07 Management Accounting
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ItemBalance Sheet Strength and Strategic Management in the Oil and Gas Industry( 2018-09-02)We investigate how accounting can support strategic decision-making in the dynamic context of cyclical industries where risk is the nature of business. We conduct our analysis in the context of the Canadian Oil and Gas (O&G) Industry. Based on our discussions with industry leaders, analysis of company disclosures, and reviews of industry reports, business and academic articles, we identify two strategies that are prevalent in the O&G industry – an aggressive strategy that invests heavily in growth periods and a conservative strategy that invests less in growth periods to build and sequester resources for decline periods. We use a long-term measure of balance sheet strength based on cash flows to debt to discriminate across these two strategies. We find that companies that are more conservative (lower debt to cash flows over time) achieve higher operating efficiency in general and that their efficiency advantage is greater in post-crisis periods following sharp price declines. We also document that conservative firms invest more in post-crisis periods and that their acquisitions yield significantly more reserve quantities per dollar of investment than other companies, especially in the post-crisis periods.
ItemExpectation Accuracy, Cost Behavior, and Slippery Prices( 2018-08-31)This study investigates the relation between the accuracy of managerial demand expectations and cost behavior. Based on a unique dataset of 4,107 firm-year observations from 737 companies in Denmark, this paper first shows that cost stickiness is substantially stronger for unforeseen negative demand shocks than for expected demand shocks, which is in line with the argument that adjustment costs are typically higher when the time horizon for making the adjustments is shorter. Second, we find empirical evidence that omitting selling price changes can mislead researchers’ inferences about resource adjustments and cost stickiness when sales are used as a proxy for activity level, which is a common practice in the existing literature. Finally, we show a moderating effect of managerial expectation accuracy on the relationship between demand volatility and cost elasticity. This helps reconciling the ongoing debate on whether companies increase or decrease cost elasticity in response to demand volatility.
ItemAn Investigation of Monitoring Frequency and Slack Allowance on Reporting Honesty( 2018-08-31)Businesses that use participative budgeting commonly face the problem of subordinates introducing budgetary slack into the planning process in a manner that harms the organization. This study examines budgetary reporting behavior in response to two key features of a monitoring system, the frequency of monitoring (increasing versus decreasing) and thresholds in a monitoring system that determine an allowable level of budgetary slack (low versus high slack allowance). Based on prior theory and literature, we develop hypotheses and research questions regarding the effects of these monitoring features on subordinates’ slack creation. We test our predictions in a multiple-round experimental setting that uses economic incentives. Participants’ actions are consistent with the strategic creation of slack to maximize wealth (to the extent permitted given the constraints of the monitoring system) rather than preferences for honesty. Of the monitoring systems imposed, a low slack allowance combined with high monitoring frequency that decreases over time is most effective in reducing slack creation.
ItemThe Information Asymmetry between Management and Rank-and-File Employees: Determinants and Consequences( 2018-08-25)We investigate whether information possessed by rank-and-file employees is incorporated in top managers’ expectations and decisions. Using employees’ predictions of their company’s business outlook from Glassdoor.com to measure the employees’ information set, and using management earnings forecasts to measure management expectations, we show that management expectations incorporate employees’ information only partially. This intrafirm information asymmetry is lower when top managers are more experienced and internally engaged and when employees are more satisfied with senior management, firm culture, and their compensation; and higher in companies that are more decentralized, have internal control weakness, and poorly incentivize their employees. Further analyses suggest that our results are not driven by managers’ strategically choosing not to use employees’ information in their forecasts. Finally, we document that firms with large discrepancies between management forecasts and employee outlook have poorer future performance and a higher likelihood of CEO turnover.
ItemThe effects of increased transparency of CEO pay-equity and friendship on manager’s earnings management behavior( 2018-08-15)Recent regulation has increased Chief Executive Officers’ (CEO) accountability for the fairness of their pay as evidenced by the recent Dodd-Frank Act (DFA) pay-equity disclosure requirement which will likely lead to lower levels of perceived CEO pay fairness by subordinates. This study uses an experiment to examine the effects of the DFA pay-equity disclosure and friendship ties with the CEO on the earnings management behavior of business-unit managers. The results indicate that CEO friendship ties, which are associated with lower levels of social distance, results in less earning management in the absence of the DFA CEO pay-equity ratio disclosure. However, CEO friendship may result in negative repercussions in the post-DFA environment when managers are provided with the pay-equity disclosure. These findings highlight the possibility of unintended consequences of the increased transparency of CEO pay-equity under the DFA which should be considered in the design of management control systems.