Do auditors and audit committees constrain inconsistencies between financial and non-financial information in financial statements?
Jaime Schmidt, Department of Accounting
Professional standards, regulators and researchers have discussed the potential for non-financial measures to provide a powerful and independent benchmark for evaluating the validity of financial statement data. Contemporary research suggests that the use of non-financial measures is growing but is not widespread. In a study with professors Joe Brazel and Don Pagach from North Carolina State University, we examine whether auditors and audit committees improve financial reporting quality by constraining inconsistencies between non-financial measures and financial measures reported in financial statements.
The auditor and audit committee have financial reporting oversight responsibility and potential industry and financial expertise that should enable them to identify and investigate inconsistencies between financial and non-financial information. However, there is variation in the quality of auditor and audit committee oversight across companies and prior research indicates that auditors may neglect non-financial measures despite their importance. Thus, we hope to identify the characteristics of auditors and audit committees that are most important to high-quality financial reporting. Our study should inform policy-makers and parties interested in the role that auditors and audit committees play in corporate governance today.
Why Do Some CEOs Prefer Dynamism and Change? CEO Openness to Experience and Person-Environment Fit
Craig Crossland and Daniel Zyung, Department of Management
Why are some established organizations relatively inertial, exhibiting only incremental changes, while others show much more strategic dynamism? We address this question by focusing on the important role of the Chief Executive Officer as a force for inertia vs. change. Thus, we will investigate why some CEOs persist with the status quo, undertaking only minor changes, while others engage in considerable, and ongoing, change. In our study, we will explore the impact of CEO openness to experience on company strategic dynamism. Part of the well-established Five Factor Model of Personality (or “Big Five”), "openness to experience," describes the extent to which an individual desires and values new ideas, new skills and new experiences. Those with high levels of openness tend to have more intellectual curiosity and greater willingness to challenge the status quo, while those with lower levels of openness tend to avoid the unconventional and continue to practice existing routines.
We plan to examine several important firm-level implications of CEOs’ levels of openness to experience. First, we will investigate whether CEOs with high levels of openness to experience are drawn toward environments characterized by strategic dynamism. Do executives appointed to the CEO role in highly dynamic firms and industries tend to be those with high levels of openness in the first place? Second, we will investigate whether a CEO’s level of openness is manifested in firm-level strategic dynamism during the CEO’s tenure. Third, we will investigate whether situations characterized by a strong fit between a CEO’s level of openness and the firm’s level of strategic dynamism are associated with superior firm performance and/or a decreased likelihood of CEO departure. To investigate these questions, we will develop and validate unobtrusive measures of CEO openness to experience based on career mobility and language use. We will then test our predictions in a multi-year sample of experienced business professionals, CEOs from Fortune 250 firms, and National Football League head coaches.
Impact of Top Management Team Marketing Background on the Effectiveness of Marketing Spending
Leigh McAlister and Raji Srinivasan, Department of Marketing
Marketing practitioners and academics point to the importance of the marketing function having a seat at the table of upper echelon decision making. Further, recent research suggests that the stock market reacts positively to unexpected marketing spending by leading national advertisers, but reacts negatively to unexpected marketing spending by firms that advertise at a lower level. This finding suggests that leading national advertisers’ ability to more effectively leverage advertising dollars results from the fact that those firms’ have more fundamentally integrated marketing into their business strategy than have other firms. We further hypothesize that marketing will be fundamentally built into firm strategy if the members of the TMT have marketing backgrounds.
Given this background, we extend developments in the TMT literature in management strategy to examine whether the extent of marketing experience in a firm’s TMT influence the effectiveness of the firm’s marketing spending. Specifically, we examine the effectiveness in terms of marketing’s ability to increase sales, profits, and stock returns, and consider whether these effects are influenced by firm and industry characteristics. We formalize these questions as testable hypotheses and test using data on firm financial characteristics and backgrounds of the firm’s TMT from various secondary data sources.
We anticipate that the findings from this research will extend marketing theory which has hitherto taken the presence of a Chief Marketing Officer as an indicator of marketing’s influence in the firm. We anticipate that the marketing function’s influence in the firm is better represented by the extent to which marketing expertise is represented on the TMT. We also anticipate that the findings will be useful to senior marketing practitioners who may not be aware of the potential influence of the marketing backgrounds of their firm’s TMT.
Marketing ROI: Unlocking Managers and Investors’ Perceptions Regarding Marketing and Firm Performance
Debika Sihi and Raji Srinivasan, Department of Marketing
Michael Clement, Department of Accounting
Marketing managers have always struggled to measure the return on the investment in marketing assets (e.g. brand equity). In order to better understand marketing ROI, we must understand both firm managers’ and analysts’ perceptions regarding the returns of firms’ market-based assets.
Managers are custodians of a firm’s assets, and their perceptions guide the strategic emphasis given to these assets. Financial analysts are sophisticated information intermediaries between the firm and the financial market. Analysts’ evaluations of managers’ marketing investment decisions affect their earnings’ forecasts and stock recommendations. Earnings forecasts and recommendations are used by investors in their investment decisions. Therefore, in order to gauge marketing ROI, it is necessary to understand both managers’ and analysts’ perceptions. We explore these perceptions through surveys of 150 U.S. based managers and 150 U.S. based equity analysts. We use structural equation modeling to test the perceptions of market-based assets on shareholder value.
We anticipate that the findings from this research will extend marketing theory which has (1) examined the direct effect of marketing action on stock market returns and (2) explored analyst recommendations and forecasts as mediating mechanisms between marketing actions and shareholder value. Managers’ and analysts’ perceptions related to the effects of marketing-based assets on shareholder value have yet to be analyzed. We believe examining perceptions has theoretical relevance as perception guide actions. We also anticipate that our findings will be useful to marketing managers. A new discipline called ROMI (return on marketing investments) has already emerged among global consultants like The Boston Consulting Group and Deloitte Consulting. Our study elucidates how analysts evaluate management emphasis on market-based assets. If analysts have different perceptions regarding the impact of marketing assets on firm performance, then investments made by marketing managers may have unintended stock market effects. If perceptions between managers and analysts are similar, then managers may exercise more discretion, not only in investment decisions related to marketing assets, but also in the disclosure of marketing information to analysts and investors.
How did Different Credit Rating Agencies Obtain Similar Ratings with Different Assumptions?|
John Griffin, Department of Finance
CDOs were at the heart of the financial crisis. While there is no shortage of opinions, commentary, and congressional inquiry, there has been little systematic empirical examination on why many AAA rated CDOs became junk grade status so quickly. One puzzling feature of CDO credit ratings is that different credit rating agencies often used quite different assumptions. Yet, they generally still came up with the same AAA rating. We examine possible explanations as to how such different assumptions could lead to the same outcome. This research should lead to a better understanding of what caused the financial crisis and may help shape policy so that past mistakes can potentially be avoided.
Utilizing Multiple Information Sources: How do individuals resolve the cost vs precision trade-off?
Dorothee Honhon and Canan Ulu, Department of Information, Risk, and Operations Management
Firms and individual decision makers alike need to learn about uncertainties that affect their well-being. While a firm may be interested to learn about consumer tastes to increase profitability, an individual decision maker may need to learn about the underlying economic state to decide how to invest. More often than not, there are multiple sources of information available to the decision maker that vary in terms of their precision and costs. More precise information sources are likely to be more costly, thus forcing the decision maker to make a trade-off when considering which information source to use and how much information (if any) they should gather.
Through multiple experiments under various settings, we propose to study the dynamics of learning when several information sources with different precision and cost structures are present. For example, in one of our experiments, subjects will be asked to choose an assortment of products to offer to a population of consumers without perfect knowledge of their tastes. Offering more products tailored to consumer tastes can be more costly, however, such assortments provide better information about consumer tastes compared to assortments with fewer products because consumers are more likely to buy what they truly want. This research will contribute to our understanding of how individuals make such trade-offs and isolate important departures from the normative theory.
Design and Analysis for a Highly Selective Choice Process
Ty Henderson, Department of Marketing
Consumers shopping for technology products today face a dizzying array of feature-intense products in the marketplace. How do consumers wade through all this information and make choices? Recent research has described the deleterious effects that too many options in an assortment can have on decision making (e.g. Iyengar and Lepper 2000). Cognitive constraints dictate that increasing the width of the product assortment makes it more likely that consumers will selectively process information in making a choice – thus more is not necessarily better. Our research focuses not just on product assortment proliferation per se, but also on the increasing complexity of the products themselves. In particular, when faced with a large number of options, consumers are more likely to pay attention to only a selective subset of product attributes and levels (variables). We refer to this as a highly selective choice process. For example, when shopping for a new digital camera, an individual may decide based only on the brand, zoom and color characteristics of the cameras – ignoring all the other many aspects of the product. This is important because understanding a highly selective choice process can help design better products and improve the buying experience.
In practice, website attribute filter tools and machine learning algorithms (e.g. Dyzabura and Hauser 2009) are a post hoc approach to capturing the essence of a highly selective choice process. In contrast, when there is a priori knowledge that the choice process is highly selective, there is little guidance on how to efficiently design and analyze choice experiments – an important tool to understand marketplace preferences for new and existing products. Our new framework uses a non-compensatory utility structure through heterogeneous variable selection across individuals and choice contexts and accounts for individual differences through hierarchical specifications of model parameters which are linked to stated preference and individual characteristics such as demographics, personal traits and contextual variables. We describe construction of efficient designs for a highly selective choice process using customized and super-saturated designs and explore the ramifications of these approaches to understanding the “overchoice” effect.
The Road to Recovery: Restoring Financial Reporting Legitimacy Following a Restatement
Jaime Schmidt, Department of Accounting
The announcement that a company must restate its financial statements often impairs the company’s perceived financial reporting legitimacy (i.e., investors’ perceived integrity and credibility of the company’s financial reporting). Theoretical research in management offers prescriptions for what companies can do to maintain and restore lost legitimacy. In a joint study with Dr. Patrick Badolato, we investigate whether a company’s disclosure of remedial actions taken to address a restatement restores the company’s financial reporting legitimacy. In other words, we investigate whether companies successfully implement some of the prescriptions set forth in the prior literature to maintain and restore confidence in their financial reporting.
To study this question, we identify a sample of companies with impaired financial reporting legitimacy resulting from a restatement, and we identify disclosed actions taken by the impaired companies to address the financial reporting failure. We then examine if these disclosed remedial actions improve the response by market participants to the release of subsequent financial information or increase/restore investment in these companies. Our study should benefit managers and directors who must make difficult disclosure choices following a restatement and navigate through an environment where restatements are prevalent.
Motivational Consequences of Perceived Velocity in Consumer Goal Pursuit
Ying Zhang, Department of Marketing
Prior literature suggests that there are both pros and cons for setting subgoals in consumers’ pursuit of overarching goals. For instance, subgoals can reduce the complexity and difficulty of the overall goal, and can provide intrinsic reward and enhance self-efficacy in the pursuit. On the other hand, subgoals can also replace the overall goal as the center of reference and cause complacency, and can cause motivational distraction and interference with the overall goal. We propose that providing feedback to people based on their progress on subgoals versus progress on the overarching goal can both be motivating, depending on their current positions in the pursuit. For persons who are still uncertain about their commitment to the overarching goal (e.g., those who are new to the pursuit of this goal), they will be more concerned about the attainability of the overall goal, and providing feedback based on their progress on subgoal signals higher attainability of the overall goal, leading to higher motivation in further pursuit. On the other hand, for individuals who are relatively certain about his commitment to the overarching goal (e.g., those who have made substantial progress), they are more concerned about reducing the reaming discrepancy to the end point, and thus providing feedback on one’s progress on overall goal signals the need for further effort to close the remaining discrepancy, leading to higher motivation in accomplishing the goal.
The Role of Cross-Understanding for Diverse Groups
Kyle Lewis and Shannon Rariden, Department of Management
Organizational workgroups are often assembled with the goal of capitalizing on members’ diverse knowledge, beliefs, and perspectives. The benefits of diversity in workgroups often go unrealized, however, because members fail to surface, discuss, and use their uniquely held knowledge or because members’ biases favoring similar versus dissimilar members can restrict communication and undermine collaborative behaviors.
Cross-understanding is a new theoretical construct in the group cognition literature that may help explain the underlying mechanisms in diverse groups. Cross-understanding is the extent to which group members have an accurate understanding of one another’s mental models. Our project investigates the extent to which cross-understanding increases communication effectiveness, members’ learning about the task, and group coordination. Such improvements should result in better group processes and outcomes, even when members’ mental models are diverse.
To test whether cross-understanding can improve group processes and performance, we designed an experiment that was run in the McCombs Behavioral Lab using undergraduate students as study participants. Participants worked together in groups of three in virtual chat sessions. There were two different scenarios that we tested. In the first scenario, participants were given useful information about other group members, creating groups with high cross-understanding. In the other scenario, participants were not given information about their group members, resulting in groups with low cross-understanding. Group members then worked together to solve a complex, information-intensive problem. We expect to find that diverse groups whose members were given special information about each other will perform better than diverse groups whose members do not have any special information about each other. We expect that knowledge about other members will be helpful because members will communicate more effectively, learn more about the task, and coordinate their actions more smoothly. We plan to test hypotheses using data gathered from chat transcripts and survey data. A pilot experiment was completed during the summer session of 2011; we plan to collect additional data this Fall.
A presentation based on this research was given at the INGRoup Conference 2011, held in Minneapolis, Minnesota.