The Accounting Review200782(4), 907-937open access
This paper uses a multi-method, multi-case field research design to study the evolving portfolio of the management control systems (MCSs) of 78 early-stage startup companies. We examine 46 individual systems from eight different MCS categories—financial planning, financial evaluation, human resource planning, human resource evaluation, strategic planning, product development, sales/marketing, and partnerships. We report analysis of the following: (1) The speed of adoption of financial planning and financial evaluation systems in relation to six other MCS categories. These systems are considered key MCSs associated with management accounting. We find financial planning to be the most widely adopted MCS category at an early stage, followed by the human resource planning and strategic planning categories. Financial evaluation systems are typically adopted at a later stage. (2) Variables associated with the rate of adoption of MCSs. Our results indicate that number of employees, presence of venture capital, international operations, and time to revenue are positively associated with the rate of adoption. Furthermore, the rate of adoption simultaneously affects company size. (3) CEO turnover and the rate of adoption of MCSs. We find that CEOs who have adopted fewer MCSs have shorter tenures. This is consistent with the hypothesized difference between entrepreneurs and managers. Overall, the evidence strongly supports the relevance of MCSs to the growth of early-stage startup companies.
As different activities cannot be measured or communicated with the same precision, accounting information is often only a partial and unbalanced reflection of the fundamental economics, emphasizing certain aspects of the underlying operations while disregarding others. We highlight this inherent imbalance in information as the source of an interaction between corporate operating and discretionary disclosure strategies, and thereby also as an important determinant of the information acquisition strategy. We demonstrate that information imbalance, via its distorting effect on operating activities, leads to a reduction in the propensity of managers to acquire information and provide voluntary disclosures.
Recently, there has been considerable interest among accounting researchers in the relation between asymmetric information and cost of capital. A number of empirical studies document associations between risk premiums and proxies for asymmetric information such as earnings quality. However, the theoretical foundation for these studies has yet to be fully established. In this study, we consider the effects of private signals that are informative of both systematic factors and idiosyncratic shocks affecting asset payoffs in a competitive, noisy, rational expectations setting. Taking a large economy limit, we show that (1) risk premiums equal products of betas and factor risk premiums, irrespective of information asymmetries; (2) holding total information constant, greater information asymmetry leads to higher factor risk premiums and, thus, higher costs of capital; and (3) controlling for betas, there is no cross-sectional effect of information asymmetries on cost of capital. These results provide guidance in interpreting the findings of existing empirical work and suggest specifications helpful for future research.
We examine the role of accounting in CEO equity compensation design. For a sample of ExecuComp firms in 1995–2001, we find that financial reporting concerns are positively related to stock option use and total compensation, and negatively related to the use of restricted stock. We confirm our findings by examining changes in CEO compensation in firms that begin expensing options in 2002 or 2003. We find that these firms reduce their option use and increase their restricted stock use after starting to expense options but exhibit no decrease in total compensation. Taken together, our analyses suggest that favorable accounting treatment for options led to a higher use of options and lower use of restricted stock than would have been the case absent accounting considerations.