internal accounting perform a monitoring role that controls the manager's opportunistic behaviour.     

Socialism and Intrafirm Asset Allocation

We rely on a survey of Swiss firms to document deviation from first‐best for reasons of internal ‘fairness’ when allocating resources. This ‘socialist’ practice is more widespread in smaller than in larger firms. It ignores the reputation and past performance of the managers who apply for funding, but takes into account their hierarchical position and their past use of resources. Socialism is only partially explained by concerns about empire building and managerial optimism, and it is not meant to benefit shareholders.     

Unpacking the notion of subjectivity: Performance evaluation and supervisor discretion

This study puts forward the notion of subjectivity according to supervisor discretion and the organization's subjective performance evaluation rules. This is needed because most studies investigating subjectivity do not distinguish supervisor idiosyncrasies from features of the organization's management control systems. This study uses a survey to capture subjectivity and suggests that subjectivity entails two concepts. One concept is related to the amount of discretion that supervisors can exercise under the organization's current performance evaluation. The other concept concerns supervisor's idiosyncrasies when evaluating subordinates. This study provides evidence that subjectivity is multidimensional and may not represent a single concept. The results suggest that studies investigating subjectivity should treat supervisor discretion and subjective performance evaluation rules separately because of their different associations towards subordinate performance, psychological empowerment, and supervisor-subordinate conflict.     

The expectancy–valence theory revisited: Developing an extended model of managerial motivation

This empirical study examines the relationship between managerial perceptions of elements of the performance measurement, evaluation and reward system (PMERS) and motivation. An extended version of the traditional expectancy–valence (E–V) model is developed to conceptualise the process of motivation at the middle management level. Based on this model, the direct effect of and interplay between the value of rewards, the attainability of targets, the accuracy of measures used to gauge achievement, the transparency of the performance–rewards relationship and managerial motivation are examined. Using structural equation modelling (SEM), the perceptions of 200 plus middle managers in a large, successful company in the financial services sector are analysed. The observed data generally provide a good fit with the structural model. The findings indicate that both extrinsic and intrinsic rewards have a significant positive impact on managerial motivation. However, the value of extrinsic rewards is significantly affected by other elements of the PMERS design, namely the accuracy of the performance measures and the transparency of the performance measures–rewards link. This has important implications for the design of extrinsic reward schemes, and the utilisation of alternative motivational drivers potentially present in the middle manager's job environment.     

The shrouded business of style drift in active mutual funds

This study investigates the motivation and performance consequence of intentional style drift in an exclusively in-house fund management industry in China. With style drift, fund investors are exposed to investment portfolio outside their risk-return preference but are generally unaware that their risk and return expectations are disrupted, and the functioning of the fund market undermined. Our study provides evidence for the first time about the incentive that motivates style drift behavior. We find that style drift increases a fund's subsequent net inflows, thus affirming the maximization of AUM-linked compensation as the motivation for fund manager's style drift behavior. We also find that larger funds have greater incentive to drift. We demonstrate that style drift behavior interferes with the picking of quality stocks to deliver fund performance for fund investors. Style drift as an unobserved risk behavior harms fund investor interest and undermines market integrity.     

Delegation and dynamic incentives

Using an agency model, we show how delegation, by generating additional private information, improves dynamic incentives under limited commitment. It circumvents ratchet effects and facilitates the revelation of persistent private information through two effects: a play‐hardball effect, which mitigates an efficient agent's ratchet incentive, and a carrot effect which reduces an inefficient agent's take‐the‐money‐and‐run incentive. Although delegation entails a loss of control, it is optimal when uncertainty about operational efficiency is large. Moreover, delegation is more effective with production complementarity. We also consider different modes of commitment to yield insights into optimal organizational boundaries.