Qi Dong, Yiting Cao, Victoria Dickinson, Hongrui Feng
Building on prior research showing a positive link between internally generated cash flows and innovation output, we hypothesize and find that the inclusion of cash-flow performance metrics in CEOs’ compensation contracts positively impacts firm innovation. Our findings are consistent with the theory that cash-flow metrics incentivize CEOs to make prudent investment decisions, thereby addressing both the overinvestment and the underinvestment challenges for firm innovation. As a result, firms utilizing cash-flow metrics exhibit lower innovation input and higher innovation output compared to firms not employing such metrics. Furthermore, our research indicates that the incentive effect of cash-flow metrics on firm innovation is more pronounced when cash flows convey unique information not reflected in earnings and when CEOs have longer expected employment horizons. This study underscores the effectiveness of cash-flow metrics in motivating management to promote firm innovation. Data Availability: Subscription-based data are obtained from Wharton Research Data Services; public data are obtained from public sources specified in the paper. JEL Classifications: D81, G30, J33, M52.
{"title":"Do Cash-Flow Performance Metrics in CEOs’ Compensation Contracts Enhance Firm Innovation?","authors":"Qi Dong, Yiting Cao, Victoria Dickinson, Hongrui Feng","doi":"10.2308/jmar-2022-083","DOIUrl":"https://doi.org/10.2308/jmar-2022-083","url":null,"abstract":"\u0000 Building on prior research showing a positive link between internally generated cash flows and innovation output, we hypothesize and find that the inclusion of cash-flow performance metrics in CEOs’ compensation contracts positively impacts firm innovation. Our findings are consistent with the theory that cash-flow metrics incentivize CEOs to make prudent investment decisions, thereby addressing both the overinvestment and the underinvestment challenges for firm innovation. As a result, firms utilizing cash-flow metrics exhibit lower innovation input and higher innovation output compared to firms not employing such metrics. Furthermore, our research indicates that the incentive effect of cash-flow metrics on firm innovation is more pronounced when cash flows convey unique information not reflected in earnings and when CEOs have longer expected employment horizons. This study underscores the effectiveness of cash-flow metrics in motivating management to promote firm innovation.\u0000 Data Availability: Subscription-based data are obtained from Wharton Research Data Services; public data are obtained from public sources specified in the paper.\u0000 JEL Classifications: D81, G30, J33, M52.","PeriodicalId":46474,"journal":{"name":"Journal of Management Accounting Research","volume":null,"pages":null},"PeriodicalIF":1.7,"publicationDate":"2024-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"139828395","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}
Qi Dong, Yiting Cao, Victoria Dickinson, Hongrui Feng
Building on prior research showing a positive link between internally generated cash flows and innovation output, we hypothesize and find that the inclusion of cash-flow performance metrics in CEOs’ compensation contracts positively impacts firm innovation. Our findings are consistent with the theory that cash-flow metrics incentivize CEOs to make prudent investment decisions, thereby addressing both the overinvestment and the underinvestment challenges for firm innovation. As a result, firms utilizing cash-flow metrics exhibit lower innovation input and higher innovation output compared to firms not employing such metrics. Furthermore, our research indicates that the incentive effect of cash-flow metrics on firm innovation is more pronounced when cash flows convey unique information not reflected in earnings and when CEOs have longer expected employment horizons. This study underscores the effectiveness of cash-flow metrics in motivating management to promote firm innovation. Data Availability: Subscription-based data are obtained from Wharton Research Data Services; public data are obtained from public sources specified in the paper. JEL Classifications: D81, G30, J33, M52.
{"title":"Do Cash-Flow Performance Metrics in CEOs’ Compensation Contracts Enhance Firm Innovation?","authors":"Qi Dong, Yiting Cao, Victoria Dickinson, Hongrui Feng","doi":"10.2308/jmar-2022-083","DOIUrl":"https://doi.org/10.2308/jmar-2022-083","url":null,"abstract":"\u0000 Building on prior research showing a positive link between internally generated cash flows and innovation output, we hypothesize and find that the inclusion of cash-flow performance metrics in CEOs’ compensation contracts positively impacts firm innovation. Our findings are consistent with the theory that cash-flow metrics incentivize CEOs to make prudent investment decisions, thereby addressing both the overinvestment and the underinvestment challenges for firm innovation. As a result, firms utilizing cash-flow metrics exhibit lower innovation input and higher innovation output compared to firms not employing such metrics. Furthermore, our research indicates that the incentive effect of cash-flow metrics on firm innovation is more pronounced when cash flows convey unique information not reflected in earnings and when CEOs have longer expected employment horizons. This study underscores the effectiveness of cash-flow metrics in motivating management to promote firm innovation.\u0000 Data Availability: Subscription-based data are obtained from Wharton Research Data Services; public data are obtained from public sources specified in the paper.\u0000 JEL Classifications: D81, G30, J33, M52.","PeriodicalId":46474,"journal":{"name":"Journal of Management Accounting Research","volume":null,"pages":null},"PeriodicalIF":1.7,"publicationDate":"2024-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"139887923","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}
Hong Qu, Lucy F. Ackert, D. Hermanson, Velina K. Popova
We examine the interactive effect of justification and ambiguity on the tendency to distort operating decisions in an incentivized experiment. Managers decide whether to drop or keep a project on behalf of the owners. Although dropping the project always leads to higher payoffs for managers, keeping the project leads to higher payoffs to the owners for projects with good future outcomes. Dropping a project with good future prospects is akin to real earnings management (REM), such as cutting R&D to meet bonus targets. We find that justification increases REM when project outcomes are ambiguous but has no effect when the distribution of project outcomes is known. Ambiguity gives flexibility for managers to craft a plausible justification for dropping the project that appears accountable to the owners. The opportunity for impression management makes selfish actions more attractive to managers because it helps to promote a positive social image.
{"title":"The Joint Effect of Justification and Ambiguity on Operating Decision Distortion","authors":"Hong Qu, Lucy F. Ackert, D. Hermanson, Velina K. Popova","doi":"10.2308/jmar-2023-027","DOIUrl":"https://doi.org/10.2308/jmar-2023-027","url":null,"abstract":"\u0000 We examine the interactive effect of justification and ambiguity on the tendency to distort operating decisions in an incentivized experiment. Managers decide whether to drop or keep a project on behalf of the owners. Although dropping the project always leads to higher payoffs for managers, keeping the project leads to higher payoffs to the owners for projects with good future outcomes. Dropping a project with good future prospects is akin to real earnings management (REM), such as cutting R&D to meet bonus targets. We find that justification increases REM when project outcomes are ambiguous but has no effect when the distribution of project outcomes is known. Ambiguity gives flexibility for managers to craft a plausible justification for dropping the project that appears accountable to the owners. The opportunity for impression management makes selfish actions more attractive to managers because it helps to promote a positive social image.","PeriodicalId":46474,"journal":{"name":"Journal of Management Accounting Research","volume":null,"pages":null},"PeriodicalIF":1.7,"publicationDate":"2024-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"139891620","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}
Hong Qu, Lucy F. Ackert, D. Hermanson, Velina K. Popova
We examine the interactive effect of justification and ambiguity on the tendency to distort operating decisions in an incentivized experiment. Managers decide whether to drop or keep a project on behalf of the owners. Although dropping the project always leads to higher payoffs for managers, keeping the project leads to higher payoffs to the owners for projects with good future outcomes. Dropping a project with good future prospects is akin to real earnings management (REM), such as cutting R&D to meet bonus targets. We find that justification increases REM when project outcomes are ambiguous but has no effect when the distribution of project outcomes is known. Ambiguity gives flexibility for managers to craft a plausible justification for dropping the project that appears accountable to the owners. The opportunity for impression management makes selfish actions more attractive to managers because it helps to promote a positive social image.
{"title":"The Joint Effect of Justification and Ambiguity on Operating Decision Distortion","authors":"Hong Qu, Lucy F. Ackert, D. Hermanson, Velina K. Popova","doi":"10.2308/jmar-2023-027","DOIUrl":"https://doi.org/10.2308/jmar-2023-027","url":null,"abstract":"\u0000 We examine the interactive effect of justification and ambiguity on the tendency to distort operating decisions in an incentivized experiment. Managers decide whether to drop or keep a project on behalf of the owners. Although dropping the project always leads to higher payoffs for managers, keeping the project leads to higher payoffs to the owners for projects with good future outcomes. Dropping a project with good future prospects is akin to real earnings management (REM), such as cutting R&D to meet bonus targets. We find that justification increases REM when project outcomes are ambiguous but has no effect when the distribution of project outcomes is known. Ambiguity gives flexibility for managers to craft a plausible justification for dropping the project that appears accountable to the owners. The opportunity for impression management makes selfish actions more attractive to managers because it helps to promote a positive social image.","PeriodicalId":46474,"journal":{"name":"Journal of Management Accounting Research","volume":null,"pages":null},"PeriodicalIF":1.7,"publicationDate":"2024-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"139831394","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 uses covenant violations as a quasinatural experimental setting to examine creditors’ roles in shaping corporate cost behavior. Using a regression discontinuity design, I find that cost stickiness experiences a sharp decline following debt covenant violations when control rights are transferred to creditors. The cost stickiness effect is more substantial for borrowers with lower credit ratings and when creditors possess greater bargaining power. The effect is also more pronounced during industry downturns when borrowers have fewer alternative sources of finance. Results are consistent when I use alternative measures of cost stickiness and alternative research designs. Overall, my evidence indicates that creditors play a monitoring role in firms’ cost behaviors and identifies a specific channel (loan covenants) through which the misalignment of incentives can impact cost asymmetry. JEL Classifications: D24; G32; M41.
{"title":"Creditors’ Role in Shaping Asymmetric Cost Behavior: Evidence from Debt Covenant Violation","authors":"Jie Zhou","doi":"10.2308/jmar-2023-014","DOIUrl":"https://doi.org/10.2308/jmar-2023-014","url":null,"abstract":"\u0000 This study uses covenant violations as a quasinatural experimental setting to examine creditors’ roles in shaping corporate cost behavior. Using a regression discontinuity design, I find that cost stickiness experiences a sharp decline following debt covenant violations when control rights are transferred to creditors. The cost stickiness effect is more substantial for borrowers with lower credit ratings and when creditors possess greater bargaining power. The effect is also more pronounced during industry downturns when borrowers have fewer alternative sources of finance. Results are consistent when I use alternative measures of cost stickiness and alternative research designs. Overall, my evidence indicates that creditors play a monitoring role in firms’ cost behaviors and identifies a specific channel (loan covenants) through which the misalignment of incentives can impact cost asymmetry.\u0000 JEL Classifications: D24; G32; M41.","PeriodicalId":46474,"journal":{"name":"Journal of Management Accounting Research","volume":null,"pages":null},"PeriodicalIF":1.7,"publicationDate":"2024-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"139878278","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}
In this study, we explore the negative impact of upstreamness on suppliers’ investment quality and management earnings’ forecast accuracy and investigate whether a shared auditor engaged by both a supplier and its major customers could mitigate these effects. Using a comprehensive dataset of multitier supply chains, we find that suppliers located further upstream tend to have lower investment efficiency and exhibit less accurate management earnings forecasts. However, our results also show that the presence of a shared auditor in the supplier-customer pair could alleviate these adverse impacts by enhancing the quality of information in the supply chain. Our findings shed light on the implications of upstreamness in the supply chain, such as reduced investment efficiency and increased management forecast errors and suggest a role for information quality in mitigating these consequences. Data Availability: All data are available from public sources mentioned in the text.
{"title":"The Impact of Upstreamness on Investment Quality in Multitier Supply Chains","authors":"Jengfang Chen, J. D. Eshleman, Sungsoo Kim","doi":"10.2308/jmar-2022-056","DOIUrl":"https://doi.org/10.2308/jmar-2022-056","url":null,"abstract":"\u0000 In this study, we explore the negative impact of upstreamness on suppliers’ investment quality and management earnings’ forecast accuracy and investigate whether a shared auditor engaged by both a supplier and its major customers could mitigate these effects. Using a comprehensive dataset of multitier supply chains, we find that suppliers located further upstream tend to have lower investment efficiency and exhibit less accurate management earnings forecasts. However, our results also show that the presence of a shared auditor in the supplier-customer pair could alleviate these adverse impacts by enhancing the quality of information in the supply chain. Our findings shed light on the implications of upstreamness in the supply chain, such as reduced investment efficiency and increased management forecast errors and suggest a role for information quality in mitigating these consequences.\u0000 Data Availability: All data are available from public sources mentioned in the text.","PeriodicalId":46474,"journal":{"name":"Journal of Management Accounting Research","volume":null,"pages":null},"PeriodicalIF":1.7,"publicationDate":"2024-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140463178","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}
Jeremy B. Lill, Michael J. Majerczyk, Ivo D. Tafkov
This study investigates, via an experiment, how the decentralization of a firm’s selection process affects the caliber of the chosen candidate in a team-based environment. We predict and find that, when decision makers have comprehensive and unambiguous candidate-specific information regarding who is the best for the job, the quality of the selected candidates is lower under a decentralized versus centralized selection process. We also find that nonpecuniary status concerns drive the effect. Results of two boundary conditions reveal that, as the clarity of information regarding who is the best candidate for the job decreases (due to decision-makers having weaker or mixed signals about job candidates), the quality of selected candidates becomes no worse under a decentralized than under a centralized selection process. Overall, our results indicate that nonpecuniary status considerations and information environment can influence candidate selection decisions in organizations. Data Availability: Data are available from the authors upon request.
{"title":"Candidate Selection in Teams: Be the Best or Surround Yourself with the Best?","authors":"Jeremy B. Lill, Michael J. Majerczyk, Ivo D. Tafkov","doi":"10.2308/jmar-2022-085","DOIUrl":"https://doi.org/10.2308/jmar-2022-085","url":null,"abstract":"\u0000 This study investigates, via an experiment, how the decentralization of a firm’s selection process affects the caliber of the chosen candidate in a team-based environment. We predict and find that, when decision makers have comprehensive and unambiguous candidate-specific information regarding who is the best for the job, the quality of the selected candidates is lower under a decentralized versus centralized selection process. We also find that nonpecuniary status concerns drive the effect. Results of two boundary conditions reveal that, as the clarity of information regarding who is the best candidate for the job decreases (due to decision-makers having weaker or mixed signals about job candidates), the quality of selected candidates becomes no worse under a decentralized than under a centralized selection process. Overall, our results indicate that nonpecuniary status considerations and information environment can influence candidate selection decisions in organizations.\u0000 Data Availability: Data are available from the authors upon request.","PeriodicalId":46474,"journal":{"name":"Journal of Management Accounting Research","volume":null,"pages":null},"PeriodicalIF":1.7,"publicationDate":"2024-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"139965780","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 organizations are moving toward a more open, transparent working environment. However, a concurrent trend toward remote work in organizations could moderate the effect of this move toward organizational openness by reducing organizational identification. This study investigates the joint effect of organizational identification and reporting environment openness on managerial reporting behavior. Using an experiment, we find that weak versus strong organizational identification leads to greater slack creation in an open reporting environment, but this effect attenuates in a closed reporting environment. By speaking to the joint effect of internal reporting environment openness and organizational identification, this study contributes to our understanding of the theoretical drivers of misreporting and how they interact with concurrent trends in practice. Data Availability: The data used in this paper are available upon request.
{"title":"The Joint Effect of Organizational Identification and Internal Reporting Environment Openness on Budgetary Misreporting","authors":"Jeremy B. Lill, Michael Majerczyk, Ke Xu","doi":"10.2308/jmar-2023-006","DOIUrl":"https://doi.org/10.2308/jmar-2023-006","url":null,"abstract":"\u0000 Many organizations are moving toward a more open, transparent working environment. However, a concurrent trend toward remote work in organizations could moderate the effect of this move toward organizational openness by reducing organizational identification. This study investigates the joint effect of organizational identification and reporting environment openness on managerial reporting behavior. Using an experiment, we find that weak versus strong organizational identification leads to greater slack creation in an open reporting environment, but this effect attenuates in a closed reporting environment. By speaking to the joint effect of internal reporting environment openness and organizational identification, this study contributes to our understanding of the theoretical drivers of misreporting and how they interact with concurrent trends in practice.\u0000 Data Availability: The data used in this paper are available upon request.","PeriodicalId":46474,"journal":{"name":"Journal of Management Accounting Research","volume":null,"pages":null},"PeriodicalIF":1.7,"publicationDate":"2024-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"139394615","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 the association between monopsony power and hospital cost structure using data from more than 2,000 U.S. hospitals. Monopsony characterizes a market with a single buyer and many suppliers. Accordingly, monopsony power is a potentially critical determinant of cost structure because it affects managers’ resource procurement decisions. Results indicate that hospitals with monopsony power adopt more elastic cost structures, and monopsony power magnifies the positive relationship between demand uncertainty and cost elasticity identified in prior research. These findings suggest monopsony power lowers the costs of procuring resources on flexible, short-term, and variable bases as opposed to making long-term commitments. Therefore, due to the high fixed-cost nature of the industry, hospitals with monopsony power choose more variable cost structures and make larger cost structure adjustments in response to demand uncertainty. Although we conduct this research using hospitals, our theory and results have implications for other industries. Data Availability: Data are publicly available from the sources cited in this study. JEL Classifications: D22; D23; I11; M20; M40.
{"title":"Monopsony Power and Cost Structure: Evidence from the U.S. Hospital Industry","authors":"Mina Pizzini, Brian Vansant","doi":"10.2308/jmar-2022-078","DOIUrl":"https://doi.org/10.2308/jmar-2022-078","url":null,"abstract":"\u0000 We examine the association between monopsony power and hospital cost structure using data from more than 2,000 U.S. hospitals. Monopsony characterizes a market with a single buyer and many suppliers. Accordingly, monopsony power is a potentially critical determinant of cost structure because it affects managers’ resource procurement decisions. Results indicate that hospitals with monopsony power adopt more elastic cost structures, and monopsony power magnifies the positive relationship between demand uncertainty and cost elasticity identified in prior research. These findings suggest monopsony power lowers the costs of procuring resources on flexible, short-term, and variable bases as opposed to making long-term commitments. Therefore, due to the high fixed-cost nature of the industry, hospitals with monopsony power choose more variable cost structures and make larger cost structure adjustments in response to demand uncertainty. Although we conduct this research using hospitals, our theory and results have implications for other industries.\u0000 Data Availability: Data are publicly available from the sources cited in this study.\u0000 JEL Classifications: D22; D23; I11; M20; M40.","PeriodicalId":46474,"journal":{"name":"Journal of Management Accounting Research","volume":null,"pages":null},"PeriodicalIF":1.7,"publicationDate":"2024-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"139636810","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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