Nonprofit Governance: Are Related Board Members Bad for Nonprofits?

Following recommendations from a Congressional panel tasked with improving nonprofit governance, in 2005, the IRS began requiring nonprofit organizations to report the existence of family and business relationships among board members. We study these relationships and find they are common in U.S. nonprofits and not associated with assumed detrimental effects. Rather , we find that organizations reporting relationships between board members have less management spending, lower levels of excess cash, and better reporting quality, while receiving higher contributions. Further, using detailed disclosure information, we find that while both business and family relationships among board members are associated with less administrative spending, lower levels of excess cash, and higher contributions, family relationships are also associated with better reporting quality. Overall, our evidence supports the idea that relationships among board members do not harm nonprofit organizations.

Budget Ratcheting and Debtholders’ Monitoring: Evidence from Private Colleges and Universities

This study examines whether budget ratcheting occurs in Japanese private colleges and universities (PC&Us) and how debtholders affect it. We predict that managers of Japanese PC&Us have incentives to increase their budgets in order to enhance their reputation from internal stakeholders; moreover, most of their stakeholders are less likely to strictly monitor the manager’s behavior, which creates the opportunity for budget ratcheting. First, we find that the budget for program expense increases associated with prior year overspending is larger than for decreases associated with underspending of the same amount, consistent with the budget ratcheting hypothesis. Second, we also find that the extent of budget ratcheting is less pronounced in PC&Us with debtholders and earnings losses, suggesting that debtholders such as banks monitor budgetary practices. This study contributes to the budget ratcheting literature by adding new findings on the budget ratcheting practices of nonprofit organizations, namely, PC&Us.

The Relation between Internal Forecasting Sophistication and Accounting Misreporting

We examine the association between internal forecasting sophistication and end-of-the-year accounting misreporting. We draw on survey data from investment center managers of Dutch companies. Consistent with our hypothesis, results suggest that more sophisticated internal forecasting allows firms to reduce their costly accounting misreporting as these firms make more accurate projections and create contingency plans such that they can revise operational plans in a more appropriate and timely manner. Cross-sectional analyses reveal that the benefits in terms of greater forecasting capabilities can vary across conditions. We find that investments in internal forecasting are less effective in reducing the demand for misreporting when environmental volatility is high, when capital market pressure to meet expectations is comparably high, and when within-firm information asymmetry is high. The paper especially speaks to the planning role of budgeting and forecasting, as opposed to the relatively more extensively studied evaluation and incentive role.

Changing the blame game: Does the presence of a pay ratio disclosure impact nonprofessional investors’ reactions to CEOs’ internal attributions for poor firm performance?

We conduct two experiments to investigate how the presence of the CEO pay ratio, a recently mandated disclosure, influences nonprofessional investors’ reactions to a CEO’s internal attributions for poor firm performance. Results of our first experiment suggest that relative to blaming oneself, blaming other firm employees for poor firm performance more effectively absolves a CEO from responsibility for poor firm performance and damages perceptions of the CEO’s trustworthiness less when a pay ratio disclosure is present versus absent. These perceptions, in turn, affect investors’ support for the CEO’s compensation and the company’s attractiveness as an investment. Our second experiment provides evidence of the underlying process, showing the pay ratio disclosure and the CEO’s attribution to other employees affects the perceived status of a CEO. Together, our findings inform managers about the impact of their attributions for poor firm performance and regulators about potential unintended consequences of pay ratio disclosures.

Market Reaction to Abnormal Inventory Growth: Evidence for Managerial Decision-Making

Prior research demonstrates that manufacturing firms increase production (relative to sales) to transfer fixed costs from cost of goods sold (COGS) to inventory accounts, thereby increasing income to reach or surpass earnings thresholds. We examine how the market reacts to this earnings management strategy. We find that investors respond positively to inventory growth based on an expectation of increased future sales; however, this signal is weaker for inventory manipulators. Further, the market premium from meeting or beating analyst earnings forecasts by manipulating inventory is smaller than the premium for achieving this threshold absent inventory manipulation or through accrual manipulation. Finally, we examine firms considered to be “serial” inventory manipulators, finding that the market consistently discounts earnings beats for these firms, suggesting that inventory manipulation erodes investor confidence in firms’ earnings. Collectively, our results provide new insights into a challenge facing operations managers and finance managers in manufacturing firms.

How Relative Performance Information Affects Exploration-exploitation Decisions

Employees often make recurring decisions that entail deciding whether to continue using a “status quo” strategy that yields reliable results or try an alternative strategy of unknown efficacy. Via an experiment, we study how relative performance information (RPI) influences this choice and its expected outcome. We theorize and find that RPI has both a social motivational effect that increases employees’ propensity to explore alternative strategies and an informational effect that helps them determine whether exploring alternative strategies will likely help or harm their performance (i.e., it conveys decision-facilitating benefits). Likewise, as predicted, we also find that RPI’s decision-facilitating benefit occurs more strongly among low- versus high-performing employees. Our study helps inform employers about the decision-facilitating implications of incorporating RPI into their performance feedback systems.

The Moderating Effect of Achievement Motive on Performance Feedback in Choices of Challenging Tasks

Successful employee engagement in cognitively challenging tasks is a driving force of performance in modern organizations. Research has shown that performance feedback can be a powerful management control tool to stimulate engagement in such tasks; however, little is known about how individuals with different achievement motive respond to it. This paper examines the main and interactive effects of achievement motive and performance feedback on engagement in tasks that become progressively more challenging. We designed a within-subject experiment deploying an increasingly difficult cognitive task. We find that feedback is a key determinant of engagement in challenging tasks, as the main effect and in the interaction with achievement motive. Failure feedback discourages individuals with low achievement motive more than those with high achievement motive. Success feedback strongly encourages individuals to engage in a challenging task and levels out differences in achievement motive.

The Effect of Advice Valence on the Perceived Credibility of Data Analytics

We use an experiment to examine how advice valence (i.e. whether the advice suggests good news or bad news) affects the perceived source credibility of data analytics compared to human experts as a result of motivated reasoning. We predict that individuals will perceive data analytics as less credible than human experts, but only when the advice suggests bad news. Using a forecasting task in which individuals are seeking advice from either a human expert or data analytics, we find evidence consistent with our prediction. Furthermore, we find that this effect is mediated by the perceived competence of the advice source. We contribute to the nascent accounting literature on data analytics by providing evidence on a potential impediment to successfully transitioning to the use of analytics for decision-making in organizations.