Financial expertise among independent directors of U.S. banks is positively associated with balance-sheet and market-based measures of risk in the run-up to the 2007–2008 financial crisis. While financial expertise is weakly associated with better performance before the crisis, it is strongly related to lower performance during the crisis. Overall, the results are consistent with independent directors with financial expertise supporting increased risk taking prior to the crisis. Despite being consistent with shareholder value maximization ex ante, these actions become detrimental during the crisis. These results are not driven by powerful chief executive officers who select independent financial experts to rubber stamp strategies that satisfy their risk appetite.

ABSTRACT: Performance-based compensation contracts can affect productivity both by motivating effort and by attracting workers whose abilities align best with the offered contracts. Using an experiment in which participants design “rebus puzzles,” this study tests whether the incremental benefits of contract self-selection extend to a multi-dimensional performance environment in which participants choose between a contract that rewards both quantity and creativity versus a contract that rewards quantity only. Findings indicate that participants who choose a creativity-weighted pay scheme perceive themselves to have greater creative potential than those who choose a quantity-only scheme. This perceived creativity advantage manifests itself in the superior initial creativity ratings of such participants’ productive output. However, in the aggregate, participants paid only for quantity eventually surpass the creativity-weighted productivity scores of participants paid for creativity-weighted productivity, whether compensation contracts are self-selected or randomly assigned. Thus, the implications of contract selection on creativity-weighted productivity hinge on the importance of the initial advantage enjoyed by participants who self-select a creativity-weighted contract.

ABSTRACT In an environment where employees have the freedom to direct some time away from their day-to-day routine tasks to work on creative endeavors, we examine whether nonbinding targets for the amount of time to spend (input target) and/or the amount of output to produce (output target) on the routine task affects creative task performance. Results of a laboratory experiment demonstrate that providing both an input and an output target on the routine task leads to greater creative task performance relative to providing one or none of these targets. This result is consistent with theory suggesting that individuals need guidance as to how much routine work to complete in order to achieve the cognitive closure necessary for them to think creatively. However, individuals also need guidance that encourages them to limit time on their relatively comfortable routine work and spend time on more open-ended creative endeavors. By setting expectations as to what employees need to achieve on their more routine day-to-day responsibilities, organizations can increase the efficacy of the growing practice of allowing employees to spend a portion of their work week on creative endeavors. Data Availability: Contact the authors.

We construct a firm-level governance index that increases with minority shareholder protection. Compared with U.S. matching firms, only 12.68% of foreign firms have a higher index. The value of foreign firms falls as their index decreases relative to the index of matching U.S. firms. Our results suggest that lower country-level investor protection and other country characteristics make it suboptimal for foreign firms to invest as much in governance as U.S. firms do. Overall, we find that minority shareholders benefit from governance improvements and do so partly at the expense of controlling shareholders.

We construct a firm-level governance index that increases with minority shareholder protection. Compared with U.S. matching firms, only 12.68% of foreign firms have a higher index. The value of foreign firms falls as their index decreases relative to the index of matching U.S. firms. Our results suggest that lower country-level investor protection and other country characteristics make it suboptimal for foreign firms to invest as much in governance as U.S. firms do. Overall, we find that minority shareholders benefit from governance improvements and do so partly at the expense of controlling shareholders. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: [email protected]., Oxford University Press.

ABSTRACT We use a laboratory experiment to examine whether corporate giving to charity motivates employees. We find a strong altruism effect. Even when employees cannot be remunerated for their actions, employee contributions to employers significantly increase as the level of corporate giving increases. We also find a signaling effect. When employees can be remunerated for their actions, employee contributions initially increase as the level of corporate giving increases. Thus, even though corporate giving to charity decreases the amount that can be shared between employees and employers, employees behave as if more charitable employers will return proportionally more to employees. It is not until relatively high levels of corporate giving that employee contributions to employers eventually decrease. Collectively, our results suggest that corporate giving is an effective lever for motivating employee effort and contributions to organizational endeavors. Corporate giving can increase the efficacy of implicit (relational) contracts and reduce the need for formal accounting-based reward systems and controls.

ABSTRACT In an environment where individual productivity can be increased through efforts directed at a conventional task approach and more efficient task approaches that can be identified by thinking outside-the-box, we examine the effects of productivity-target difficulty and pay contingent on meeting and beating this target (i.e., target-based pay). We argue that while challenging targets and target-based pay can hinder the discovery of production efficiencies, they can motivate high productive effort whereby individuals work harder and more productively using either the conventional task approach or more efficient task approaches when discovered. Results of a laboratory experiment support our predictions. Individuals assigned an easy productivity target and paid a fixed wage identify a greater number of production efficiencies than those with either challenging targets or target-based pay. However, individuals with challenging targets and/or target-based pay have higher productivity per production efficiency discovered, suggesting these control tools better motivate productive effort. Collectively, our results suggest that the ultimate effectiveness of these control tools will likely hinge on the importance of promoting the discovery of production efficiencies relative to motivating productive effort. In doing so, our results provide a better understanding of conflicting prescriptions from the practitioner literature and business press.

ABSTRACT In an environment where three-person groups develop a creative solution to an important problem, we examine whether the efficacy of either individual- or group-based creativity-contingent incentives depends on whether they take the piece-rate or tournament form. We predict and find that group (intergroup) tournament pay increases group cohesion and collaborative efforts, which ultimately lead to a more creative group solution, relative to group piece-rate pay. While individual (intragroup) tournament pay increases individual efforts, we find that it does not enhance the creativity of group solutions relative to individual piece-rate pay. Our results advance the burgeoning management accounting literature on creativity-contingent incentives by demonstrating that reward systems are more likely to promote group creativity through collaborative efforts rather than independent individual efforts. We also provide important insights into when and why tournament pay can boost group creativity in organizations. In doing so, we contribute to a better understanding of observations from practice suggesting that organizations valuing creativity often induce intergroup competition. Data Availability: The experimental data are available upon request.

ABSTRACT Agency theories predict that the value of corporate cash holdings is less in countries with poor investor protection because of the greater ability of controlling shareholders to extract private benefits from cash holdings in such countries. Using various specifications of the valuation regressions of Fama and French (1998) , we find that the relation between cash holdings and firm value is much weaker in countries with poor investor protection than in other countries. In further support of the importance of agency theories, the relation between dividends and firm value is weaker in countries with stronger investor protection.