An Examination of the Roles of Organization Capital in Accounting and Finance.

Abstract

In Essay 1, the impact of organization capital on managerial short-termism is examined. In the current literature, competing views exist on the relation between organization capital and managerial short-termism. In an attempt to resolve these competing views, I split corporate activities associated with managerial short-termism into two broad categories, internal and external dimensions, and then examine the impact of organization capital on each category. I predict that an investment in organization capital internally encourages long-term management in real operations, whereas such an investment induces short-term pressure on management in an external dimension. Consistent with my predictions, I find that firms with greater organization capital switch from real activities manipulation to accrual-based earnings management. My hypotheses are consistent even after controlling for corporate governance. The results are robust to using alternative measures of organization capital and employing a two-stage least squares (2SLS) test and change regressions for the endogeneity issues as well as the omitted variable problems. I then employ a difference-in-difference (DID) methodology that relies on the exogenous variation in organization capital generated by technology shock to demonstrate that my predictions continue to hold. I also document that the introduction of the Sarbanes-Oxley Act (SOX) could attenuate the problematic influence of organization capital on accruals. The impact of organization capital on real activities manipulation is more pronounced for firms with competitive industries. By providing a channel between organization capital and managerial mindsets, my paper attempts to facilitate future research on the impact of organization capital on various corporate outcomes. To extend the internal and external mechanisms of Essay 1, Essay 2 aims to create a better understanding of how organization capital and corporate cash holdings are related. Organization capital is positively associated with growth opportunities. In addition, I find that organization capital has a positive impact on cash-cash flow sensitivity, implying that an increase in organization capital can lead firms to rely more on internal financing. Taken together, these suggest that firms with high organization capital tend to build more cash holdings. I also reveal the disciplining presence that the threat of hostile takeover in high organization capital firms has. The results, even after controlling for idiosyncratic risk, support my baseline findings. My empirical results are robust to using a two-stage least squares (2SLS) test, change regressions, and the difference-in-difference (DID) test addressing omitted variables and endogeneity concerns. The findings in my paper (i) highlight the precautionary motive behind corporate cash holdings and the underlying channels that show how organization capital and corporate cash holdings are related, and (ii) emphasize a growing importance of the disciplining role of corporate governance for high organization capital firms.