RATIONAL MODEL OF DECISION MAKING, STRATEGY, AND FIRM PERFORMANCE

The present study tests the proposition that the normative rational model of decision making influences diversification strategy which, in turn, influences the firm’s performance. Questionnaires measuring rational decision making were mailed to 441 large U.S. manufacturing firms with a response rate of 23%. Compustat was used to measure Palepu’s entropy measures of diversification: total, related, and unrelated diversification. The results show a significant positive relationship between top management’s emphasis on rational decision making and diversification as well as a significant negative relationship between diversification and firm performance. Thus, the study shows strong support for the role of diversification strategy as a mediator between rational decision making and firm performance.     

STRATEGIC CHANGE IN THE TURNAROUND PROCESS: THEORY AND EMPIRICAL EVIDENCE

Early corporate turnaround theorists argued that strategic reorientations are central to the recovery process at many declining firms. However, subsequent large-sample empirical studies have reported that performance turnarounds for declining firms are primarily associated with cutback actions that increase efficiency, thus creating a gap between theory and empirical findings. We close this gap by presenting and empirically supporting a model proposing that the extent of strategic change initiated in a successful turnaround varies systematically with a declining firm’s need and capacity to reorient its strategy. Based on our model, we offer explanations for why past large-sample researchers were not able to verify the role of strategic change in the turnaround process and we reassert the adaptive role that strategic reorientations have in the turnaround attempts of declining firms with weak strategic positions. © 1997 by John Wiley & Sons, Ltd.     

On the Determinants of Optimism in Financial Analyst Earnings Forecasts: The Effect of the Market's Ability to Adjust for the Bias

This paper examines whether the documented bias in analyst earnings forecasts is intentional by examining whether it is related to the market's ability to adjust for this bias. For intentional bias to exist it is not enough for analysts to face incentives but rather, analysts should also be willing to respond to these incentives. As the market's ability to adjust for the bias increases, its market effects decrease while analyst reputation costs increase reducing analyst willingness to bias their forecasts. The paper utilizes a firm‐specific design that allows for both the bias component of the forecast error and the market's ability to adjust for the bias to be computed at the firm level. Results suggest that even though forecast error is positive in the latter part of the period under review reflecting overall analyst pessimism, the bias embedded in the forecasts is optimistic throughout the period. More importantly, I find that analyst forecast bias is decreasing in the market's ability to adjust for it. This result provides further evidence that analysts knowingly bias their forecasts and provides support for the existence of reporting bias, in particular. Thus, the evidence provides justification for recent regulatory efforts to increase the objectivity of analyst research reports.     

Environment, Corporate Ideology, and Employee Involvement Programs

Corporations are implementing employee involvement programs in both union and nonunion settings in response to growing environmental pressures. This study examines the relationships among environmental pressures, corporate ideology, and participative practices in union and nonunion settings and tests two industrial relations models. Questionnaires measuring environmental pressures, corporate ideology, and participation were completed and returned by the Vice President of Human Resources (or similar corporate executive) in 159 of the largest manufacturing companies in the United States. Multiple regression results show that environmental pressures exert little effect on corporate ideology, but ideology has a significant effect on participative practices in both union and nonunion settings.     

Criticizing positive accounting theory*

Abstract. One theoretical approach recently emphasized in the accounting literature is positive accounting theory. Synonymous with this theoretical view are the 1978 and 1979 articles published by Ross Watts and Jerold Zimmerman. These two articles prompted criticism from three different perspectives. There are critiques that refer to technical research methods problems, critiques concerned with philosophy of science issues, and critiques centered on the limitations of economics-based accounting research. In their 1990 article, Watts and Zimmerman responded to most of the published critiques. They specifically claimed that methodological criticisms have failed to have any influence on accounting research. This paper provides a critical examination and assessment of these alleged failures by examining two types of critiques, economics-based critiques and those based on issues of the philosophy of science. The critiques discussed include those to which Watts and Zimmerman responded as well as several other critiques that either Watts and Zimmerman failed to discuss or that were not published until after their 1990 article appeared. Positive accounting theory is shown to be applied economic positivism. Tracing the historical background of positive accounting research through its economic roots shows that the “positive” aspect of the Watts and Zimmerman approach is more rhetoric than methodology. It is argued that positive accounting theory does represent a problem shift toward a domain of research that is appropriate for Chicago School economics. A review of the published critiques of positive accounting theory shows that although critiques based on philosophy of science may not be very effective, economics-based critiques that emphasize the limitations of equilibrium-based economic analysis offer a promising avenue for methodological critiques of positive accounting theory. Résumé. Parmi les publications relatives à la comptabilité, celles qui touchent la «théorie de la comptabilité positive» attiraient récemment l'attention. Ross Watts et Jerold Zimmerman, dans leurs articles publiés en 1978 et 1979, adoptaient l'équivalent de ce point de vue théorique. Ces deux articles ont soulevé les critiques, dans trois perspectives différentes. Certaines critiques portent sur le problème des méthodes techniques de recherche, d'autres ont trait aux questions relatives à la philosophie de la science et d'autres encore sont centrées sur les limites de la recherche comptable qui s'appuie sur l'économique. Dans leur article de 1990, Watts et Zimmerman réfutaient la plupart des critiques qui avaient été publiées, invoquant plus précisément le fait que les critiques méthodologiques ne sont pas parvenues à influer sur la recherche comptable. Les auteurs procèdent à un examen et à une évaluation critiques des lacunes que l'on impute à cette théorie, sous forme d'analyse de deux ordres de critiques: les critiques relatives aux fondements économiques et les critiques relatives aux questions touchant la philosophie de la science. Les critiques analysées comportent celles auxquelles Watts et Zimmerman ont répondu ainsi que plusieurs autres critiques que ni Watts ni Zimmerman n'avaient analysées auparavant ou qui n'ont été formulées qu'après la publication de leur article de 1990. Les auteurs démontrent que la théorie de la comptabilité positive équivaut au positivisme économique appliqué. En retraçant les fondements historiques de la recherche sur la comptabilité positive dans ses racines économiques, ils démontrent que l'aspect «positif» de l'approche de Watts et Zimmerman est plus réthorique que méthodologique. La théorie de la compatibilité positive représente toutefois le déplacement du problème vers un domaine de recherche qui convient à l'économique de l'École de Chicago. L'analyse des critiques de la théorie de la comptabilité positive qui ont été publiées démontre que même si les critiques se rapportant à la philosophie de la science ne se sont peut-être pas révélées très efficaces, les critiques se rapportant à l'économique et mettant l'accent sur les limites de l'analyse économique basée sur l'équilibre ouvrent des horizons prometteurs aux critiques méthodologiques de la théorie de la comptabilité positive.     

Compensation Structure and Establishment Quit and Fire Rates

Despite the claims of efficiency wage theory, there is surprisingly little direct evidence that firms that pay higher wages have lower turnover rates than otherwise similar firms. This study uses data on 205 child care establishments to examine the influence of wages, fringe benefits, and the dispersion of wages within a skill class on establishment quit and fire rates. We separately examine one high-skill group (teachers) and one lowskill group (teacher aides). While we find that wages (alone) significantly reduce establishment quit and fire rates, the effect seems too small to be consistent with the efficiency wage hypothesis.