I consider the optimal contract for an overconfident manager in a principal-agent model with moral hazard where the contract is written on the earnings of the firm. Overconfidence causes the manager to overestimate his ability to affect the outcome of the firm. Overconfidence first reduces cost of agency, and if the level of overconfidence is significant enough, it causes the manager to wager on his wrong beliefs. The accounting system obscures the outcome of the manager's effort, which attenuates the effect of significant overconfidence and decreases the principal's profit. Inducing the manager to truthfully communicate his self-observed success allows the principal to directly contract on the cause of disagreement, the manager's effect on firm outcome. This reduces the risk premium for a slightly overconfident manager and emphasizes the wager effect for a significantly overconfident manager. The value of communication is first decreasing in overconfidence for a slightly overconfident manager and then increasing in overconfidence for a significantly overconfident manager.
{"title":"Managerial Overconfidence and Self-Reported Success","authors":"Nikolaj Kirkeby Niebuhr","doi":"10.2139/ssrn.3517188","DOIUrl":"https://doi.org/10.2139/ssrn.3517188","url":null,"abstract":"I consider the optimal contract for an overconfident manager in a principal-agent model with moral hazard where the contract is written on the earnings of the firm. Overconfidence causes the manager to overestimate his ability to affect the outcome of the firm. Overconfidence first reduces cost of agency, and if the level of overconfidence is significant enough, it causes the manager to wager on his wrong beliefs. The accounting system obscures the outcome of the manager's effort, which attenuates the effect of significant overconfidence and decreases the principal's profit. Inducing the manager to truthfully communicate his self-observed success allows the principal to directly contract on the cause of disagreement, the manager's effect on firm outcome. This reduces the risk premium for a slightly overconfident manager and emphasizes the wager effect for a significantly overconfident manager. The value of communication is first decreasing in overconfidence for a slightly overconfident manager and then increasing in overconfidence for a significantly overconfident manager.","PeriodicalId":376768,"journal":{"name":"CGN: Psychology (Topic)","volume":"68 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-01-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122533722","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Andreas Barth, Sasan Mansouri, F. Woebbeking, S. Zörgiebel
We analyze two competing hypotheses of how markets perceive (a lack of) factual language when senior management verbally conveys information in earnings calls. On one hand, avoiding complex terminology in favor of a broader language could improve the accessibility of financial disclosures. On the other hand, markets could interpreted the absence of precise financial terminology as blathering, i.e. obfuscating information by ‘beating around the bush.’ We observe lower cumulative abnormal returns and a higher implied volatility following earnings calls where managers use a less precise language, supporting the argument that an excessive use of non-factual language is perceived as blathering that retards the reduction of information asymmetries. ‘Beating around the bush’ is particularly pronounced when earnings management is more likely, when analysts' questions are tougher, and when last quarters' return on equity was poor.
{"title":"How to Talk Down Your Stock Performance","authors":"Andreas Barth, Sasan Mansouri, F. Woebbeking, S. Zörgiebel","doi":"10.2139/ssrn.3336671","DOIUrl":"https://doi.org/10.2139/ssrn.3336671","url":null,"abstract":"We analyze two competing hypotheses of how markets perceive (a lack of) factual language when senior management verbally conveys information in earnings calls. On one hand, avoiding complex terminology in favor of a broader language could improve the accessibility of financial disclosures. On the other hand, markets could interpreted the absence of precise financial terminology as blathering, i.e. obfuscating information by ‘beating around the bush.’ We observe lower cumulative abnormal returns and a higher implied volatility following earnings calls where managers use a less precise language, supporting the argument that an excessive use of non-factual language is perceived as blathering that retards the reduction of information asymmetries. ‘Beating around the bush’ is particularly pronounced when earnings management is more likely, when analysts' questions are tougher, and when last quarters' return on equity was poor.","PeriodicalId":376768,"journal":{"name":"CGN: Psychology (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-07-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130968881","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We examine overconfident CEO directors and find they attend more board meetings, are more likely to serve on the nominating or the compensation committee, have more independent directorships, and foster higher attendance rates on boards. Boards with overconfident directors are more likely to appoint a better prepared and more reputable CEO following a turnover. These newly appointed CEOs are also more likely to be overconfident. This evidence indicates overconfident CEO directors exhibit significant influence on the board and over the firm’s CEO selection.
{"title":"Director Overconfidence","authors":"Randy Beavers, Shawn Mobbs","doi":"10.2139/ssrn.2622739","DOIUrl":"https://doi.org/10.2139/ssrn.2622739","url":null,"abstract":"We examine overconfident CEO directors and find they attend more board meetings, are more likely to serve on the nominating or the compensation committee, have more independent directorships, and foster higher attendance rates on boards. Boards with overconfident directors are more likely to appoint a better prepared and more reputable CEO following a turnover. These newly appointed CEOs are also more likely to be overconfident. This evidence indicates overconfident CEO directors exhibit significant influence on the board and over the firm’s CEO selection.","PeriodicalId":376768,"journal":{"name":"CGN: Psychology (Topic)","volume":"14 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-12-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116430444","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using 13,233 acquisitions from 57 countries, we examine M&A decisions made by busy boards. We find that few busy acquirers originate from emerging markets and that they tend to undertake cross-border mergers, favor public targets, finance with cash and equity, pursue non-diversifying mergers, avoid targets with multiple bidders, and long-term underperform relative to non-busy acquirers. Importantly, we discover a non-linear relation between an acquirer’s board busyness and announcement returns. We find that the labor market penalizes directors who approve bad acquisitions, but does not reward them for good mergers. We observe that acquirers with busy boards consistently underperform.
{"title":"Mergers and the Market for Busy Directors: An International Analysis","authors":"Stephen P. Ferris, Narayanan Jayaraman, M. Liao","doi":"10.2139/ssrn.3170753","DOIUrl":"https://doi.org/10.2139/ssrn.3170753","url":null,"abstract":"Using 13,233 acquisitions from 57 countries, we examine M&A decisions made by busy boards. We find that few busy acquirers originate from emerging markets and that they tend to undertake cross-border mergers, favor public targets, finance with cash and equity, pursue non-diversifying mergers, avoid targets with multiple bidders, and long-term underperform relative to non-busy acquirers. Importantly, we discover a non-linear relation between an acquirer’s board busyness and announcement returns. We find that the labor market penalizes directors who approve bad acquisitions, but does not reward them for good mergers. We observe that acquirers with busy boards consistently underperform.","PeriodicalId":376768,"journal":{"name":"CGN: Psychology (Topic)","volume":"20 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-04-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132278732","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Many societies today are experiencing growing inequality in terms of wealth, income, health, education, resources or opportunities, trends that have negative effects upon well-being, trust, and motivation. We investigated whether inequalities –– particularly those perceived as fair –– can have positive effects upon individuals and groups. Using cross-national survey data (Study 1) and experimental data (Study 2), we find that inequalities arising from merit-based processes are perceived as fairer and as less acute. Further, in two experimental studies, using both monetary and real-effort social dilemmas, we demonstrate that inequalities perceived as procedurally fair can promote cooperation and trust. Participants received payments based on a fair (merit-based) or unfair (luck-based) process prior to being assigned to a group in which the other members’ payments were either equal or unequal to their own. We then measured positive contributions to the group via monetary contributions to a public good (Study 3) or a real-effort cooperation task (Study 4). Compared to conditions of equality, participants were more likely to cooperate when inequality of initial payments was perceived as fair, and less likely to contribute when inequality was perceived as unfair. We disentangle the effects of inequality and fairness on behavior, and underscore the importance of understanding how people construe the systems that give rise to inequality to an understanding of inequality’s effects on motivation and cooperation.
{"title":"When Inequality is Good for Groups: The Moderating Role of Fairness","authors":"Einav Hart, Paul K. Piff","doi":"10.2139/ssrn.3372685","DOIUrl":"https://doi.org/10.2139/ssrn.3372685","url":null,"abstract":"Many societies today are experiencing growing inequality in terms of wealth, income, health, education, resources or opportunities, trends that have negative effects upon well-being, trust, and motivation. We investigated whether inequalities –– particularly those perceived as fair –– can have positive effects upon individuals and groups. Using cross-national survey data (Study 1) and experimental data (Study 2), we find that inequalities arising from merit-based processes are perceived as fairer and as less acute. Further, in two experimental studies, using both monetary and real-effort social dilemmas, we demonstrate that inequalities perceived as procedurally fair can promote cooperation and trust. Participants received payments based on a fair (merit-based) or unfair (luck-based) process prior to being assigned to a group in which the other members’ payments were either equal or unequal to their own. We then measured positive contributions to the group via monetary contributions to a public good (Study 3) or a real-effort cooperation task (Study 4). Compared to conditions of equality, participants were more likely to cooperate when inequality of initial payments was perceived as fair, and less likely to contribute when inequality was perceived as unfair. We disentangle the effects of inequality and fairness on behavior, and underscore the importance of understanding how people construe the systems that give rise to inequality to an understanding of inequality’s effects on motivation and cooperation.","PeriodicalId":376768,"journal":{"name":"CGN: Psychology (Topic)","volume":"283 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-03-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122304883","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The purpose of this study is to explore differences in the decision making styles between family and nonfamily firms, while assessing how family participation relates to the use of decision making styles in family firms. The empirical evidence is provided by a sample of 155 firms, located in the Autonomous Region of the Azores, Portugal, 82 family-controlled and 73 nonfamily-controlled firms. Results suggest that there are no differences in the use of rational decision making between family and nonfamily firms. However, nonfamily firms show higher levels of experiential decision making than family firms. Results also show that family participation plays a key role in guiding the decisional process, by promoting the use experiential decisions and inhibiting the adoption of a rational decision making style in family firms. From an applied perspective, assessing the influence of family participation in the adoption of a decisional style is potentially valuable for practitioners as well as for owners and managers. Providing them with clues that may help them better understand the basis of their decisions which can benefit their relations with other family members, as with customers, partners and suppliers that play a key role in the firm’s growth, profitability and adaptability. This study responds to a gap in the literature, by exploring the use of experiential versus rational decision making styles in small family and nonfamily firms. This study also contributes to the understanding of the decision making within family firms, by assessing the role of family participation in the decisional process.
{"title":"Fast or Slow? Decision Making Styles in Small Family and Nonfamily Firms","authors":"Duarte Pimentel, M. Scholten, J. Couto","doi":"10.2139/ssrn.3136993","DOIUrl":"https://doi.org/10.2139/ssrn.3136993","url":null,"abstract":"The purpose of this study is to explore differences in the decision making styles between family and nonfamily firms, while assessing how family participation relates to the use of decision making styles in family firms. The empirical evidence is provided by a sample of 155 firms, located in the Autonomous Region of the Azores, Portugal, 82 family-controlled and 73 nonfamily-controlled firms. Results suggest that there are no differences in the use of rational decision making between family and nonfamily firms. However, nonfamily firms show higher levels of experiential decision making than family firms. Results also show that family participation plays a key role in guiding the decisional process, by promoting the use experiential decisions and inhibiting the adoption of a rational decision making style in family firms. From an applied perspective, assessing the influence of family participation in the adoption of a decisional style is potentially valuable for practitioners as well as for owners and managers. Providing them with clues that may help them better understand the basis of their decisions which can benefit their relations with other family members, as with customers, partners and suppliers that play a key role in the firm’s growth, profitability and adaptability. This study responds to a gap in the literature, by exploring the use of experiential versus rational decision making styles in small family and nonfamily firms. This study also contributes to the understanding of the decision making within family firms, by assessing the role of family participation in the decisional process.","PeriodicalId":376768,"journal":{"name":"CGN: Psychology (Topic)","volume":"10 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-01-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121852246","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper examines whether it is possible to forecast 1-year-ahead returns of individual companies based on the observed ‘psychopathic’ characteristics of their top management team. We find that language characteristic of psychopaths present in annual report narratives, questionable integrity, excessive risk-taking and failure to contribute to charitable undertakings tend to reduce future shareholder wealth. These findings imply that firms could benefit from incorporating psychological evaluation in their recruitment processes, especially when seeking to fill senior management posts. While the return predictability described in this paper supports the upper echelons perspective, it simultaneously challenges the notion of informationally efficient stock prices.
{"title":"Psychopathic Traits of Corporate Leadership as Predictors of Future Stock Returns","authors":"T. Wisniewski, L. Yekini, Ayman Omar","doi":"10.2139/ssrn.2984999","DOIUrl":"https://doi.org/10.2139/ssrn.2984999","url":null,"abstract":"This paper examines whether it is possible to forecast 1-year-ahead returns of individual companies based on the observed ‘psychopathic’ characteristics of their top management team. We find that language characteristic of psychopaths present in annual report narratives, questionable integrity, excessive risk-taking and failure to contribute to charitable undertakings tend to reduce future shareholder wealth. These findings imply that firms could benefit from incorporating psychological evaluation in their recruitment processes, especially when seeking to fill senior management posts. While the return predictability described in this paper supports the upper echelons perspective, it simultaneously challenges the notion of informationally efficient stock prices.","PeriodicalId":376768,"journal":{"name":"CGN: Psychology (Topic)","volume":"11 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-06-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127733224","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study is the first stage of a multi part study examining halo effects among auditors. We specifically examine two questions: (1) Are auditors susceptible to halo effects, and (2) Does the presence of fraud risk factors mitigate halo effects by increasing auditor objectivity and skepticism? The latter question is motivated by SAS 99 which specifically links the concepts of fraud risk and auditor skepticism. Results of a single experiment are both striking and unexpected. Despite successful halo manipulations, judgments by student participants did not exhibit halo effects in the absence of fraud risk factors, but did exhibit significant halo effects in the presence of fraud risk factors. These results suggest that auditors may not be subject to halo effects directly, but become subject to halo effects when processing other information/evidence.
{"title":"The Halo Effect in the Presence of Fraud Risk Factors: An Examination of Auditor Skepticism","authors":"Kevan L. Jensen, Mark Smith","doi":"10.2139/ssrn.3135339","DOIUrl":"https://doi.org/10.2139/ssrn.3135339","url":null,"abstract":"This study is the first stage of a multi part study examining halo effects among auditors. We specifically examine two questions: (1) Are auditors susceptible to halo effects, and (2) Does the presence of fraud risk factors mitigate halo effects by increasing auditor objectivity and skepticism? The latter question is motivated by SAS 99 which specifically links the concepts of fraud risk and auditor skepticism. Results of a single experiment are both striking and unexpected. Despite successful halo manipulations, judgments by student participants did not exhibit halo effects in the absence of fraud risk factors, but did exhibit significant halo effects in the presence of fraud risk factors. These results suggest that auditors may not be subject to halo effects directly, but become subject to halo effects when processing other information/evidence.","PeriodicalId":376768,"journal":{"name":"CGN: Psychology (Topic)","volume":"3 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-12-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123899963","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2014-09-01DOI: 10.6084/M9.FIGSHARE.1194532.V1
Reema Malhotra, K. Bhola
This paper first covers the traditional meaning of 'gaming' and 'playing' followed by the changes fostered by the use of internet. Online gaming as an emerging phenomena is then discussed in the light of changing trends in the available resources, opportunities and lifestyle of the modern youth. The purpose of this paper is to study the lived experience of online gamers and to derive core psychosocial constructs from their inner life. Using the qualitative research method of semi-structured interviews, five case-accounts are used to explore what meanings does an engagement in an online game carry for them. Understandings around their motivations, dissociations, negotiations with reality as well as social adaptation are critically arrived at, using theoretical concepts and citations from personal stories. As this up-and-coming trend is becoming increasingly popular, its future implications are discussed by considering its ramifications in the area of education, clinic and society as a whole.
{"title":"Playing Games: A Qualitative Study on Online Gamers","authors":"Reema Malhotra, K. Bhola","doi":"10.6084/M9.FIGSHARE.1194532.V1","DOIUrl":"https://doi.org/10.6084/M9.FIGSHARE.1194532.V1","url":null,"abstract":"This paper first covers the traditional meaning of 'gaming' and 'playing' followed by the changes fostered by the use of internet. Online gaming as an emerging phenomena is then discussed in the light of changing trends in the available resources, opportunities and lifestyle of the modern youth. The purpose of this paper is to study the lived experience of online gamers and to derive core psychosocial constructs from their inner life. Using the qualitative research method of semi-structured interviews, five case-accounts are used to explore what meanings does an engagement in an online game carry for them. Understandings around their motivations, dissociations, negotiations with reality as well as social adaptation are critically arrived at, using theoretical concepts and citations from personal stories. As this up-and-coming trend is becoming increasingly popular, its future implications are discussed by considering its ramifications in the area of education, clinic and society as a whole.","PeriodicalId":376768,"journal":{"name":"CGN: Psychology (Topic)","volume":"110 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132744937","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
ACKNOWLEDGMENTS 1. INTRODUCTION PART I. WHAT'S WRONG WITH THE DOMINANT THEORIES? 2. THE PUZZLES OF CEO COMPENSATION 3. The Corporate Personality Myth 4. MARKET MYTHOLOGY 5. Incentives Mythology PART II. WHAT'S REALLY GOING ON? 6. Performance Pay Mythology 7. Causation Mythology 8. Predictability Mythology PART III. HOW CAN WE BEST REFORM THE SYSTEM? 9. ALIGNMENT MYTHOLOGY 10. MOVING FORWARD Notes Index
{"title":"Introduction: Indispensable and Other Myths: Why the CEO Pay Experiment Failed and How to Fix It","authors":"Michael B. Dorff","doi":"10.1525/9780520958593","DOIUrl":"https://doi.org/10.1525/9780520958593","url":null,"abstract":"ACKNOWLEDGMENTS 1. INTRODUCTION PART I. WHAT'S WRONG WITH THE DOMINANT THEORIES? 2. THE PUZZLES OF CEO COMPENSATION 3. The Corporate Personality Myth 4. MARKET MYTHOLOGY 5. Incentives Mythology PART II. WHAT'S REALLY GOING ON? 6. Performance Pay Mythology 7. Causation Mythology 8. Predictability Mythology PART III. HOW CAN WE BEST REFORM THE SYSTEM? 9. ALIGNMENT MYTHOLOGY 10. MOVING FORWARD Notes Index","PeriodicalId":376768,"journal":{"name":"CGN: Psychology (Topic)","volume":"102 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-07-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125547629","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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