Many firms use forced rating systems in which supervisors must evaluate employees according to a predefined distribution. We develop new theory suggesting that forced ratings are less likely to enhance performance when supervisors assess subjective dimensions of employee performance (e.g., creativity), but can have some harmful side effects. In a laboratory experiment, employees work on a creative task, and supervisors rate their performance. We do not find any difference in the employees’ performance or effort in a creative task setting between forced and free ratings. We do, however, find that forced ratings create higher stress for employees (ex post stress scales and biomarkers). Higher stress in turn mitigates the positive effect of effort on creativity. Furthermore, we find that actual creativity explains less of supervisors’ ratings of employees’ performance under forced ratings. Instead, factors that are unrelated to actual creativity, such as eloquent writing and strategic gaming behavior, matter more. Results of an additional online experiment confirm that forced ratings work differently in tasks where performance needs to be evaluated subjectively compared to tasks where objective measures are available.

Principals make decisions on various issues, ranging from contract design to control system implementation. Few studies examine the principal's active role in these decisions. We experimentally investigate this role by studying how a principal's choice of an incentive contract that may discourage misrepresentation, compared to a fixed‐salary contract, affects the honesty of his or her agents’ cost reporting. Results show that, besides an incentive effect and a principal trust effect, the active choice for incentives produces a negative “information leakage” effect. When principals use incentives, their choices not only incentivize truthful reporting and signal distrust, but they also leak important information about the social norm, namely, that other agents are likely to report dishonestly. Agents conform to this social norm by misrepresenting cost information more. Our results have important practical implications. Managers must recognize that their decisions can leak information to their agents, which may produce unanticipated consequences for the social norms of the organization.

To ensure that audit committees provide sufficient oversight over the auditing process and quality of financial reporting, legislators have imposed stricter requirements on the independence of audit committee members. Although many audit committees appear to be “fully” independent, anecdotal evidence suggests that CEOs often appoint directors from their social networks. Based on a 2004 to 2008 sample of U.S.-listed companies after the Sarbanes-Oxley Act, we find that these social ties have a negative effect on variables that proxy for oversight quality. In particular, we find that firms whose audit committees have “friendship” ties to the CEO purchase fewer audit services and engage more in earnings management. Auditors are also less likely to issue going-concern opinions or to report internal control weaknesses when friendship ties are present. On the other hand, social ties formed through “advice networks” do not seem to hamper the quality of audit committee oversight. Data Availability: All data are publicly available from sources identified in the text.

Although employees' time estimates are used extensively for costing purposes, they are prone to measurement error. In an experimental setting, we research how measurement error in time estimates varies with: (1) the level of aggregation in the definition of costing system activities (aggregated or disaggregated); (2) task coherence (the extent to which the activities that require time estimates present themselves coherently or incoherently); and (3) when notice is given that time estimates will be required (in advance or after the fact), that is, whether participants know that time estimates will be required before they perform the activities. We also test on response mode (estimates in percentages or absolute time units). The results suggest an important trade-off between the level of aggregation and measurement error: increasing aggregation in the definition of activities leads to lower measurement error. Also, advance notification reduces measurement error, especially in settings with aggregated activities or incoherent tasks. Finally, we find a strong overestimation bias when participants provide time estimates in minutes, which may be problematic for Time-Driven Activity-Based Costing that advocates the use of estimates in minutes. These results are relevant to accountants and decision makers who want to assess and control the measurement error in their costing system and to professionals in related areas that make use of time estimates (e.g., billing, tendering).

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Many companies use color codes in their internal performance reports to highlight how current performance compares to performance in a previous period. We examine whether the use of color coding affects managers' decision‐making in a resource allocation task. We argue that managers' decision accuracy will be lower if they receive noisier feedback, but that this detrimental effect of noise can be mitigated through color coding. Using two experiments, we find evidence consistent with our theory. Managers who receive reports in which performance increases are color‐coded green and performance decreases are color‐coded red are less affected by noise than managers who receive feedback reports without color coding. Supplemental analyses suggest that color coding induces managers to process feedback in a more holistic manner, which reduces the adverse effect of noise on managers' learning processes. Our findings have several important implications for research and practice.