05 Behavioral Research (BEHA)
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ItemThe Emergence of Racial Sympathy: Evidence from the Stock Market Reaction to anti-Asian Sentiment during COVID-19( 2021)Racial resentment towards Asian Americans has surged upwards in the Covid-19 pandemic. While the number of hate incidents have shot up, there is also a growing movement to reverse this trend, particularly from the business community. In this study, we examine whether racial biases – be it antagonism or sympathy – towards Asian Americans shows up in the trading behavior of investors. We compare the stock market response of Asian-American-CEO led firms with that of White-CEO led firms. We find that on days of high racial resentment, when investors are expected to be negative towards Asian Americans, the stock market reaction is positive and significant for Asian-American-CEO firms as compared to White-CEO firms. In two placebo tests, we find that the positive abnormal returns noted for Asian-CEO led firms do not occur outside of our event dates, and that the market reaction does not extend to other minority led firms. Investigating the reasons for this positive reaction, we find that it cannot be explained by differential mispricing or media coverage of Asian-American-CEO firms. We find that the positive reaction is predominantly generated from firms headquartered in states low in racial resentment, which suggests that the observed phenomenon is racial sympathy exhibited by investors. Strengthening this argument, we find that market reaction for sympathy triggering events is greater than low sympathy events. Our findings point to the emergence of racial sympathy in the financial markets.
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ItemMedia Attention and Stock Categorization: An Examination of Stocks Hyped to Benefit from the Olympics( 2021)We investigate whether there are temporary valuation impacts on stocks that media outlets list as involved in a major sporting event (the summer Olympics). We examine five summer Olympics and identify stocks that media outlets hype as benefiting from the Olympics (Olympic stocks). We find that Olympic stocks exhibit increases in comovement of returns after the announcement of the winning bid and declines in comovements after the games are played, consistent with the Olympics being used by investors as a category for investment. Furthermore, Olympic stock returns outperform their matched counterparts over this time period. If the comovement and valuation benefits are due to changes in underlying economics then we expect to observe corresponding increases in comovements of fundamentals and improvements in profitability. However, we find no observable changes in fundamental comovements or profitability. Consistent with investor sentiment driving the categorization, we find that Olympic firms with a greater retail investor presence have stronger comovements effects; and trading volume and volatility are abnormally high for Olympic firms on days where media outlets have stories linking the firm to the Olympic games. To clarify event-based categorization occurs in other settings where media outlets classify stocks for investment, we show comovement increases for stocks classified as “Stay-at-Home” by analysts and the media and “Meme” by retail investors on the Reddit social media platform.
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ItemTrust versus Rewards: Revisiting Managerial Discretion in Incomplete Contracts( 2021)Incentive compensation is often characterized by incomplete contracts. In a setting where managers have discretion over the size of employee compensation pool, prior work indicates that managerial discretion deteriorates employee productivity. In this study, I experimentally investigate whether replacing human managers’ decision making with algorithm-generated bonus allocations that mimic managers’ decision making improves employee productivity. I find that discretionary bonus pools determined by algorithms generate higher employee productivity without sacrificing firm’s residual profits. Further, the productivity-inducing effect from algorithms is stronger when employees receive generous rewards or when the rewards are not contingent on the performance signal. These results are consistent with the idea that it is hard for managers to establish credibility for rewarding employees in incomplete contracts. Employee productivity is improved once the human element is removed from the responsibilities in determining the rewards, even when the reward strategy and outcomes are held constant. This study advances our understanding of the behavioral factors influencing employee productivity in incomplete contracts and the potential ways algorithm-based evaluations can be used to improve firm outcomes.
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ItemHow Do Reward Versus Penalty Framed Incentives Affect Auditor Judgments and Actions in Diagnostic Tasks?( 2021)To motivate auditors to increase audit quality, regulators primarily introduce penalty-framed incentives. Researchers propose that more reward-framed incentives are needed to motivate auditors to supply high audit quality. We examine how incentive frames affect auditors’ risk judgments and testing actions in diagnostic tasks that are key to discerning whether a misstatement is present. We find that participants are more likely to test a potential misstatement under a reward versus penalty frame due to an action bias towards testing. However, participants increase testing primarily when a misstatement is absent. Therefore, a reward versus penalty frame results in more false alarms, with no improvement in misstatement detection. Our study suggests that providing auditors reward- versus penalty-framed incentives can increase testing but at the cost of audit efficiency.
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ItemThe Effect of National Office and External Inspection on Audit Partner’s Judgment( 2021)This paper investigates how efforts to improve audit quality within audit firms and outside of audit firms collectively affect audit partner’s judgment. Externally, audit regulators conduct inspections and provide feedback to auditors with the goal of improving audit quality. Internally, national office supports auditor partners to make judgment and prepare for inspections. However, we know little about how the two forces interact. Using a between-subject experiment with audit partners and senior managers, I predict and find that when the regulator is antagonistic (i.e., when audit regulator’s feedback anchors on failure), audit partners working with a collaborative national office are less committed to their negotiation goals than those working with a prescriptive national office, and are more likely to rely on integrative negotiation strategy (Expand the Agenda) that seeks to benefit both the client and the auditor than those working with a prescriptive national office. However, when the regulator is less antagonistic, audit partners are more committed to reducing client’s aggressive net income. My findings demonstrate national office’s move towards a more collaborative consultation approach could have negative consequences under an antagonistic regulatory environment, but they may be mitigated when the regulatory environment is less antagonistic.
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ItemTo Give Up or Not to Give Up: The Effect of Contract Frame and Target Difficulty on Effort Provision and Performance( 2021)Bonus contracts are often used in practice but can create incentives for gaming. Penalty contracts are growing in popularity as they can provide the benefit of motivating greater effort than bonus contracts. However, we do not have a clear understanding of how individuals are motivated by penalty contracts at different target levels in relation to bonus contracts. We experimentally evaluate the effects of contract frame and target difficulty on effort provision and performance. Building from Prospect Theory, we predict and find that subordinates working under a penalty contract show greater giving up behavior than those working under a bonus contract when given a high target, but not with a low target. Notably, however, subordinates who do not give up show higher performance under a penalty compared to a bonus contract when given a high target, but lower performance when working towards a low target.
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ItemThe Impact of Input Information in the Performance Report on Employee Performance( 2021)In this study, we investigate how the inclusion of input information (i.e., time devoted to the task) in the performance report to the manager and whether the manager has discretion to act on this information affect employee performance. We investigate these effects in a setting in which achieving a target results in a bonus and either 1) managers will only review performance reports or 2) managers will review performance reports and can favorably adjust an employee’s target. With a simple, effort-based task, we find employees perform better when managers have discretion over targets and this effect is amplified by the inclusion of input information in the performance report. In a second experiment, utilizing a more complex task with a weaker link between effort and performance, we find input information motivates performance even without manager discretion over target setting. Our results provide important insights into workplace settings in which inclusion of input information in performance reports positively influences performance.