Knowledge that Transforms

We examine executive bonus contracts in corporate bankruptcies. Introduced in 2005, Section 503(c)(1) of the United States' Chapter 11 corporate bankruptcy code regulates key employee retention plans (KERPs) but does not restrict performance incentive plans (PIPs). We find that, following the adoption of this reform, the likelihood of approval of KERPs and their coverage decrease, while those of PIPs increase. Unintended consequences of the reform include lower operating performance for PIPs and decreases in reorganization efficiency for bankrupt firms adopting KERPs or PIPs. Our results are consistent with the idea that KERPs were rent-extraction tools, which contrasts with prior evidence. PIP pay-performance link weakens after the reform, due to an increase in adoption of zero-performance thresholds and more discretion given to debtors over bonus pay. This suggests that watering down of PIPs' incentives may have re-introduced the rent extraction that the reform sought to eliminate. We conclude that the regulation of bonuses in bankruptcy should consider debtors’ reactions to such reforms.

Our study examines whether implementing a novel approach for incentivizing employees to engage in behavior desired by the company is associated with changes in employee behavior. We use proprietary data from a company using an online learning platform where employees could voluntarily participate in daily training. Employees who complete daily training modules and correctly answer quiz questions earn points that can be used to bid on gift cards through an online auction site. The company subsequently activated an option of allowing employees to also use their points to play an online slot machine with the possibility of winning the same gift cards available through the online auction site. Using psychology theory we predict that the arousal and excitement experienced from playing an online slot machine will lead to a positive association between the extent to which employees play the slot machine and the increase in: (1) the number of daily training modules they complete; and (2) the effort they exert to perform well on the related quizzes after the slot machine was introduced. Although the results support both of our predictions, we also find a significant decrease in the number of daily training modules completed by employees who chose not to play the slot machine as well as declines in both interest in playing the slot machine and training activity over time for employees who played. Overall, the effectiveness of implementing an online slot machine game on improving employee behavior seems short-term and limited to a sub-set employees who play, and may even generate negative effects for other employees who do not play. We identify implications for theory and practice.

Both management bias and measurement imprecision threaten the accurate reporting of complex accounting estimates, yet audit policymakers and practitioners often place a strong emphasis on bias. I examine whether directing auditors’ attention towards management bias can come at the expense of insufficient auditor sensitivity to measurement imprecision, potentially threatening overall audit quality. My primary investigation, Study 1, finds that when managers’ explicit incentives to bias financial reports are relatively weaker, an imbalanced emphasis on bias causes auditor-like participants in a stylized setting to “lower their guard” to a greater extent than when environmental factors place a more balanced emphasis on bias and imprecision. Study 2 indicates that an imbalanced emphasis on imprecision does not similarly distract auditors from bias. Study 3 utilizes a more contextually rich setting and demonstrates that an imbalanced emphasis on bias prompts even professional auditors to neglect imprecision. Accordingly, this paper suggests that a balanced emphasis on both management bias and measurement imprecision can mitigate negative consequences of auditors focusing on the former and neglecting the latter.

We experimentally investigate how increases in legally required minimum wages affect wage offers, wage premiums (i.e., the excess of wages over the minimum wage), and employee effort. Prior research has documented a gift-exchange relationship between firms and employees, whereby higher wage offers lead to higher effort. However, when the minimum wage increases, expectations regarding gift wages may also change. We predict that, following such a change, firms and employees will self-servingly determine their reference point for gift wages. As a result, while firms will increase wage offers, wage premiums will decline, and thus employees will not increase their effort. The results of (1) a laboratory experiment and (2) two online experiments are consistent with our predictions, suggesting that minimum-wage increases can have a negative effect on employee effort. Ultimately, employees respond to equivalent wages differently depending on the context surrounding the wage level. Implications for theory and practice are discussed.

We study the relation between a manager’s growth mindset and their use of resource management practices. Growth mindset is based on implicit person theory and is an established and measurable psychological construct. It refers to a person’s deeply held beliefs about whether, in general, people can learn, develop, and change throughout their lives or whether “who they are” is relatively fixed by initial talent endowments (termed a ‘fixed mindset’). Given the demonstrated importance of a growth mindset for educational outcomes and the emerging research studying the influence of mindset on behavior within organizations, we explore whether school principals’ mindset is associated with their resource management practices. Using survey and archival data from 257 primary and secondary school principals, we find that a growth mindset is associated with greater use of budgets to explain and discuss budget variances with key constituents and as an enabler in their managerial role. Principals with a growth mindset also engage in fundraising activities and use non-financial rewards for their teachers significantly more than fixed mindset principals. We also find that the relations between a principal’s mindset and some of these practices are different depending on the school’s performance context.

We find that federal bureaucrats award more, larger, and less risky contracts to politically connected firms when they have greater discretion over contracting outcomes. Using a sample of 4.3 million federal government contract actions obligating $2.47 trillion between 2000 and 2015, we show that this result varies predictably across contract and agency characteristics, over time, and in placebo tests, and is robust to a comprehensive fixed effect structure and seven alternate measures of political connectedness. Our evidence illustrates the overlooked role of the bureaucrat in facilitating political bias in federal contracting outcomes.

The Organization for Economic Co-operation and Development (OECD) reports that a male favoring pay gap exists in every one of its member countries. To reduce the gender pay gap, governments and investors are demanding that companies disclose gender pay information. While companies seem to resist these demands, there is little evidence about how investors might react to the disclosure of gender pay information. We draw on theories of fairness and the instrumental perspective of corporate social responsibility activities to predict how the disclosure of gender pay information influences investor judgments. Our experimental findings indicate investors are more willing to invest in a company that discloses gender pay equity compared to either a company disclosing a gender pay gap or one disclosing no gender pay information. Further, our mediation analyses results show a sequential mediation process whereby the gender pay disclosure affects perceptions of fairness (economic consequences) directly (indirectly through fairness), with only perceptions of the economic consequences resulting from the gender pay disclosure directly influencing willingness to invest. In addition, despite the presence of the same sequential mediation relationship, we find limited evidence investors are less willing to invest in a company that discloses a typical gender pay gap compared to a company disclosing no gender pay information. Two additional experiments indicate it is the information about gender pay, not its disclosure by the company, that influences investors; and the effect is intentional. Our results are consistent with investors anticipating real economic consequences from the disclosure of gender pay information.

Using an experiment, I examine whether managers have preferences for corporate social responsibility (CSR) in a capital budgeting setting and the factors that influence the extent to which they act on these preferences. I find that managers have and act on preferences for CSR by reporting to implement higher cost CSR investments that reduce firm profit even when they have financial incentives not to do so. I also find that when managers need to misreport to act on their preferences for CSR, their willingness to act on such preferences is decreased due to a desire to be honest. Conversely, an opportunity to create slack for personal benefit increases managers’ willingness to act on their CSR preferences, offsetting the decrease resulting from honesty concerns. Together these findings demonstrate that managers’ preferences for CSR investments can influence behavior even in the presence of competing economic incentives and social norms. Finally, an analysis of firm profit shows that firms may be better off financially with managers who act on preferences for CSR investments rather than managers who have strong preferences for wealth. This result obtains because managers with strong CSR preferences do not create slack to the same extent as managers with strong preferences for wealth. These results have implications for both theory and practice because they show that managers’ reports used to make investment decisions are influenced by their personal CSR preferences.